KBRA Releases Research – Pension Funds Increase Their Allocations to Private Credit

KBRA releases a report examining the trend of large U.S. public sector pension funds increasing their investment allocations to private credit, a growing asset class within the larger arena of alternative investments.

Private credit offers pension funds several positive attributes, including higher yields than traditional fixed income, that can provide longer-term benefits if the liquidity shortcomings of this asset class are prudently addressed. Moreover, in terms of environmental, social, and governance (ESG) considerations, there are both challenges and opportunities in this sector. Private credit can effectively target specific ESG investments, but the process of obtaining broader ESG data from the smaller, less well-resourced borrowers is still evolving.

Key Takeaways

• The asset class of private credit is growing, as is its role in the investment portfolios of public sector pension funds.
• Private credit generally has higher yields than the traditional fixed income investments of pension funds, such as publicly traded U.S. government obligations and taxable investment-grade corporate debt.
• The prevalence of floating interest rates is also beneficial in an escalating interest rate environment.
• Private credit is less liquid, which needs to be factored into the allocation decisions of pension fund managers.
• There can be good access to ESG-focused investments such as renewables projects, but it is difficult to obtain more extensive ESG data from the underlying borrower base.
• The manager-selection process for private credit funds is important, and pension funds need to develop and maintain the requisite expertise.
• KBRA’s extensive involvement across the private credit markets provides a comprehensive view of the trends, challenges, and opportunities in this sector, as well as the risks presented by a slowing economy, rising interest rates, and persistent inflation.

Click here to view the report.

Related Publications

• Private Credit Webinar Recap: Performance and Liquidity in Face of Credit Headwinds
• Business Development Company (BDC) Ratings Compendium: Where Does the Sector Stand on Liquidity?
• KBRA Has a Clear Focus on Credit Ratings, Not ESG Scores

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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