As concerns in private credit mount, Colorado PERA chief investment officer and chief operating officer Amy McGarrity tells Top1000funds.com that the pension fund isn’t seeing any strains in its growing allocation to the asset class, arguing that long-term investors are shielded from the risks because they can lock up their capital to weather market cycles.
Private credit sits within Colorado’s 6 per cent alternatives portfolio, the composition of which was changed in the last strategic asset allocation to reflect more direct lending and less opportunistic exposure. And the $67 billion pension fund has no exposure to the publicly traded private credit funds, business development companies, BDCs, which have piled into software companies vulnerable to AI disruption and are beset with liquidity challenges.
In fact, she believes the shakedown that has left some private credit funds now trading at a discounted NAV could offer buying opportunities.
“These investments, and private credit in general, are intended to be illiquid and held for maturity, so the investment thesis has not played out,” she says.
The strains in private credit have coincided with a timely pause in Colorado’s sweeping unitisation program. Under the project, beneficiaries of its $6-7 billion DC plan are being offered access to the same institutional quality, low-cost investment management as DB beneficiaries.
So far, fixed income and equity have been successfully unitised so that both asset classes now sit within Colorado’s white-label structure for DC plan participants. Private equity, real estate and alternatives will transition next, although the project is on hold because of capacity constraints and an ongoing need to modernise systems in the investment department.
But McGarrity also reflects that the crisis in private credit has highlighted the liquidity challenges of offering private credit to retail and DC investors and will likely prompt an industry-wide rethink on liquidity in private assets.
“Democratisation is good, but it is evolving quickly so we also need a certain amount of time to digest the changes.”
Around 65 per cent of Colorado’s assets under management are internally managed by a dynamic and celebrated in-house investment division. Keenly supported by the board since it was established in the 1980s, it is tasked with picking private managers, choosing stocks and bonds on the public side, and managing trading and cash flow.
Management costs are kept low by novel strategies that include paying directly for asset manager research – and when it doesn’t pay directly for research, paying through commission.
“Paying for investment research is only a small amount in terms of the expense ratio or impact on returns, but making it clear what we pay for is beneficial. We are unique when it comes to disaggregating these fees, but I see no reason for everyone not to do it.”
policy makers face inflation vs growth balancing act
As the conflict in the Middle East continues to play out, McGarrity says that inflation risk is front of mind as the higher price of oil begins to feed into industrial and consumer goods, negatively impacting the US and wider global economy.
She is also concerned about the ability of the US Federal Reserve monetary policy to navigate its twin mandates of limiting inflation and encouraging economic growth.
“I don’t have a view on the conflict’s possible outcomes, but the ability of monetary policy to manage the inflationary impact of $100 barrel oil and the impact of that on economic growth will be highly challenging,” she says.
For now, Colorado’s leadership team is meeting more frequently to talk and bounce ideas.
The pension fund doesn’t deviate from its long-term strategic asset allocation to invest tactically at a total fund level, but the underlying portfolios at the asset class level are ebbing and flowing based on the portfolio managers’ views of how markets are moving in response to inflation and interest rates particularly.
“The portfolio teams are reacting and positioning to what is going on in markets,” she says.
In line with Colorado’s latest asset liability study (2024) the allocations to private equity and real estate have recently been slightly increased (1.5 per cent each) while the allocation to global equity has been reduced by 3 per cent.
Meanwhile, the allocation to hedge funds which dates from 2015 is being wound down to zero because of its limited impact. The allocation was capped by the board to 40 per cent of the alternatives allocation in a constrained mandate that made it difficult to access managers at scale, she says.
“We were able to gain access to strong mangers in this space but the impact on overall fund was limited because of size, cost and complexity”