San Diego Plan Joins Private Debt Parade | Chief Investment Officer

Private debt is burgeoning, reaching $1.3 trillion in 2022, up from $230 billion in 2008, and Moody’s Investors Service estimates the alternative asset class will hit $2 trillion in 2027. Public pensions are big contributors to the boom, and the latest entrant is San Diego’s.

The San Diego City Employees’ Retirement System exemplifies the trend: At the May meeting of its board of administration, the plan committed to increasing its allocation to private credit to 5% of its $10 billion-plus portfolio, from nothing before.

The move is part of a rejiggering of the SDCERS’s asset allocation under CIO Carina Coleman, who assumed the plan’s investing helm last year. “Timing is particularly attractive with this asset class,” she told the board. Private debt has particularly lush payouts, often yielding 10% to 12% annually, she said. Plus it carries less risk than stocks and offers firm covenants to protect the new debt holdings, Coleman said.

By a 4 to 1 vote, the board approved the new asset allocation, which includes trimming its equities position to 36% from 39%. The money from the reduction in stocks will mostly go toward private credit, she explained, adding, “This diversifies our equity risk.”

Private debt is increasingly in vogue among investors, according to a March survey from Preqin: 44% of respondents indicated they would invest in private credit over the next year, with 40% saying they would stand pat and only 16% intending to reduce their allocation. Further, 37% expect private debt to perform better in 2023 than it did in 2022, exceeded only by hedge funds (38%).

Coleman noted that San Diego was joining other California pension funds in moving into private debt. The nation’s two largest public pension plans, the California Public Employees’ Retirement System and the California State Teachers’ Retirement System, have a 5% and a 2% allocation target, respectively, for private debt.