KBRA Insight on Private Credit: Public Sector Pensions Continue Increasing Private Credit Allocation

Several of the largest public sector pension funds in the U.S. have continued to increase their investment allocations to private credit—a growing asset class within the larger arena of alternative investments—despite rising interest rates. Private credit offers public sector pension funds various positive attributes, including higher yields than traditional fixed income, which can provide longer-term benefits if the asset class’s credit and liquidity risks are prudently addressed. Further, while rising interest rates have the potential to negatively impact companies’ cash flows and, ultimately, their ability to make loan payments, investment returns have been sound despite the elevated percentage of floating rate obligations within most private debt portfolios. The Cliffwater Direct Lending Index (CDLI) returned 6.29% for calendar year 2022, and 5.57% through Q2 2023 alone. As such, several state pension plans have continued to add exposure to private credit, now approaching an…