By Muskan Arora
After joining the $54.9B Illinois Municipal Retirement Fund in 2022, its chief investment officer, Angela Miller-May, introduced private credit to the portfolio and continues to use it as a hedge in the current volatile and high-interest rate environment.
Replacing domestic equity with private credit has not only allowed the IMRF to diversify, it has also enhanced the fund’s risk-adjusted returns, identifying opportunities for risk premia and income generation, said the CIO.
Following an asset liability study in 2022, the pension plan has strategically reduced its allocation to domestic equities with a 4% allocation to its private credit investments.
The pension plan’s private credit sleeve returned 11.08%, 6.62% and 8.67% for its one-, three- and five-year returns, as of Sept. 30, 2024, and currently stands at 1.9%, against a target of 4%.
Within the space, the portfolio targets middle-market strategies due to increased exit opportunities and less competition alongside hiring geographically diversified managers. Risk returns continue to be attractive for the lower middle market and middle market managers.
“In this environment, we have the opportunity to get equity-like returns with less risk,” said Miller-May. “That’s really what attracted us to private credit — 10% to 12% expected returns, less risky positions at the top of the capital stack and partnership lives of six to seven years. We took advantage of the unmet financing needs for private companies.”
Although the US interest rate environment was favorable, banks were minimizing their lending activities due to regulations, she added, noting European regulations made the region more favorable for private credit investments.
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The pension plan is actively making investments within software and technology sectors, among others, and she expects opportunities in private credit to grow to what private equity is today.
“We hired managers who invest in direct lending, asset back lending [and] opportunistic, special situations as they all perform differently based on the volatility in the market and where interest rates are.”
Along with implementation of a separate private credit pocket, Miller-May has also established a co-investment program to “double down on the best ideas and best companies without management fees or carry.” She also introduced an internally managed small-cap equity portfolio.
The IMRF has a funded ratio of 96%, which allows the pension plan to take calculated and reduced risks. Miller-May noted some plans that have a low funding ratio are expanding their alternative investments, which comes with less liquidity. Drawing inspiration from Elizabeth Burton, former CIO of the Hawaii ERS and current managing director at Goldman Sachs, Miller-May
explores many diversifiers including Burton’s outlook on gold investments.
Presently, the plan has no allocation to diversifiers or exposure to gold investments, but it is open to researching and identifying investments that will increase capital protection. While Miller-May finds infrastructure attractive, the plan is focused on investments within both private real estate
and real estate debt.
Besides offering diversification and generating income, real estate provides consistent core value add and
opportunistic returns to the plan’s portfolio, alongside acting as an inflation hedge with the “ability to roll rents and renew leases at market rates.”
Within real estate, the pension plan has dedicated exposure to retail, healthcare and residential real estate. Industrial and multi-family continue to be priorities as well.
“As a result of the recent search that we launched, we are investing in multi-family, workforce housing, affordable housing, attainable housing, single-family rentals, and some small percentages of senior
and student housing.”
The demand for industry is high due to e-commerce being a strong demand driver. Further, needs-based retail continues to remain attractive for the CIO. The real estate portfolio has nearly 21% exposure
to the multi-family sector and the plan’s firms find new opportunities in
regions, including Texas, Arizona, Florida, Denver, Charlotte, Phoenix, Atlanta
and Virginia.
“The opportunities in real estate continue to be attractive to IMRF but selectivity, location and the right price are key components in identifying value-add assets.”
The pension plan returned 9.32%, .66% and 7.76% for its one-, three- and five-year returns, respectively, against the benchmark of 12.76%, 3.78% and 7.50%, as of Dec. 31, 2024.
