By Muskan Arora
The $74.6bn Pennsylvania Public School
Employees’ Retirement System committed $175m to ACORE Opportunistic Credit II
(AOC), a real estate credit strategy.
The system will allocate $125m to the fund
and $50m to co-investment as a sidecar, as it makes its first allocation to the manager.
The system has $294m of dry powder left to
allocate for the remaining year.
The fund is expected to return 13-15% net
IRR with 8% cash yield, “which is a really strong replacement for real estate
equity in today's higher rate environment”.
This strategy will complement the existing real
estate credit exposure with PIMCO and TCI.
AOC’s floating-rate credit strategy is
susceptible to interest rate risk, in particular lower coupon payments and
faster repayment in decreasing interest rate environment.
“Since the Fed began raising rates in 2022
we've seen a reset to lower property values. Properties themselves are
generally performing quite well, but investors are demanding higher returns to
reflect the higher risk-free rate, and therefore paying less for properties,” said
Sarraf and Richards.
“Banks have pulled back from commercial
real estate lending, and that's allowed the non-bank lenders to step in to
finance these resilient properties and reset lower valuations, and that's
exactly what AOC will do in this fund,” said the portfolio managers.
“They will originate whole loans or subordinate
loans on performing properties with disruptive balance sheets,” added the
portfolio manager.
In today’s market environment, real estate
credit is more favorable as compared to real estate equity, which has allowed
multiple investors to enter the space.
“As we think about the future of the
private credit portfolio, we're excited about adding more hard asset collateral,
that means loans on real estate or infrastructure investments,” said Sean T.
Sarraf and Jarrett Richards, portfolio managers at PSERS.
PSERS allocates 7.4% to its private credit
sleeve, against a long-term target of 6%. The overweight is due to the Q4 2021
changes in the target allocations.
PSERS, along with consultant Aksia,
recommend a pacing of $550m to $750m in 2024 to reach the target exposure.
