Pensions pivot from vanilla private credit to focus on niche sectors

Retirement and pension funds continue to pump money into private credit, enticed by the prospect of higher returns. But as the market grows, more are turning their attention to niche sectors, such as ESG-oriented investments and specialised credit.

For example, BlackRock bought Kreos Capital, a European direct lender specialising in technology and healthcare, this past summer.

“That’s an interesting move from a large asset manager,” says Barrett. “But that’s what BlackRock was looking for: the kind of specialist expertise that it feels the mainstream debt provider is not covering.”

The need for niche credit specialists is especially apparent in sustainable and eco-friendly sectors. Debt funds are seeking investors showing a preference for renewables, solar power or infrastructure. And lenders are increasingly adding sustainability targets into their investment processes.

Last year, BlackRock said there was an opportunity to invest an estimated $100 billion in energy transition and climate change solutions projects over the next decade across its businesses. In August, the firm closed its energy transition credit fund, the Blackstone Green Private Credit Fund III. It now focuses on providing private credit to the renewable energy, infrastructure and energy transition marketplace, and in October launched the Climate Transition-Oriented Private Debt Fund.

Other firms are getting in on the act. In August, Panama-based CIFI Asset Management launched a debt fund for sustainable infrastructure in Latin America and the Caribbean. The same month, Canadian-headquartered alternative asset manager Power Sustainable launched the Power Sustainable Infrastructure Credit Fund I, to invest in energy, transportation, social and digital, and other sustainable infrastructures. In September, Dutch multinational bank Rabobank launched an independently managed direct lending platform called Colesco Capital, which has a focus on sustainable direct lending.

“I don’t think you have to give up returns for an underlying risk profile to have a sustainable asset,” said Alfred Griffin, senior managing director and head of credit at Generate Capital, at this year’s ABS East conference in Miami. “When you have capital and customers, you have something to be excited about.”

Speaking during the same panel — which was titled Capital & Climate: Financing the Green Transition — Nate Gabig, a partner in KPMG’s structured finance group, said the market is “sharp enough” to pursue only the best bets. “Deals aren’t being done just because they’re ESG,” he said.

Reach Capital’s Barrett says interest in sustainability and ESG is evident in Europe because of the growing number of funds adhering to the European Union’s Sustainable Finance Disclosure Regulation, Article 9. He cites several pension funds in Denmark and Sweden that have created sub allocations that only allocate to these strategies.