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News Analysis
Private credit managers see green in greying America
by Lisa Fu
After selling private credit investments as a must-have diversifier to institutions and wealthy individuals, asset managers are taking steps to target US workers saving for retirement.
With corporate pension plans relics of the last century, most US workers today invest their own money via employer-sponsored retirement plans like 401(k)s. This US defined contribution market represents a whopping USD 14tn in assets, according to the Investment Company Institute.
Many workers are automatically enrolled in ‘target date funds’ — a type of multi-asset retirement product that reduces risk in asset allocation over the course of an investor’s life.
Private credit managers see these funds as a way of inserting alternative assets into the market for ageing American workers concerned about the fate of Social Security and their post-retirement financial position.
Defined benefit plans
“Institutional retirement investors, or [defined benefit] plans, have had allocations of upwards of 20% to 30% in private markets,” said Steve McKay, head of US retirement at Franklin Templeton. “401(k) investors have never had that opportunity.” He believes private market assets, such as private credit, add diversification, cash generation and a different risk-return profile.
Franklin Templeton, which owns private credit specialist Benefit Street Partners, expanded its target date fund series to include exposure to private credit and real estate last month. The product will continue to offer daily liquidity to investors, while including a modest exposure to private credit and private real estate estimated to range from 2% to 8% of the overall portfolio over the course of the investors’ life.
“We had the opportunity to take a legacy target date fund that we had and reposition it using our thoughtful allocations to private markets,” said McKay. “In this case it was private credit and real estate through Benefit Street Partners and Clarion.”
Bringing private credit and other alternative assets into the defined contribution ecosystem has been talked about for years, but asset managers’ efforts took off in earnest last year, said Chris Bailey, a director with Cerulli Associates’ retirement practice.
Managers have started creating ‘off the shelf’ products that include private credit and other alternative assets for retirement plan sponsors.
401(k) investors couldn’t access private markets
Steve McKay
Head of US retirement
Franklin Templeton
Last year, KKR and Capital Group announced the two are working on a target date fund that will include private market strategies managed by KKR.
Similarly, Great Gray Trust Company announced it will include a product from Goldman Sachs Asset Management in its Panorix Target Date Series to give investors private credit exposure.
President Donald Trump encouraged retirement plans to add alternative asset exposure via an executive order last August. This has further emboldened asset managers.
“We’re starting to see indications that as managers have educated these folks, [retirement plan sponsors] seem more open to the concept [of private market assets],” said Bailey. “So I think over time, we are going to see some real adoption.”
Target date funds are designed for investors that do not work with a financial advisor or do not have time to actively manage their portfolios. Instead, trust is put into a professional team that manages the target date fund.
When private market asset exposures are kept to a minimum, target date funds can manage liquidity well enough to offer investors daily liquidity and valuation, said McKay. If for some reason the investor needs to get out of the target date fund, it can use a mix of cash on hand, leverage and the sale of liquid assets to return capital.
The industry is proceeding with caution after recent negative headlines about liquidity limits in semi-liquid private credit funds. Many of these private wealth vehicles, which offer limited quarterly liquidity, restricted outflows for the first time this past quarter.
“Plan sponsors in the US are afraid of being sued,” Bailey said. “And with something like a target date… because so much of their participants’ assets are in it, they’re very careful and deliberate in how they make decisions.”
New rules proposed
As Creditflux goes to press, the US Department of Labor has proposed rules that will establish safe harbours for retirement plan fiduciaries selecting alternative investments.
The guidance asks plans to rely on factors such as performance, fees, liquidity, valuation and complexity to reduce ligation risk.
