CIOs say selectivity matters more than ever
Major North American pension funds are keeping private credit allocations in place despite redemption pressure hitting parts of the sector, indicating that long-term institutional investors still view the asset class as part of retirement portfolios.
Private credit — loans made by nonbank lenders — has become a larger part of pension portfolios over the past decade, particularly after banks reduced lending following the 2008 financial crisis.
By late 2023, U.S. state and local retirement systems had at least $100 billion allocated to private debt out of roughly $5 trillion in total assets, according to pension researcher Equable. At the time, industry researchers and consultants said allocations were expected to continue rising as funds sought income and diversification outside traditional stocks and bonds.
Data through the end of 2024 show several U.S. pension systems with sizable exposure to private credit. Kentucky County and Kentucky Employees Retirement System each had 20% of assets in private credit, according to data from the Boston College Center for Retirement Research via NASRA and Ross Kerber.
Other pension systems with notable allocations included Virginia Retirement System at 15%, Arizona Public Safety Personnel Retirement System at 14%, Los Angeles County Employees Retirement Association at 11%, Contra Costa County at 10%, and Los Angeles City Employees’ Retirement System, Kansas City Police, San Francisco Employees’ Retirement System and Maryland PERS & Teachers at 9% each.
Separate S&P Global Market Intelligence data published in January 2025 showed many U.S. pension funds were still below their private debt targets even after increasing allocations, pointing to continued institutional interest in the asset class.
A representative for the Kentucky Public Pensions Authority did not immediately comment.
Market stress tests conviction
The pension funds’ position comes during a period of strain for parts of the private credit market.
Blue Owl Capital Inc. recently limited withdrawals in two non-traded business development companies after record redemption requests. Blue Owl is the latest BDC manager to face redemption pressure as investors weigh competition, lower returns and risks tied to software borrowers.
Howard Marks of Oaktree Capital Management said in an April 9 memo that direct lending had benefited for years from abundant capital and lighter bank competition, but rapid asset growth had also increased competition and weakened loan terms in some parts of the market. Marks said recent redemption limits in semi-liquid vehicles had led investors to question liquidity terms and the valuation process for private debt holdings.
Marks also drew a distinction between private credit broadly and direct lending, saying much of the current market pressure is concentrated in direct loans to middle-market companies rather than across all private credit strategies. He said Oaktree’s direct lending exposure is limited relative to its overall credit business and that most of its private credit assets are managed for institutional clients rather than retail investors.
The $402 billion California State Teachers' Retirement System has exposure to private credit funds, including vehicles managed by Blue Owl, and is the largest investor in one of the firm’s publicly traded BDCs, Blue Owl Capital Corp, according to LSEG data.
A CalSTRS spokesperson declined to comment on Blue Owl specifically but said the fund remains committed to its existing approach.
"While the current environment for private credit funds is being driven by investors with different goals than CalSTRS, we remain committed to our long-term investment strategy, including investing in private credit," spokesperson Melissa Jones-Ferguson said in an email.
CIOs still see a role for the asset class
In Arizona, the Arizona Public Safety Personnel Retirement System currently has about 17% of assets in private credit and plans to increase that to 20%, Chief Investment Officer Mark Steed said in an interview.
“We still believe fundamentally that the asset class has a strong role to play in pension portfolios,” Steed said.
Steed also said that trillions of pension dollars entering private credit in recent years had “got out of hand,” leading to more competition and weaker underwriting standards.
"There's going to be a shakeout," he said.
The State Teachers Retirement System of Ohio said in a report posted last June that it remained focused on building its direct and co-investment private credit portfolio.
As of April 2025, STRS Ohio had investments in 537 companies with a net asset value of about $1.8 billion. The pension fund said private credit was expected to remain around 10% of assets during the fiscal year ending September 2026.
Representatives for STRS Ohio did not respond to messages.
In Canada, the Healthcare of Ontario Pension Plan said it continues to assess private credit opportunities.
"It's something that we continue to be interested in, but again, it's sort of very idiosyncratic," Chief Investment Officer Michael Wissell said.
At the Los Angeles County Employees Retirement Association, Chief Investment Officer Jonathan Grabel said in a board report released Wednesday that the pension fund’s credit category, which includes private credit, had outperformed its benchmarks over one-, three- and five-year periods, though it was trailing in the current fiscal year.
"Credit continues to fulfill its strategic objectives of income generation, diversification and moderate risk while remaining within guidelines," Grabel wrote.
During the webcast board meeting, Senior Investment Officer Chad Timko said the fund prefers to work with credit firms raising more limited pools of capital, which allows them to be more selective in underwriting loans and negotiating creditor rights and terms.
