Indiana Public Retirement System Invests Heavily in Private Credit and Real Assets

Indiana Public Retirement system Invests $298 Million In Private Markets

Published: October 26, 2023

The $45 billion Indiana Public Retirement System (INPRS) continues to expand its private markets allocation. It recently committed $298 million across private credit and real assets strategies,according to board meeting materials.

On the credit side, INPRS committed a total of $200 million to HPS Investment Partners. The system allocated $100 million to HPS Strategic Investment Partners VI, targeting privately negotiated junior debt and high-yielding fixed and floating rate debt instruments.

An additional $100 million was committed to a direct co-investment alongside the HPS Strategic Investment Partners VI fund. This further deepens INPRS’s relationship with HPS and its focus on bespoke credit opportunities.

In real assets, INPRS approved three new allocations totaling $98 million.The largest was a $75 million commitment to Lena Specialty Grocer Fund III, managed by longpoint.

This fund focuses on specialty grocery-anchored neighborhood retail centers in major U.S.markets. this niche retail segment is viewed as defensively positioned within real estate allocations.

Additionally, INPRS committed $15 million to Macquarie Project Beaker Co-Investment. This is deployed alongside Macquarie Infrastructure Partners VI, which targets infrastructure assets across sectors including transportation, digital, utilities, and energy.

The system also made an $8 million co-investment in EnCap Energy Capital Fund XII Double Eagle V, managed by EnCap Investments. This fund focuses on U.S. oil and gas opportunities.

INPRS’s defined benefit plan continues to deliver strong returns, reporting gains of over 10% annualized thru April 30. The private markets portfolio-including private credit allocations dating back to 2017-has returned over 7% annualized.

Real assets have posted a 4.65% gain over the same period.

Disclaimer: Investment decisions should be made with the advice of a qualified financial advisor. Past performance is not indicative of future results. This article is for informational purposes only and does not constitute financial advice.

Frequently Asked Questions

• What is INPRS? It is the Indiana Public Retirement System, a large public pension fund.
• What are private markets? These include investments in assets that are not publicly traded, such as private credit and real estate.
• Why invest in private markets? They can offer potentially higher returns and diversification benefits.
• What is a co-investment? It involves investing directly in an asset alongside a fund manager.

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What are the potential benefits of INPRS investing in private credit compared to publicly traded bonds?

Shifting Portfolio Allocations: A Deeper Dive

The Indiana Public Retirement system (INPRS), managing retirement funds for Indiana’s public employees, teachers, and state police, has been strategically increasing its allocations to choice investments, particularly private credit and real assets. This move reflects a broader trend among pension funds seeking higher returns in a low-interest-rate surroundings and diversifying away from traditional stock and bond portfolios. As of recent reports, INPRS has committed billions to these asset classes, signaling a long-term commitment to this investment strategy.

Why the Focus on Private credit?

private credit, encompassing direct lending to companies, mezzanine debt, and distressed debt, offers several potential advantages for INPRS:

Higher Yields: Compared to publicly traded bonds, private credit typically offers higher yields, compensating investors for the illiquidity and increased risk.

Diversification: Private credit investments are less correlated with public markets, providing diversification benefits and possibly reducing overall portfolio volatility.

Strong Demand: The demand for private credit has been steadily increasing, driven by banks’ reduced lending capacity and companies’ need for capital.

Inflation Hedge: Certain types of private credit, particularly those tied to floating interest rates, can act as a hedge against inflation.

INPRS’s private credit portfolio includes investments across various sectors, including technology, healthcare, and industrials. They are actively deploying capital through established private debt funds and increasingly exploring direct lending opportunities.

Real Assets: Beyond Traditional Investments

Real assets, including real estate, infrastructure, and natural resources, represent tangible assets with intrinsic value. INPRS’s allocation to real assets is driven by the following factors:

Inflation Protection: Real assets often provide a hedge against inflation,as their values tend to rise with prices.

Long-term Cash Flows: Infrastructure and real estate investments typically generate stable, long-term cash flows, aligning well with INPRS’s long-term liabilities.

Diversification: Real assets offer diversification benefits, as their performance is frequently enough less correlated with traditional asset classes.

Potential for Appreciation: Strategic real estate and infrastructure investments can appreciate in value over time, enhancing returns.

Specifically, INPRS has been actively investing in:

Commercial Real Estate: Including office buildings, industrial properties, and multifamily housing.

Infrastructure: Investments in transportation, energy, and utilities projects.

Renewable Energy: Solar and wind energy projects,aligning with ESG (Environmental,Social,and Governance) considerations.

Timberland: Recognizing the long-term value and inflation-hedging properties of timber.

INPRS’s Investment Strategy: A Detailed Breakdown

INPRS’s approach to private credit and real assets isn’t simply about increasing allocations; it’s about a carefully considered strategy. Key elements include:

1. Target Allocation: INPRS has established target allocation ranges for each asset class, guiding its investment decisions. These targets are reviewed and adjusted periodically based on market conditions and the fund’s liabilities.
2. Manager selection: INPRS conducts rigorous due diligence on potential investment managers, evaluating their track records, expertise, and investment processes.
3. Diversification within Asset Classes: Within private credit and real assets, INPRS seeks to diversify its investments across sectors, geographies, and investment strategies.
4. Risk Management: INPRS employs robust risk management practices to mitigate the risks associated with these alternative investments, including illiquidity, credit risk, and market risk.
5. ESG Integration: Increasingly, INPRS is integrating ESG factors into its investment process, considering the environmental and social impact of its investments.

Performance and Challenges

While early results are promising, investing in alternative investments like private credit and real assets isn’t without its challenges.

Illiquidity: These investments are less liquid than publicly traded securities,making it difficult to quickly sell them if needed.

Valuation Complexity: Valuing private credit and real assets can be complex and subjective, requiring specialized expertise.

Due Diligence Costs: Conducting thorough due diligence on potential investments can be expensive and time-consuming.

Market Risk: While offering diversification, these assets are still subject to market risk, particularly during economic downturns.

Despite these challenges,INPRS believes that the potential benefits of investing in private credit and real assets outweigh the risks,positioning the fund for long-term success. Recent performance data indicates that these asset classes have contributed positively to INPRS’s overall returns,helping to meet its obligations to retirees.

Case Study: INPRS’s Infrastructure Investment in Renewable Energy

A notable example of INPRS’s real asset strategy is its investment in a portfolio of renewable energy projects. This investment, made through a partnership with a leading infrastructure fund, provides INPRS with a stable stream of cash flows, inflation protection, and exposure to the growing renewable energy sector. The project portfolio includes solar and wind farms located across the United States, generating clean energy and contributing to a more sustainable future. This investment exemplifies INPRS’s commitment to both financial returns and responsible investing.

Benefits for Indiana Taxpayers and Retirees

The success of INPRS’s investment strategy directly benefits Indiana taxpayers and retirees. By generating higher returns, INPRS can:

* Reduce Contribution Rates: Lowering the amount that taxpayers and