UNITED STATES - Several pension funds in the United States have decided to invest some capital into a distressed debt investment strategy but are choosing to do so through leverage-driven funds.
Orange County Employees Retirement System, Sacramento County Employees Retirement System and the New York State Teachers Retirement System are the latest to buy into distressed debt situations, as Lorelei Chao, investment officer with Orange County, notes: "It's our belief that the dislocation in the credit markets is going to create some strong investment opportunities through the purchase of residential and commercial mortgages across the country."
This pension fund made a $50m (€35.2m) commitment to the PIMCO Distressed Mortgage Fund as part of its 5% target allocation to alternative assets. To August this year, Orange County had invested just 1.8% of total assets in alternatives.
Similarly, Sacramento County will be making a $25m commitment to the same commingled fund, according to chief investment officer Jeff States.
"Over the last three to four months there has been a lot of discussion of distressed debt and the opportunity that it represents. We agree that there are some distressed assets in the market that represent a good investment opportunity."
Pacific Investment Management Company is expecting to deliver investors leveraged IRR of 15% through the $2bn fund which invests in residential and commercial mortgage-backed securities (CMBS). The fund can apply a maximum of 50% leverage on its investments.
In contrast, New York State Teachers has placed $146m into the ING Clarion Debt Opportunity Fund, which is designed to achieve net return of 15% a year by investing in US BBB-rated, or less, mortgage-backed securities.