Australia’s Pension Giants Eye Nascent Private Credit Products for Portfolio Diversification and Returns Boost

Australia’s pension giants are on the hunt for new investment opportunities in the private credit market as they seek to diversify their portfolios and boost returns in a cash-flushed industry.

AMP Ltd., one of Australia’s largest pension providers, has recently launched a new A$300 million alternative debt fund to invest in credit risk transfer, a relatively new corner of the private market. Aware Super, managing A$175 billion of assets, is also exploring niche products for potential investments.

With the Australian pension pool growing rapidly to A$3.7 trillion and receiving over A$2 billion in inflows each week, many of the country’s largest pension funds are increasing their allocations to private credit. The asset class has grown to $1.65 trillion globally, according to data from Preqin Ltd.

Stuart Eliot, head of portfolio management at AMP, stated that exposure to private credit is increasing across superfund portfolios. AMP has allocated up to 3% of its active portfolio to private credit, including credit risk transfer, distressed credit, and special situations.

Credit risk transfer, a product more familiar to European banks, is gaining popularity in the US and offers attractive returns. AMP’s new fund is offering returns between 8% and 10% over the Reserve Bank of Australia’s official cash rate of 4.35%.

While some pension funds are cautious about investing in new products like credit risk transfer, others are exploring niche investment strategies such as private asset-backed lending and specialized areas within energy infrastructure credit.

As the private credit market faces potential headwinds from heavily-indebted borrowers and rising defaults, pension funds are looking to mix strategies to mitigate risks. Conversations with larger funds are focusing on niche areas to diversify portfolios and enhance returns.

Overall, Australian pension giants are actively seeking new opportunities in the private credit market to stay ahead in a competitive industry and maximize returns for their members.