Quiver Quantitative - Rich Hall, the newly appointed CEO of the University of Texas/Texas A&M Investment Management Company (UTIMCO), which boasts an impressive $55 billion endowment, has expressed reservations about delving deeper into the thriving private credit sector. Even as various endowments and pension funds are channeling significant investments into this $1.6 trillion global market, Hall remains circumspect, citing concerns over the leverage inherent in private credit. "We just haven’t really found a great strategic reason for us to own a lot of private credit," Hall articulated during an interview at UTIMCO's Austin-based office.
UTIMCO's skepticism towards private credit comes at a time when Wall Street luminaries perceive it as a gold mine. Institutions like Goldman Sachs (NYSE:GS) and BlackRock (NYSE:BLK) have voiced bullish sentiments on private credit's growth prospects, with the latter even introducing a private credit fund aimed at retail investors. Simultaneously, renowned private equity firm Blackstone (NYSE:BX) dubbed the current phase of private credit as its "golden moment." Furthermore, large pensions such as the California Public Employees’ Retirement System have expressed intentions to reduce their stock portfolios in favor of bolstering their investments in private credit.
However, the allure of private credit has marginally faded for UTIMCO over the last decade. While it constituted 4.5% of the fund a decade ago, private credit now makes up approximately 2.2%, translating to $1.2 billion, with Fortress Investment Group being the most substantial individual manager. Hall's cautious approach is rooted in the inherent risks associated with amplifying returns using leverage, which could expose investors to heightened vulnerabilities in economic downturns or funding shortages. "You’re taking a leveraged return to try and get...a very vanilla credit return and juice it up a little bit more," remarked Hall, emphasizing the resultant volatility.
Despite Hall's wariness of private credit, he remains optimistic about other alternative assets. Recent board decisions at UTIMCO have pivoted the endowment’s focus, upping private equity allocations from 25% to 30% while trimming public equity from 35% to 27%. ARCH Venture Partners and HarbourVest Partners currently hold the distinction of being the endowment’s premier private equity managers.
This article was originally published on Quiver Quantitative