Inside CalSTRS’s $1 Billion Direct Lending Allocation

CalSTRS has invested with Owl Rock Capital under a customized mandate.

 Owl Rock headquarters in New York City. (Caitlin Ochs/Bloomberg)

Owl Rock headquarters in New York City.

(Caitlin Ochs/Bloomberg)

The California State Teachers’ Retirement System has made a $1 billion allocation to direct lending asset manager Owl Rock Capital.

The deal, announced Monday by Owl Rock, is a customized mandate that fits into CalSTRS’s so-called collaborative model strategy, which aims to move toward more direct investing in collaboration with fund managers.

The allocation size is large as far as single mandates go, particularly in direct lending, a relatively small yet growing asset class. Owl Rock is a young firm, founded about five years ago by alums from GSO Capital Partners, KKR & Co., and Goldman Sachs Group.

“Our partnership aligns with the CalSTRS Collaborative Model investment strategy, which focuses on leveraging our partners to reduce costs, increase investment returns and control risk,” said Scott Chan, CalSTRS deputy chief investment officer, in the announcement.

According to Marc Lipschultz, co-founder of Owl Rock and James Clarke, a managing director at the firm, a hallmark of this deal was CalSTRS’s thorough due diligence.

“The depth and breadth they brought to this, coronavirus or not, is noteworthy,” Lipschultz said by phone. “Needless to say, the terrible impacts of the pandemic are severe on everybody. It doesn’t change that they have a lot of pensioners who count on them.”

Clarke noted that he visited CalSTRS’ s Sacramento office five times between August 2019 and February 2020 to get to know the pension fund’s team.

Deal talks heated up as the coronavirus pandemic gained steam stateside. “Anecdotally, we probably spent 50 hours on Zoom calls over the last four or five months, which included half of those that were due diligence related,” Clarke said by phone.

Owl Rock derives a large portion — roughly 33 percent — of its more than $20 billion in assets under management from public pension funds, according to a source familiar with the matter.

And that number is expected to grow.

“Yields are so low,” said Lipschultz. “A lot of institutions are thinking ‘What is a prudent way for me to deliver for my pensioners?’”

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Although, as Institutional Investor previously reported, deal churn in the middle market slowed in the second quarter, Lipschultz remains confident.

“The markets are competitive, but candidly, the competition in direct lending is quite small,” Lipschultz said. “It’s quite a young asset class.” He compared the direct lending market to what private equity looked like 25 years ago, both in terms of allocation sizes and the number of large competitors.

“I think if you picture the competitive environment, there’s a good number of smaller participants,” Lipschultz said. “The market is a bit pyramid-shaped.”

He added that there are “very few” direct lending firms that can do financings that are larger than $100 million in size.