Apollo, Fortress, Marathon, Golden Tree Hired to NYC’s Strategic Credit Mandate

The New York City Bureau of Asset Management, which oversees the $125 billion New York City Employees’ Retirement System (Nycers), has finalized the contracts with four managers it has hired to its new strategic credit mandate for the city pension system. The managers are the $159.2 billion, New York–based Apollo Global Management, $46.4 billion Fortress Investment Group, $10 billion Marathon Asset Management and $16.1 billion Golden Tree Asset Management. More contracts are expected to be finalized shortly.

Marc Spilker, president of Apollo, announced on an Apollo earnings call last week that the firm had received a $600 million allocation from “a large city pension fund.” The pension fund in question was subsequently confirmed as the New York City pension system, which is overseen by the office of the city comptroller, John Liu. The investment in Fortress is $400 million. All of these allocations are separate accounts. In the case of Fortress, the account will be invested alongside the Fortress Credit Opportunities III fund and will be managed by the firm’s credit group, overseen by co-CIOs Peter Briger and Constantine "Dean" Dakolias. Marathon has received a $400 million commitment. Golden Tree has a $300 million mandate that will be invested in high yield and its best distressed ideas.

These strategic credit commitments are a build-out from the opportunistic credit allocation the City carved out in 2008. The intent at the time was to take advantage of the opportunities being created by the market dislocation. At the time, the pension system committed 1.5 percent of its assets — or around $1.5 billion — to opportunistic credit and invested in funds then being raised by New York–based $13.1 billion Avenue Capital Group and California-based $1.77 trillion Pimco, among other firms. While the fund was therefore able to take advantage of investment opportunities in mortgage-backed securities and other markets, being in closed-end funds meant they could not get their money back when the opportunity was over and that funds which had been raised for a specific purpose were not typically able to move as the markets — and the investment opportunities — changed.

After CIO Lawrence Schloss came on board, in January 2010, a new plan was put together that would invest sizable chunks of capital to credit managers that the Bureau of Asset Management and its advisers have judged to have expertise in a number of areas of the credit spectrum — such as Treasury bonds, distressed credit and asset-backed lending. The managers are then given license to invest wherever they see opportunity within their approved areas of expertise.

Last summer, four of the five pension funds that make up the New York City system — NYCERS, the New York City Fire Department Pension Fund, the New York City Police Pension Fund and the New York City Teacher’s Retirement system — all voted to approve the new strategic credit relationships and to increase the opportunistic credit allocation from 1.5 percent to 5 percent of the fund, or around $6 billion. (The New York City Board of Education Retirement System, the smallest fund in the system, did not vote in favor of the proposal.)

From an asset allocators’ standpoint, the advantage of the new credit program is that it enables the pension plan to be more nimble, or opportunistic. The Bureau does not have to go to the board every time they want to shift the credit portfolio and they also do not have to hire new managers to take advantages of different moments in the credit cycle or pull funding from managers where they see no opportunity. For managers there is obviously prestige and fees in such a large commitment. Although investing in such large amounts, and through separate accounts, can enable a fund like New York City to negotiate more attractive terms on fees.

The New York City fixed-income allocation also signifies an increasing awareness by public pension plans and other institutional investors of the range and diversity of credit strategies. No longer are pension plans just investing in Treasuries. Credit managers have shown they can be just as different — and in some cases just as risky — as their equity management counterparts. As a result, institutional investors are starting to look at more creative ways to invest in the asset class.

Fixed income is not the only area where the New York City Retirement System has been branching out. Three of the five pension plans — all except the teachers and the board of education — are also making their first foray into hedge funds. Last year they hired Permal Group, a fund-of-hedge-funds manager, to run a fund-of-hedge-funds mandate. This spring the plans made their first direct hedge fund investments, hiring New York–based hedge funds D.E. Shaw Group and Brigade Capital Management and London-based Brevan Howard Asset Management.