AUSTRALIA’S pension giants are looking to expand their private credit exposure to some nascent products, as the cash-flushed industry hunts for ways to diversify portfolios and boost returns.

AMP, one of Australia’s largest pension providers, has launched a new A$300 million (S$268 million) alternative debt fund to invest in credit risk transfer, a relatively new corner of the private market. Aware Super, which manages A$175 billion of assets, is also studying the market of niche products for investment potential.

The nation’s fast-growing A$3.7 trillion pension pool is looking for investment avenues as the sector gets more than A$2 billion of inflows each week. Many of the country’s largest pension funds such as Cbus, HostPlus and AustralianSuper have increased asset allocations to private credit. The asset class has ballooned to US$1.65 trillion across North America, Europe and Asia-Pacific at the end of September 2023, according to figures from investment data firm Preqin Ltd.

“Exposure to private credit is increasing across our superfund portfolios,” said Stuart Eliot, head of portfolio management at AMP. “As we already have a domestic allocation to direct lending strategies, we were looking for complementary exposures which have a different risk-return dynamic.”

AMP has allocated as much as 3 per cent of its active portfolio to private credit. Besides credit risk transfer – a type of bond issued by banks to insure the first loss on a pool of loans – its new fund’s mandate also includes distressed credit and special situations where borrowers are in financial difficulties.

Credit risk transfer is a more familiar product to major European banks and also gaining popularity in the US. Some of the bonds pay double digit returns, attracting investors such as Blackstone and Oaktree Capital Management. AMP’s fund is offering returns between 8 per cent and 10 per cent over the Reserve Bank of Australia’s official cash rate of 4.35 per cent.

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