U.S. state and local retirement funds are pumping billions into private credit, joining the stampede into a booming sector of finance in the pursuit of higher returns.

These systems are collectively allocating at least $100 billion of their roughly $5 trillion in assets into private debt, according to Equable, a bipartisan pension researcher founded by public finance leaders. While that’s only a sliver of their holdings at present, funds’ private credit positions have been steadily growing and are poised to take off as pension plans including the California Public Employees’ Retirement System — the largest among its peers and a bellwether — show a keen interest in committing more to the space.

“Everybody is looking at private credit,” said Rosemary Guillette, a vice president for Segal Marco Advisors who has advised public pensions for more than two decades. “You are going to see a steady increase.”

For almost two decades, public pension funds have increasingly looked beyond traditional investments such as stocks and bonds and tapped alternatives to help boost returns and fill funding shortfalls. They’ve ramped up their exposure to private credit in recent years as the asset class has ballooned to $1.6 trillion globally. Private debt allocations at state pension funds, for example, may reach 6% over the next two years, up from 3.6% last year and 2.1% in 2017, according to Cliffwater, an investment adviser that specializes in alternative assets.

So-called direct lenders have filled a void left by banks that have retreated from extending credit to some riskier corporate borrowers amid a spike in interest rates and tightening regulations. Other aspects of private credit include asset-based finance as well as debt for real estate and infrastructure.

While potentially rewarding for retirement plans, the shift into private credit isn’t without hazards. Amid the explosive growth of the asset class, financial watchdogs have raised red flags about its lack of transparency and regulation, while citing risks around a sector that hasn’t been tested by a prolonged downturn. There’s also the overarching question of whether alternative investments are worth the risk for funds that are devoted to ensuring public servants receive their pensions as promised.

Proponents point to the benefits of private credit as an alternative investment over other options such as private equity and real estate, including that the debt is often senior-secured and backed by the assets of the company. It also offers juicy yields and interest-rate risk is limited given its typically floating-rate structure.

“Looking forward, private debt is certainly the biggest new asset class for the industry as a whole,” said Anthony Randazzo, executive director of pension researcher Equable.

The California Public Employees’ Retirement System, or CalPERS, began tracking private debt as a unique asset class within its portfolio last year and is targeting an allocation of 5%. The Chicago Teachers’ Pension Fund is currently searching for asset managers to invest more than $300 million in private debt, to boost its allocation from zero to 3% of assets.

The Public Employees Retirement Association of New Mexico first invested in the market in a significant way just over a year ago. The system held $524 million in private credit as of Sept. 30, and aims to increase its exposure, said Michael Shackelford, chief investment officer of New Mexico’s pension system.

“It’s a combination of banks vacating that space and pensions looking for yields,” Shackelford said. Wider spreads and regular cash distributions with investor protections in the event of bankruptcy have made private credit attractive, he said.