US pension funds remain below their median target allocation to private debt, though they have increased their exposure to the asset class as a whole.

Across 118 US pension funds, 77 remain underallocated, 34 exceed their targets and seven match their targets, according to S&P Global Market Intelligence data.

The median target allocation is $175.5 million versus a median actual allocation of $147.5 million, indicating an aggregate underallocation of $28 million as of Jan. 3.

The actual allocation, however, shows that pension funds as a group have increased exposure to private debt since August 2024, when the net underallocation was $76 million.

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Pension funds are not meeting their target allocation due to infrastructure and internal resource limitations and the need to rebalance investments following substantial public market gains, according to David Neuenhaus, KPMG's global sovereign wealth and pension funds tax lead.

At the same time, the number of nonbank financial lenders has increased, Zia Uddin, president of middle-market lender Monroe Capital LLC, told Market Intelligence.

"Part of it is a bandwidth issue and part of it is just that there are a lot of managers they have to talk to. It takes longer for them to do diligence because everybody can't be winners," Uddin said.

Short of target

The California Public Employees' Retirement System (CalPERS) recorded the largest underallocation to private debt among US pension funds, falling $25.72 billion short of its target.

In November 2024, CalPERS reported that its private credit investments recorded a 17% one-year return, the pension fund's second-best performing asset class after public equities. CalPERS also announced an increase in private debt allocation to 8% from 5% of plan assets.

The Western Conference of Teamsters Pension Trust (WCTPT) ranked second with an actual allocation of $2.05 billion compared with a target of $5.13 billion. WCTPT has a target allocation of 9% of assets to private debt, a significant increase from its current 3.60%, according to Preqin data.

Over the target

The Pennsylvania Public School Employees' Retirement System had the highest overallocation to private debt, with $5.99 billion in actual allocation, $1.50 billion above its target.

The Texas County & District Retirement System came in second with an actual allocation of $13.10 billion, nearly $1 billion above its target of $12.13 billion.

Top allocators

CalPERS emerged as the top allocator to private debt, at $16.36 billion, followed by the Virginia Retirement System with $16.12 billion in private debt allocation.

Among the US pension funds analyzed, the Dallas Police and Fire Pension System, Texas Abilene Firemen's Relief & Retirement Fund and IBEW Local 150 Supplemental Pension Fund recorded the lowest allocation to private debt at $1 million each.

Long-term tailwinds drive investment in private debt

Monroe Capital does 110 to 130 deals annually, roughly split between new deals and follow-on financings for existing deals, Uddin said. As a middle-market lender, the firm's private debt business is driven by private equity M&A, which was up 25% in value in 2024.

Uddin said feedback from private equity clients "is that they expect 2025 to be a pretty robust M&A year," despite interest rates that are likely to remain higher for longer.

Pension fund flows into private credit vehicles will continue, driven by demand for diversification, as well as relatively dependable yield and low volatility that help reach statutory return targets, Uddin said.

"What you don't see [with private debt] is a lot of mark-to-market volatility like in the liquid markets," Uddin said.