Stay informed with free updates

US public pension funds are allocating less capital to private credit investments amid concern about looser underwriting standards and rising credit risks.

A Financial Times analysis of public records shows 70 major US public pension funds reported an 18 per cent decline in allocation to private credit in the first six months of 2025 from a year earlier. Public pensions have been a key source of capital for the sector, which posted an overall 40 per cent drop in North American fundraising in the first half of the year, according to financial data provider Preqin.

State and city pension plans told the FT they have tightened scrutiny of new private credit managers and paused allocations since the start of the year.

The pullback highlights institutional investors’ growing unease with a boom that emerged as private investment funds became key lenders to small- and mid-market businesses.

“The more money coming in, the lower the percentage that can be allocated to attractive deals,” said Jay Love, US chief investment strategist at investment consultancy Mercer, referring to the flood of capital into private credit.

Private credit has flourished in recent years as it has filled the void left by banks that pulled back from small and medium-sized business lending amid tougher capital rules and strains at regional lenders such as Silicon Valley Bank.

The asset class has drawn investors by delivering high single- to double-digit returns with limited risks. Total assets under management at US private credit vehicles more than doubled to $1.4tn in 2024 from five years ago, according to Federal Reserve estimates. 

Until now, public pension funds played a pivotal role in fuelling the boom. A survey of 438 public pension plans by the National Conference on Public Employee Retirement Systems in November last year found their average allocation to private debt had surged to 4.1 per cent from 0.7 per cent three years ago. 

But as the private credit binge has intensified, spreading from institutions to retail investors, pension funds are beginning to retrench.

The $44bn Iowa Public Employees’ Retirement System paused its $550mn annual private credit allocation after committing $100mn in the first five months of this year, according to public records. 

At a June board meeting, chief investment officer Sriram Lakshminarayanan said the fund would resume making new private credit commitments in the following month but set a “pretty high” bar for future investments.

The $2.4bn Cincinnati Retirement System has also shelved plans to hire a new private credit manager. “I’d rather wait and see what happens over the next six months,” said chief investment officer Jon Salstrom.

Such caution has led many funds to allocate less to private credit than they previously planned. An S&P Global Market Intelligence study of more than 70 plans found 66 per cent fell short of their targets in June, up from 63 per cent in January.

Some managers cite policy uncertainty as a factor, as many plans struggled to gauge the impact of President Trump’s tariff war and tax bill on investment outcomes.

Pat Reinhardt, a senior investment officer at Iowa’s public pension fund, said at the June board meeting the fund suspended its private credit allocations because of market volatility following Trump’s sweeping tariff announcement in April. “We thought it best to take a step back and see how things played out before we move forward with more commitments,” he said.

Pension plans are also worried the surge in private credit funds may weaken lending standards and increase default risks.

Yup Kim, CIO of the $46bn Texas Municipal Retirement System, said the retail rush was leading to an abundant supply of capital which can lead to “looser covenants, structural protections, and underwriting standards” — trends that ultimately affect pensions as well.

“Whenever you have an influx of retail capital coming in,” he said, “their expectations of return or risk-reward might not be commensurate with those 100-plus-year-long institutions.”

The problem is exacerbated by higher-for-longer interest rates and an uncertain US economic outlook that may “inevitably” cause private credit defaults to “tick up”, said Ross Alexander, a senior portfolio manager at the $85bn Alaska Permanent Fund Corporation.

Recommended

Alexander said Alaska is looking to work with private credit managers with experience in asset recovery to make sure the fund’s returns are “better protected.”

“Given all of what we are seeing in private credit, it is even more imperative that we focus on workouts and what happens when something goes wrong — because inevitably it will,” he added.

Despite the concerns, some pension plans are still keen to expand their private credit exposure in the belief that careful planning may generate excess return without undue risk. 

Steven Meier, CIO of the $295bn New York City Retirement Systems, said the fund is looking to increase its private credit allocation, which yielded 9.5 per cent in the 12 months ending June, by “a couple percentage points” by adding investment-grade and asset-backed private credit in the coming years. 

“We have completely committed to private credit,” he said. “We are willing to trade illiquidity and complexity for a higher return.”