PIMCO tells OHA trustees private credit can boost yield but carries liquidity and policy risks

PIMCO portfolio managers on March 9 briefed the Office of Hawaiian Affairs Committee on Investments and Land Management about private credit, describing it as a large, heterogeneous market that can offer higher income and different risk drivers than public markets. "Investing in private credit means effectively disintermediating the banks," said Jason Steiner, managing director and portfolio manager at PIMCO.

The presentation defined private credit as direct lending by nonbank institutions across corporate, residential and specialty-finance markets. PIMCO summarized the asset class as including direct middle-market lending, nonqualified mortgages, consumer specialty finance (auto, student, home-improvement and solar loans) and commercial real estate lending. The firm noted private credit has expanded since the financial crisis as banks have faced higher regulatory capital costs and some lenders moved away from holding long-duration loans.

PIMCO identified typical return and risk characteristics. "Generally, private credit strategies, we're looking target within our strategies 8 to 12% returns over a long period of time," Steiner said. Managers often structure vehicles with lockups or defined lives to manage the asset-liability mismatch; speakers repeatedly emphasized illiquidity as the primary risk and recommended diversified strategies across submarkets.

As an example, PIMCO described an aircraft-leasing portfolio it underwrote to a roughly 9% unlevered return and estimated could produce about a 15% leveraged return for investors, noting diversification across aircraft and lessees as a risk-mitigation tool. The presenters described mortgages (including nonqualified mortgages), auto and student loans, equipment and specialized lending as other sizable opportunity pools.

Trustees asked how private credit fits OHA's portfolio and about oversight. Endowment Director Ryan Lee said PIMCO's tactical opportunities fund — described in the presentation as a hybrid public/private credit vehicle — sits in OHA's diversifying bucket and that current exposure to the PIMCO strategy is about $36,000,000. "That fund is a hybrid credit strategy ... 50% public securities ... and the other 50% is in private markets," a PIMCO presenter said; Ryan Lee confirmed the approximate exposure figure.

Trustees pressed on governance and sourcing: whether PIMCO makes allocation recommendations and how OHA decides to increase exposure. Ryan Lee described the relationship as collaborative: managers bring opportunities and staff evaluates whether to recommend additional allocations to the board. Trustees also asked about competition from banks and the regulatory environment; PIMCO noted regulatory changes created much of the private-credit opportunity and said banks may remain cautious because laws remain in place even if enforcement shifts.

Trustees raised practical concerns such as modeling time horizons and liquidity. PIMCO described typical portfolio lives of about three to three-and-a-half years for the strategies it favors, and warned that investor expectations must account for periods of dislocation (for example, COVID) when liquidity can change quickly.

The briefing was educational in purpose; no formal investment action or vote was taken at the meeting on PIMCO recommendations. The trustees thanked the presenters and were invited to follow up through staff for additional detail.

Ending: Trustees asked staff for follow-up materials on OHA's exposure to PIMCO strategies and on due-diligence processes for private-credit allocations; staff said it would coordinate with PIMCO and with Endowment Director Ryan Lee.