FROM: Don Pierce, Chief Investment Officer
SUBJECT: Arini Capital Management - Master Custody Account
RECOMMENDATION:
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Recommend that the Board approve the establishment of a Master Custody Account (MCA) with Arini Capital Management, including a $200 million initial allocation, subject to completion of due diligence and legal documentation.
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BACKGROUND:
Starting in 2024, staff undertook an effort to broaden the SBCERA portfolio’s capabilities in the European credit universe. As previously communicated, this included an in-depth process to survey the market and identify target areas of interest. Beginning with 62 survey respondents, staff conducted focused diligence on 10 managers and identified 4 managers that aligned with SBCERA’s objectives from a strategy and firm perspective.
Staff recommends that SBCERA establish a new Master Custody Account (MCA) with Arini Capital Management (“Arini” or “the firm”). This account will initially focus on three main categories of investment:
- Arini Credit Master Fund (“ACMF”) - $50mm of the MCA (25%)
o Open-ended all-weather strategy focused on delivering absolute returns through the identification of specific long and short positions across the credit universe. The fund will largely emphasize opportunities across public bonds, loans, CDS and structured credit, with the majority of exposure in Europe and the remainder in the US.
- Arini Credit Opportunities Fund (“ACOF”) - $75mm of the MCA (37.5%)
o Drawdown hybrid strategy focused on catalyst-driven situations, including restructuring, refinancing and capital solutions. The fund will have slightly more concentration than ACMF and will have a 50/50 profile with respect to public and private investments.
- Direct Investments - $75mm of the MCA (37.5%)
o Bespoke positions represented by investments that either are too large for existing Arini funds or fall outside of existing fund mandates. Staff expects that this sleeve will mostly be comprised of private opportunities in Europe.
All opportunities in the MCA are driven by sector-focused research teams who view their universe through a fundamentally driven lens. Senior members of the investment team are each responsible for specific areas of coverage in various industries; these names are kept up to date through regular and consistent touchpoints on both a fundamental and financial basis. It is this knowledge that drives the investment process and allows the team to act quickly in times of dislocation.
Arini Capital Management was founded in October 2021 by Hamza Lemssouguer as an alternative asset manager dedicated to credit markets in Europe. Prior to founding Arini, Mr. Lemssouguer was the Head of European High Yield Credit Trading at Credit Suisse, where he was responsible for updating, developing, and refining the firm’s approach to European high yield markets; these changes contributed significantly to the success and growth of the desk during those years. Arini currently manages approximately $10bn of assets under management, and the firm employs approximately 90 people in total, with the vast majority in their London headquarters and an additional satellite office in New York City.
Staff and NEPC believe that Arini is a compelling opportunity for SBCERA for the following reasons:
- Proven ability to blend credit protection with upside optionality.
o The research team is differentiated from peers in that senior investment professionals are highly experienced sector specialists; this approach allows Arini to proactively source ideas through deep industry knowledge and relationships. The strategy blends a fundamental, bottoms-up process regarding underlying value with a trading-oriented willingness to form opinions ahead of industry consensus. Moreover, the Arini research team has the added benefit of having the ability to evaluate relative value as they look at credits across both public and private markets. As a result, staff and NEPC expect the blended portfolio to achieve a low double-digit to mid-teens net return over a typical cycle.
- Secular growth and structural benefits to harvest in European credit.
o A positive supply-demand imbalance exists in European credit markets due to several factors. On the supply side, European credit markets have continued to grow, and a maturity wall in the latter half of this decade brings concomitant refinancings. On the demand side, geographic complexity exists due to multiple regulatory jurisdictions and the need for country-specific industry knowledge. Additionally, as global alternative credit managers have grown in size, most have concentrated their efforts on US markets; Arini can take advantage of these market dynamics to act as a credible and nimble credit specialist.
- Compelling opportunity to invest in a firm at an earlier stage of growth.
o Arini represents an attractive fit within SBCERA’s portfolio, namely as a source of alpha largely focused on European public and private credit markets. The founding team has relevant experience to operate in these markets, a demonstrated ability to generate strong returns and a clear motivation to succeed. Importantly, the firm is newer in its lifecycle and SBCERA has the potential advantage of being able to grow with the firm over time with this initial allocation.
NEPC has reviewed Arini’s strategies and the firm overall; additionally, Neil Sheth accompanied staff on a due diligence meeting in London at Arini headquarters. NEPC believes that this MCA investment is a good fit with SBCERA on multiple levels - within credit, within our international lineup, and within the broader portfolio.
This investment will be included in SBCERA’s Global Fixed Income allocation, which has a Board-established target allocation of 17% of plan assets. Staff and NEPC are recommending the Board establish an MCA with Arini with an initial funding commitment of $200mm (1.2% of plan assets), with the potential for account growth over time pending additional co-invest and strategy-specific diligence.
BUDGET IMPACT:
Investment Costs are deducted from Net Asset Value.
STRATEGIC PLANNING GOAL/OBJECTIVE:
Prudent Fiscal Management
STAFF CONTACT:
Thomas Kim
ATTACHMENTS:
Exhibit A: Arini Capital Presentation
Exhibit B: NEPC Cover Memo
Exhibit C: NEPC Research Memo (confidential)
Exhibit D: NEPC Quant Sheet (confidential)
Exhibit E: Additional Staff Information (confidential)