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Eunice McHugh, Director, Private Credit, San Francisco Employees' Retirement System (SFERS)

Institutional Investor • 29 August 2023

Alpha Edge Recognition - Outstanding Manager Selection Approach

This year, Allocator Intel is recognizing leaders in the allocator community, acknowledged by their peers, for exceptional leadership in the key areas of portfolio construction in the Alpha Edge Recognition Awards.
Eunice McHugh is nominated for her Outstanding Manager Selection Approach in Private Credit Investing at the San Francisco Employees' Retirement System (SFERS). She joined the $33 billion public pension fund in 2013 as a Security Analyst in Fixed Income. In her current role as Director of Private Credit, Eunice is responsible for portfolio construction and leads due diligence and manager selection. 
She is a graduate of the University of California, Davis, where she studied Economics, and the University of San Francisco, where she received her Master of Science degree in Financial Analysis. She began her career in investment management. After two years as an Associate in Private Investment Management at Lehman Brothers, she spent five years as a Senior Associate in Private Wealth Management at Morgan Stanley.
The following is edited for length and clarity.

Let’s talk about the portfolio

We started our private credit program in 2008 and received a formal allocation in late 2017, so we have been one of the earlier investors in private credit.
In addition, the portfolio is well diversified across sub-strategy, geography, and manager. Direct lending represents about half our program with the balance essentially in opportunistic strategies. In this latter area, we have investments in a variety of strategies including everything from credit opportunities and distressed to real estate debt and a meaningful allocation to specialty finance (asset-based lending, royalties, insurance, and transportation, among others).

What have been the most significant changes?

The most significant change has been getting the allocation to private credit established in late 2017. When I joined SFERS in early 2013, private credit represented a very small portion of the fixed income portfolio. I was active in building out this sub-allocation, with support by our CIO and our Board, given this is where we saw the most attractive opportunities. Since then, my team and I have worked to increase this allocation, which now represents over 7% of the total plan today. 
At the portfolio level, we have been quite active in diversifying our corporate credit exposure, in anticipation of market correction. This began roughly five years ago and included the addition of less-correlated strategies and other opportunities that exhibited strong downside protection. This should hopefully help protect the portfolio in the current environment.

What are some of the factors you consider when evaluating opportunities in the investment space?

For the private credit portfolio, we assess relative value including how attractive the opportunity is on a risk-adjusted return basis relative to others.
In addition, we consider the diversification benefits that the opportunity will provide to our existing portfolio. We also consider how the opportunity or strategy is expected to perform in various market environments. For example, are their macro tailwinds or headwinds that could impact the opportunity? Further, we closely evaluate the firm and the team leading the strategy including their philosophy and approach to underwriting and portfolio construction.

When looking to form strategy partnerships, what do you focus on?

Once we have identified an opportunity where we believe a strategic partnership makes sense, there are several things we consider. This can include the stability of the firm and team leading the strategy as well their ability to execute and scale the strategy. We also assess their prior performance including how much risk the manager took to generate their returns relative to their peers.
In addition, we also focus on a manager’s approach to underwriting and risk management as well as our ability to tailor the investment limitations to meet the needs of our portfolio. It is very important that we get comfortable here given these types of investments tend to be larger and represent a meaningful portion of our portfolio. Lastly, but also importantly, we focus on alignment. These types of relationships are meant to be longer term partnerships and it is important for us to see a demonstrated alignment with SFERS.

What are some of the investment opportunities you’re looking at?

I think all private credit strategies are now more attractive, particularly lending opportunities given the higher interest rate environment. Over the next 12-18 months, we will continue to focus on asset-backed lending opportunities as well as more corporate credit including direct lending and distressed/special situations. Real estate debt is another area where we will spend more time.

What challenges do you anticipate for the next one to two years?

I think if the current higher interest-rate environment persists, the market is going to experience challenges. We expect defaults to increase, which could impact our existing portfolio. 
With this said, we have really focused on managers who have invested through prior cycles and have the resources, including ideally a dedicated team, to focus on workouts.     

What would you say would be your office’s greatest accomplishment since you joined?

We have a strong investment team that has more than doubled in size since I joined in early 2013. Our asset class teams are independent, motivated, and hardworking. In addition, I am very proud of how much we have achieved within private credit. 
The other great accomplishment has been the recent hiring of our CEO and CIO Alison Romano. Alison is an excellent addition to SFERS, and she provides the leadership our organization needs to take us to the next level.

What do you like outside of work?

I enjoy spending time with my family, including my husband and two young daughters (ages 6 and 3). I especially love traveling with them.
I also enjoy volunteering at my daughters’ schools especially in their classrooms, and for a local children’s nonprofit organization, Children’s Health Guild, where I sit on the board as their Treasurer.

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