Finland’s State Pension Fund, Valtion Eläkerahasto (VER), has warned in its annual report that the increasing volume of capital now chasing private credit has affected covenant policies adopted by fund managers.

The pension fund, which acts as a buffer for government staff pensions, posted a 13.8% return on investments for 2019 – up from 2018’s 3.4% loss. Listed real estate investment trusts (REITs) ending up as the most profitable asset class, producing a 28.1% return as the funds emulated the strong performance of the equity markets, VER said.

Commenting on non-liquid fixed income investments, VER said in its annual report: “Non-existing or weaker loan collateral has given rise to concerns about future returns on private credit funds in the coming years.”

The Helsinki-based fund said it had expected a correction in non-liquid fixed income markets for some time now, but that interest in private credit investments had continued to grow.

“The increase in the capital available for investments and intensifying competition affected the covenant policies adopted by fund managers,” it said.

VER’s return on private credit funds dropped to 1.7% in 2019 from 12.4% the year before, while direct non-liquid lending produced a 4.9% return – up from 3.8% in 2018.

The pension fund only has 2.1% of its overall portfolio invested in the category of “other fixed income investments”, which includes private credit funds and direct non-liquid lending.

However, in general fixed income investments had performed better than expected.

Timo Viherkenttä, VER’s chief executive officer, said: “The year was excellent, particularly for equity investments, but fixed income investments also proved a pleasant surprise, and VER invested quite heavily in the fixed income market in the emerging economies, which, once again, gave a splendid return.”

Listed equities generated a 24.6% return, compared with -7.4% the year before, and liquid fixed income returned 5%, up from -1.9%, the pension fund reported.

Central banks had played a key role during the year for market sentiment, VER said, with their assurances, action and continued expansive monetary policy serving to counteract uncertainties over the US-China trade talks and Brexit.

The Financial Times yesterday reported that internationally, assets invested in private debt – largely made up of non-bank loans to unlisted companies – grew to a record $812bn (€732bn) last year, and that even industry insiders were warning “the boom in private debt is turning into a frenzy”.

VER’s former leader Timo Löyttyniemi has rejoined the fund today as CEO after five years in a different job, replacing Viherkenttä who is now returning to academia.