Private Credit Strategic Plan

Review and RecommendationSanta Barbara County Employees' Retirement

System

December 9, 2020

Page

Table of Contents

• Private Credit Strategic Plan Review 3– Strategic Plan Goals

– Current Portfolio

– Pacing Plan

• Private Credit Fund Recommendation 9– AG Direct Lending Fund IV

Page 2

SBCERS Private Credit Strategic Plan Review

Strategic Plan Review Summary

• The following is a review of the strategic plan for the SBCERS private credit

program.

• The goals are a blend of SBCERS and RVK recommendations, but have

incorporated SBCERS’ preferences around portfolio administration,

diversification, and views on different market segments.

Page 4

Review of Strategic Plan Goals for Private Credit

• Partner with consistent

General Partners to

reduce decision burden

on future committees.

• Prefer long term

relationships over

moving in and out of

fund strategies.

Establish long term

partnerships with GPs

• Achieve sufficient fund

diversification for the

portfolio.

• Avoid over

diversification and

regressing to the mean.

Invest in approximately

two funds per year

• Commitment to building

portfolio with senior

direct lending

strategies.

• Preference for funds

with low amounts of

fund-level leverage,

typically 1.5x or less.

Initial strategy focus

on direct lending

Status

Upcoming commitments are

to existing managers

Consistently committed to

one or two funds per year

during the past three years

Multiple commitments to

senior direct lending

strategies across middle

and lower-middle markets

Page 5

Commitment Schedule & Pacing Review

• Through November 2020, SBCERS will have committed approximately $85 million

across four funds within US direct lending and multi-sector strategies.

• Individual vintage year commitments have been between $25M and $40M, in-line

with the initially recommended annual pacing commitments of $40M as the plan

ramps to the target allocation.

Fund vintage shown represents year of board approval.

Commitment Schedule

Vintage Commitments# of

Funds

2018 $25M 1

2019 $40M 2

2020 $20M 1

$0

$50

$100

$150

$200

$250

$300

2018 2019 2020 2021 2022 2023 2024 2025 2026

Mill

ion

s

Private Credit Allocation Percentage

Actual Market Value Estimated Market Value

Private Credit Target (3.67%)

Page 6

Private Credit Current Portfolio (As of 9/30/2020)

Fund Vintage

Paid in

Capital

($M)

Distributed

Capital

($M)

Market

Value

($M)

Net

IRR

Net

Multiple

AG Direct Lending Fund III 2018 $23.0 $1.6 $23.6 7.4% 1.09x

THL Credit Direct Lending Fund IV 2019 $17.2 $2.8 $15.3 6.7% 1.05x

PIMCO Private Income Fund 2019 $20 $0 $21.9 N/M 1.10x

Deerpath Capital V 2020 $0* - - - -

Total Portfolio $60.3 $4.4 $60.9 9.3% 1.08x

Data as of 9/30/2020. Performance data has been calculated by RVK with cash flows provided by the managers. Net IRRs are shown only if an accurate IRR could

be calculated with one year or more of cash flows. Applicable IRRs are marked with "N/M" for not material. Fund vintage shown represents year of board approval.

*Deerpath Capital V had initial capital calls of approximately $8 million in October 2020.

$25

$20

$20

$20

Commitment Allocation by Manager ($M)

AG Direct Lending Fund III THL Credit Direct Lending Fund IV

PIMCO Private Income Fund Deerpath Capital V

Commitment Allocation by Strategy ($M)

Direct Lending Multi-Strategy

Page 7

Forward Commitment Schedule

Commitment Schedule

Vintage Commitments# of

Funds

2020 Q4 $20M 1

2021 $40M 2

2022 $40M 2

2023 $40M 2

2024 $40M 2

Over the next 5-year strategic plan, SBCERS is expected to achieve the 3.67%

target allocation to Private Credit by approximately 2024.

0%

1%

2%

3%

4%

5%

6%

2018 2019 2020 2021 2022 2023 2024 2025 2026

Private Credit Allocation Percentage

Actual Allocation Estimated Allocation

Private Credit Target (3.67%)

Page 8

Private Credit Fund Recommendation

AG Direct Lending Fund IV

AG Direct Lending Fund IV – Profile

Overview: This is a direct lending strategy that seeks to source, underwrite, and actively manage a diversified

portfolio of private, senior secured loans to corporate borrowers in the middle and lower-middle market.

Strategy: The strategy focuses on first lien loans to private equity sponsored-backed companies with an EBITDA

of under $25 million. By taking a leadership role in the loan structuring process, the team is able to employ strong

lender protections, including a covenant in every loan. Additionally, the strategy takes a differentiated approach to

dynamically monitor its loans by supplying a revolving loan facility in every deal, which provides real-time data for

each borrower’s financial health and liquidity needs. The portfolio will be highly diversified and is expected to

include over 125 loans across several industries.

Platform: Angelo Gordon is one of the most active participants within direct lending markets, investing nearly $10

billion with over 200 unique borrowers since 2015. Further, the team has established a substantial sourcing

network, completing deals with nearly 90 private equity sponsors. Finally, the Fund is captained by a group of

senior team members that have over 20 years of investment experience on average, and leads a well-resourced

team of nearly 70 professionals.

Performance data has been calculated by RVK with cash flows provided by Angelo Gordon. The AG fund series performance is represented by the onshore vehicles. The

AG fund series has been compared against the Private Debt – Direct Lending peer group provided by Preqin and is as of 6/30/2020. The peer group contains both levered

and unlevered direct lending strategies. Vintage 2018 Net IRR Quartile data is not yet available and has been marked “N/M” for not material.

Target Size Approximately $2 Billion Target Return 10-13% Net IRR (Levered, Onshore Vehicle)

Term3 Year Investment Period

5 Year Harvest PeriodFees

1% Management Fee

15% Incentive Fee over a 7% Hurdle

Investment StyleUS Middle and Lower-Middle

Market Senior Direct LendingClosing Schedule Expected Final Close in Q1 2021

Strategy Track Record (As of 6/30/2020)

Fund VintageCommitted

Capital ($M)Net IRR Net Multiple

Net IRR

Quartile

Net Multiple

Quartile

Fund I (Levered) 2015 $594 9.6% 1.29x 2nd 2nd

Fund II (Levered) 2016 $1,165 8.5% 1.20x 2nd 2nd

Fund II (Unlevered) 2016 $415 5.8% 1.15x 3rd 3rd

Fund III (Levered) 2018 $1,860 7.1% 1.07x N/M 3rd

Fund III (Unlevered) 2018 $891 4.8% 1.06x N/M 3rd

Page 10

Merits and Issues to Consider

Strengths/Merits

• Defensive Strategy through Transaction Leadership: By taking a leadership role within the

lender group, AG is able to seek lender-friendly loan documents and increased origination fees.

• Dynamic Monitoring Capability: Through its large and well-resourced investment team, as

well as its revolving loan facilities, the strategy’s monitoring capabilities are especially strong.

• Strong Sourcing Network: The investment team has built a substantial sourcing network over

the past two decades which we believe is a key competitive advantage.

• Diverse Portfolio: The portfolio is expected to include over 125 investments and be highly

diverse across both position and sector, thereby reducing concentration risk on multiple fronts.

Issues to Consider

• Competition within Direct Lending: The direct lending market has been characterized by

extremely high levels of fundraising over the past decade, including a record $68 billion in 2019.

• Small General Partner Commitment: Angelo Gordon will commit up to $15 million to the

Fund, which is only 0.75% of the Fund’s approximate target size of $2 billion.

• Fund-Level Leverage: The levered fund will target fund-level leverage of 1.25x to 1.5x debt to

investor’s capital, with a maximum allowance of 2.5x. We believe the target fund-level leverage

of 1.25x to 1.5x of this Fund is relatively conservative in a peer group of direct lending funds

that frequently utilize leverage of 2x or more.

Page 11

Investment Recommendation

RVK recommends that SBCERS commit $20 million to AG Direct Lending Fund IV,

in order to continue maintaining its exposure to this strategy series through a

follow-on commitment.

• We continue to believe that this represents one of the best available options in senior secured

direct lending and it remains a best idea in the context of a conservative private credit portfolio.

• Committing to the next fund in Angelo Gordon’s fund series will act to maintain SBCERS’

desired level of exposure to this strategy.

SBCERS Strategic Plan Goal Review

This Fund represents the

continuation of a

relationship with a top-tier

General Partner.

Establish long term

partnerships with GPs

This commitment aligns

with the SBCERS forward

commitment pacing

schedule.

Invest in approximately

two funds per year

Ongoing capital deployment

of a senior secured direct

lending strategy.

Initial strategy focus

on direct lending

Page 12

Disclaimer of Warranties and Limitation of Liability - This document was prepared by RVK, Inc. (RVK) and may include

information and data from some or all of the following sources: client staff; custodian banks; investment managers;

specialty investment consultants; actuaries; plan administrators/record-keepers; index providers; as well as other

third-party sources as directed by the client or as we believe necessary or appropriate. RVK has taken

reasonable care to ensure the accuracy of the information or data, but makes no warranties and disclaims

responsibility for the accuracy or completeness of information or data provided or methodologies

employed by any external source. This document is provided for the client’s internal use only

and does not constitute a recommendation by RVK or an offer of, or a solicitation for, any

particular security and it is not intended to convey any guarantees as to the future

performance of the investment products, asset classes, or capital markets.