Giant LPs look for value out of smaller funds

It’s not every day you see a large system try and get access to smaller funds.

An interesting situation is happening in Texas, where one of the largest public pension systems in the US has pivoted down market to target smaller private equity funds.

It’s not every day you see a large system try and get access to smaller funds; generally, LPs of this size are content to stay with the largest managers in the business, where they can cut massive checks and manage the relationships with small staffs.

This was the situation for the Teacher Retirement System of Texas in its early days of being a PE investor, with a small staff. The system back then famously formed massive relationships with KKR and Apollo, committing billions across the firms’ platforms into multiple funds and co-investments.

Shift to today: Texas Teachers’ has a 26-member PE team and is now dedicated to targeting mid-market and smaller PE funds, where the firm believes it can find strong performance and better arrangements.

The system continues to put out around $3 billion to $4 billion per year, the system’s PE chief Scott Ramsower told me, but is spreading that capital around, rather than concentrating in a few huge relationships.

“In the early days, scale was our friend – we needed to put large amounts of capital out the door with fewer resources and, as a result, we had very large minimum bite sizes. Therefore, by and large, we were focused on the larger end of the market,” Ramsower said.

“We also pay close attention to our benchmark, which has a lot of exposure to the lower end of the market. Since we now have more resources, we are able to focus on the lower end of the market so that we can move more in line with our benchmark going forward.”

Access to the smaller and middle areas of the private markets can be vital for the performance of a program. Size can be a “frenemy” of portfolio company performance, Andrea Auerbach, global head of private markets at Cambridge Associates, wrote last year in affiliate Private Equity International.

“Based on analyses using information gathered from our database of operating metrics for nearly 5,000 US companies, smaller companies grow faster than their larger counterparts and are acquired at lower prices in transactions that use less leverage, which in today’s interest rate environment costs more and can constrain growth,” Auerbach wrote.

Another giant system expanding its reach into smaller funds is California Public Employees’ Retirement System. The system has long had programs to target emerging managers, but these days, the system is making commitments out of its main pool into smaller funds.

A quick look at CalPERS’ portfolio shows some unusual names, like Base10 Advancement Initiative II, which was in market last year targeting $400 million. The system, out of its main pool (and not through its emerging manager program) made a $50 million commitment to the fund, according to CalPERS documents.

We’ll be looking into this effort further. But these two examples show that some large systems are looking for value away from their traditional sources. Are you seeing other examples out there? Let me know! Reach me with tips ’n’ gossip, feedback or other ideas at or find me on LinkedIn.