LeBlanc Challenges Status Quo At Texas TRS

It’s not so much that Steve LeBlanc set out to upend the world of investing in buyouts, it just seems to be working out that way.

While moderating a panel in November at the Buyouts Texas conference in Dallas, LeBlanc, a senior managing director at the Teacher Retirement System of Texas, called for the development of an “eBay for secondaries,” a marketplace where investors could buy and sell their commitments to GPs.

“A robust liquid secondary market would be a good thing for private equity,” said LeBlanc, who heads the pension’s private equity investing, in an interview after the conference, but he acknowledged that such a development is unlikely any time soon. “Until you get a standardized, homogenous contract or instrument that you can trade, it would be very hard to do.”

Some existing private marketplaces, such as SecondMarket, offer platforms for trading secondary LP interests, but LeBlanc said he was not familiar with that one; and in any case, he suggested, the complex terms of partnership agreements would likely make diligence cost-prohibitive. In the meantime, he proposed, GPs could take a more active role in facilitating secondary trading among their existing LPs; at least that way, the traders would be familiar with the contracts and portfolios they were dealing with.

As a newcomer to private equity—LeBlanc, formerly the CEO of a publicly traded real estate investment trust, Summit Properties, joined Texas TRS only in the fall of 2008 as the financial industry was sliding into crisis—he takes a view of managing the pension’s investments that is much akin to the way corporate executives manage their finances.

More liquidity Wanted

Just as a corporate board may authorise the repurchase of shares if their price is low or can sell additional shares into a rising market, so also should private equity investors have the ability to rebalance their portfolios according to changing market conditions, LeBlanc argued.

“Return requirements are driven by three main factors: transparency, volatility and liquidity,” he said, noting that recent accounting changes, especially FAS 157 which requires sponsors to mark their holdings to market quarterly, will increase portfolio volatility.

“Most likely it was already volatile. We just didn’t recognize it,” he said. But with FAS 157, “measured volatility will go up. And as volatility goes up, other factors being equal, required returns go up.”

This is the “Texas Way,” a philosophy of investing set forth by Britt Harris, who became CIO of Texas TRS in 2007. According to a July 2010 profile in the state capital newspaper Austin American-Statesman, Harris urged the state legislature to give the pension more latitude to invest in a broader set of asset classes to improve the fund’s financial performance.

In terms of asset allocation, “we have a very simple investment portfolio,” LeBlanc said. Global equity is 60 percent of the portfolio, comprising 48 percent public equity and 12 percent private equity. (The fund’s actual allocation to private equity stood at 11.1 percent of TRS’s portfolio, as of Oct. 30). The remaining 40 percent is divided in half, with 20 percent dedicated to stable value, designed to hold up during periods of deflation, LeBlanc said, and 20 percent “real return,” focusing on inflation-protected assets.

If the model is simple, the standards are tough. As part of the Texas Way, LeBlanc maintains a “premier list” of top-performing fund managers, as BusinessWeek recently reported, and buyout shops must undergo re-evaluations as often as every six months in order to maintain their place on the list, to qualify for increased allocations from the pension, while underperformers run the risk of being cut.

LeBlanc also has been in the forefront of the investor advocacy movement, working with the Institutional Limited Partners Association to strengthen their role in dealing with general partners. The ILPA has gotten a “very good response” from GPs, LeBlanc said, as major firms such as Kohlberg Kravis Roberts & Co., The Blackstone Group and Apollo Global Management have signed on to the ILPA principles.

“I do think the relationship between GPs and LPs has improved as a result of ILPA,” he said. The firms’ participation in the program also was a factor in the TRS decision, announced in November, to use Apollo and KKR to manage $3 billion each of the pension’s assets under what were described at the time as “fund-of-funds master limited partnership” agreements.

It was not clear, however, exactly how these arrangements would work, and in the interview, LeBlanc would not elaborate, saying that the pension has not yet finalized the contracts with the firms. But he said he was looking forward to putting the new arrangements in place: “They are fantastic firms, with long track records, global platforms, best-in-market leadership. They are just two of the premiere private equity firms in the world. We’re proud to be their partner.”