PSERS continues separate account push with TPG commitment

PSERS increasingly relies on separate accounts with established managers as a means of building up its exposure to alternative credit strategies. In June, the $51.9 billion retirement system allocated up to $300 million to Cerberus Capital Management for co-investments alongside its direct lending platform. PSERS also committed $200 million to an account with Park Square last year for investments in European senior debt.

Many major pensions now direct major commitments toward separate accounts managed by alternative asset managers, particularly firms like TPG orBlackstone Group, which can offer a wide range of investments across a single platform. In exchange for larger commitments, the LPs often receive significant discounts on fees and terms.

PSERS spokeswoman Evelyn Williams declined to disclose the terms of PSERS new commitment to TPG. “We evaluate situations for separate accounts as they come up and if we think it makes sense,” Williams said in an email. “We have no defined strategy with regards to increasing the number of separate accounts.”

The new commitment to TPG is a follow-up to the $250 million PSERScommitted to the firm in 2014. As with the previous separate account, the new $250 million commitment will pursue adjacent and co-investment opportunities generated across TPG’s special situations business, which also includes its closed-end credit funds (TPG Opportunities Partners), its business development company (TPG Specialty Lending), and leveraged loan platform (TPG Institutional Credit Partners).

TPG will likely invest 60 percent to 70 percent of the account in opportunities that don’t fit the investment mandate of its investment funds, Portfolio Advisors Managing Director William Indelicato wrote in a memo for PSERS. The firm will deploy the remaining capital alongside TPG Opportunities Partners funds or the BDC.

The strategy provides a “differentiated business model that will allow the fund to pursue opportunities during all parts of the credit cycle and generate attractive risk-adjusted returns that are not dependent on a high corporate default rate environment,” Pennsylvania Investment Officer James Del Gaudio wrote in a memo.

Long history

TPG was a likely candidate for a separate account with PSERS. The retirement system has committed upwards of $1.5 billion to the asset management firm over the last two decades, including more than $680 million to the firm’s private equity business. But while TPG’s storied buyout funds receive the lion’s share of the attention, its young special situations platform generates significantly stronger returns for the retirement system.

PSERS began investing in TPG’s private equity funds in 1993 with a $24.2 million commitment to TPG Partners I. That early investment yielded approximately $89.3 million in distributions, good for a net IRR of 36.6 percent, according to pension documents.

As TPG grew, so did PSERS’ commitments to its funds. The pension system took a $50 million stake in TPG Partners II, then committed $250 million to Fund V and $350 million to Fund VI. Returns never approached what Fund I generated, however. Overall, PSERS $684.2 million of TPG Partners fund stakes netted a 12.2 percent IRR through June 30, according to pension documents.

In contrast, PSERS’ investments with the special situations platform have returned 19 percent since 2011, according to pension documents, a remarkably strong rate of return for debt-related strategies. The median IRR for private debt funds hovers between 10 and 15 percent, according to a November Preqin report.

Despite being less than a decade old, TPG’s special situations platform boasts and impressive pedigree, led by the former head Goldman Sachs Americas Special Situations Group Alan Waxman. The special situations platform has approximately $12 billion under management, roughly $8 million of which is controlled by the TPG Opportunities Partners funds.

TPG could not be reached for comment.

TPG Performance for PSERS