Texas ERS boosts 2019 pacing plan after big PE commitments

  • Target for PE pledges $1.45 bln, up from $1 bln
  • Recently made two large commitments to LGT
  • LGT pledges went to strategies in secondaries, Asia

Texas Employees’ Retirement System bumped its private equity pacing target to $1.45 billion for 2019 to make room for large commitments approved in March.

Texas ERS, which has $28.2 billion in assets and a 14.6 percent allocation to PE, had planned to commit $1 billion to PE for 2019. It increased that target at its May meeting, with an expanded range of $1.1 billion to $1.8 billion, based on recent large commitments to LGT Capital Partners.

The board approved two commitments to LGT in a special meeting in March, committing $125 million to Crown Asia-Pacific Private Equity IV fund and $100 million to Crown Secondaries Special Opportunities II fund.

Ricky Lyra, PE-portfolio manager for Texas ERS, told the board the commitments were a good opportunity for the fund. He said they were large enough that Texas ERS wanted to ensure it had enough flexibility for future PE commitments.

“It took us to a level of commitment this year that required an adjustment to our tactical plan,” Lyra said. “It was a very special opportunity with an important strategic relationship that we have.”

Asked about the risk of making large PE commitments when company valuations are so high, Lyra said investment staff did not consider the recent commitments particularly risky.

“The strategy that we brought to the board is significantly diversified in terms of fund exposure, vintage exposure, geographic exposure, so these things were all considered,” Lyra said. “It is a very particular strategy that is, from a private equity standpoint, very defensive.”

Lyra also pointed out that high valuations can also provide PE access to blue-chip companies that wouldn’t be sold in less favorable economic conditions.

“If you have a great company, you’re not going to come to market when multiples are down,” Lyra said. “We believe that our managers are taking those items into consideration, and the acquisitions that we see in many cases are companies that are generating more capital.”

Under the new pacing strategy, Texas ERS plans to commit $1 billion to PE in 2020 and 2021, before increasing its allocation to $1.2 billion in 2022.

Texas ERS intends to invest a significant portion of that in co-investments, targeting $200 million in 2020 and 2021 and $240 million in 2022.

The pacing plan accounts for the increased concentration with LGT by reducing the number of expected commitments from the year, with a new expected range of nine to 14 commitments. Texas ERS had previously expected to make between nine to 18 commitments for the year.

The increased pacing goal doesn’t lock Texas ERS into committing additional capital to the asset class, Lyra said. In 2018, for example, the pension approved a $1 billion pacing plan, but committed just over $700 million.

Texas ERS is also aware that it is currently overweight to private equity, with a target allocation of 13 percent, Lyra said.

Action Item: View the revised Texas ERS pacing plan here https://bit.ly/2X3pLlj