Texas ERS considers changing PE performance benchmark

  • AUM: $26.9 billion
  • PE target allocation: 13 pct
  • PE allocation: 15.2 pct
  • Whom to contact: Kelley Davenport, assistant to the executive director, kelley.davenport@ers.texas.gov
  • Why is this important: Texas ERS is changing its benchmark to better serve how assets are structured

Employee Retirement System of Texas, like several other U.S. public systems, is considering changing the way it measures the performance of its private equity program, a recorded discussion from the system’s March meeting shows.

The board wants to move from its current benchmark, MSCWI ACWI IMI plus 300 basis points, to Wilshire TUCS Peer Universe Benchmark.

If approved, the change would take effect Sept. 1, said Sharmila Kassam, the system’s deputy CIO.

Texas ERS’s PE portfolio generated a 2.1 percent return for the third quarter, according to the recording. It’s not clear how the pension performed against the private equity benchmark, as of press time.

“Private equity benchmarking doesn’t lend itself to be easily replicable or investable,” said NEPC Investing Consulting’s director of traditional research and partner, Timothy Bruce.

The idea is not a way to lower the performance bar, said Bruce and Kassam. Rather, the change would reflect how ERS wants the asset class to be structured, they said.

“We’re trying to find the most reasonable benchmark to fit the objective, …” Bruce said.

NEPC, which signed on as a general investment consultant in December, did not find any substantial issues with past benchmarks. The board also recommended benchmark changes for absolute return.

Texas ERS’s current PE allocation is 15.2 percent, with a long-term allocation target of 13 percent, a document from the meeting says.

Other systems that have changed their PE benchmarks include California Public Employees’ Retirement System, which shifted from 300 basis points to a 150-basis-point premium over a public-market equivalent in July 2018; and Los Angeles Fire and Police Pensions, which in September switched from measuring PE-investment performance against a benchmark of the S&P 500 plus 4 percent to the S&P 500 plus 2, Buyouts previously reported.

Update: This report was updated to provide more clarity around the PE return in the third quarter and benchmark performance.