Texas ERS ups PE allocation to limit program scale-back

The $36bn pension, which counts Advent, TPG, Hg and Industry Ventures among its long-standing GP relationships, was overallocated to PE by more than 6 percentage points.

Employees Retirement System of Texas is looking to slow its private equity investment pace without killing a golden goose.

The Austin-headquartered pension has raised its target allocation to 16 percent from 13 percent to “reduce the need to drastically scale back that well-performing program,” according to documents accompanying an August 24 board meeting.

PE accounted for 19.7 percent of the $36.2 billion pension’s portfolio, driven by the outperformance of the asset class compared with its public holdings, the documents said.

“We’re still guiding down from almost 20 percent currently, so this asset mix puts all our private asset classes on the flight path down,” said chief investment officer David Veal at the meeting. “The capital plan is reducing our commitment pacing to get back to our targets.”

Its $6.55 billion PE portfolio has been a key driver of outperformance over the past five years, according to the documents. The asset class was up 34 percent year-on-year as of a March 9 investment committee meeting.

The institution’s long-standing GP relationships include Advent International, TPG, Hg and venture capital secondaries buyer Industry Ventures, according to PEI data.

The Texas ERS investment team has lowered PE’s projected illiquidity premium in light of private valuations not yet reflecting the decline in public markets, Veal said. The asset class is expected to outperform an index of large-cap equities by 250 basis points, 50 bps points less than the previous assumption.

PE is the biggest winner from a wider asset allocation overhaul approved by the pension’s board at last week’s meeting. Texas ERS reduced its public equities- and private infrastructure allocations by 2 percentage points, and public credit and special situations allocations by 1 percentage point, as it looks to meet the significantly higher long-term liquidity needs of its members.

“The expected net outflows from the trust are forecast to rise from 3 percent of assets annually in 2022 to around 4 percent over the next five years and to remain at those levels for several more years,” the documents noted.

Texas ERS is one of many public pensions facing PE allocation pressures due to a combination of numerator- and denominator effects. In June, PEI reported that New Mexico State Investment Council had to downsize its commitment to TDR Capital’s latest fund despite the “great job” the GP has done.

“The successful managers in our programme have a burden from a portfolio diversification perspective,” said David Lee, New Mexico SIC’s PE director, at the time. “You have an outsized NAV for the size of your previous allocation and that ends up being an outsized portion of the portfolio.”