Texas Municipal uses ‘chunky’ special relationships to power PE build-out

The $33.7bn pension recently doubled its PE target and is using two big commitments to HIG and HarbourVest to smooth its path towards getting there.

Tom Masthay
Tom Masthay

When Tom Masthay took over Texas Municipal Retirement System‘s private equity program last year, he was filling big shoes.

Christopher Schelling helped start the program just a few years before and developed a plan to aggressively grow it. When he left last year to join investment advisor Windmuehle Funds, the target allocation had recently been doubled from 5 percent to 10 percent. As of December 31, the PE allocation was 3.94 percent, meaning it had a long way to go.

“I think an opportunity and a challenge for us is how do we continue down that path of implementation with double the capital to deploy,” Masthay told Buyouts in a recent interview.

But one factor making that easier is the large chunk of capital Texas Municipal committed last year to two strategic relationships.

In September, the pension committed $400 million to a co-investment fund-of-one with HarbourVest Partners.

Then, in December, it committed $500 million to HIG Capital‘s second strategic partners offering, as Buyouts reported, with an additional $100 million going to co-investments. This fund will allow Texas Municipal’s capital to be applied across 12 to 15 different HIG vehicles.

“Really big, chunky ways to get capital out the door with managers we trust across a number of strategies really enables us to continue to experiment in finding new managers and new structures for our portfolio,” Masthay said.

That means that while Texas Municipal aims to invest $1.2 billion this year, around $850 million comprises new commitments.

Meanwhile, Masthay said the pension is in a bit of a “re-up cycle” with some of its PE managers, the first major one since it started its program in 2015. “We should be super active,” he added.

Many of the pension’s fund investments are with smaller, emerging managers in the buyouts and growth equity space. Instead of having to get allocations to big managers, Masthay hopes it will be able to scale its relationships with current managers over time, thereby keeping its count of managers under control while building more meaningful relationships with the managers it does have.

“I think those are the benefits that those strategic relationships provide for us,” Masthay said.

When it does look at new managers or strategies, Masthay said the pension would be likely to focus on strategies that deploy capital faster, meaning more of a focus on buyouts or growth equity over credit funds.

“We have done credit in the past, but I think we are looking to be increasingly equity-focused in our private equity book,” Masthay said. “It seems a little weird to say, but I think that’s going to be one of our focuses.”

As of December 31, Texas Municipal’s total fund value was $33.7 billion.

Action Item: read Texas Municipal’s most recent financial report here.