Texas School Fund re-ups with PE manager Neuberger Berman

Texas Permanent School Fund approved a new three-year contract with private equity manager Neuberger Berman, extending a relationship that gives Neuberger discretionary control over 30 percent of its PE investments.

The $44 billion school fund has a 13 percent target allocation to PE, and it has contracted with Neuberger Berman as its PE adviser since 2010.

With the contract set to expire, the Texas Board of Education accepted a recommendation to keep the firm on, at the same fees and the same scope of work, for three more years. The new contract has an option to extend the relationship for three more years.

“This has been a very good working relationship and we certainly appreciate the experience working with Neuberger Berman,” CIO Holland Timmins said at the fund’s April meeting. “We think the contract extension for three years is a very positive decision.”

The school fund’s PE program allocates about 30 percent of its PE-commitments budget to Neuberger Berman for a discretionary separate account that focuses on co-investments and secondaries. Neuberger Berman also provides non-discretionary advisory services for the primary private equity fund investments that make up the rest of the PE portfolio.

Neuberger Berman Chief Operating Officer Brien Smith said at the April meeting that his firm initially had more control over the school fund’s PE investments during “phase one” of its relationship with the fund. He said it gradually turned over more authority to Texas Permanent School Fund staff as they gained more experience in the asset class.

The first phase, in which Neuberger Berman invested $650 million through a discretionary account, has a 1.6x multiple and 15.4 percent IRR since inception in 2010, Smith said.

The second phase, which involved more joint decision making on primary fund commitments, began in 2013, and that $1.8 billion allocation has a 1.39x multiple and 16.6 percent IRR, Smith said.

The third phase, which began in September 2015, with Texas Permanent School Fund staff doing most of the legwork on primaries, has a 1.17x multiple  and a 19.3 percent IRR.

The fourth phase, which the new contract would kick off, will largely divide responsibilities along the same lines as the arrangement that began in 2015, Smith said.