Texas School Fund Taps Neuberger For $900M Account

Investor: Texas Permanent School Fund

Assets Managed: $26 Billion (Aug. 2012)

Private Equity Assets Managed: $435M (Aug. 2012)

Private Equity Allocation / Target: 2% / 6% (Aug. 2012)

Chief Investment Officer: Holland Timmins

Brien Smith, a Neuberger Berman managing director who presented the firm to the board, said the School Fund was Neuberger Berman’s “single largest private equity client.”

The Texas Permanent School Fund is a relative newbie to private equity, having launched its program in 2006. The School Fund has a target allocation of 6 percent to the asset class, but with just 2 percent so far invested in private equity, the School Fund is still far from reaching its target allocation.

The $900 million “hybrid discretionary separate account” will be split between co-investments and secondaries on the one hand, and regular fund commitments on the other. For secondary and co-investments, Neuberger Berman will have sole discretion to make investment decisions. For regular fund commitments, decision-making responsibilities will be made jointly via a new committee made up of Neuberger Berman portfolio managers and investment officers from the School Fund.

Smith dubbed the new arrangement “collaborative discretion” with the School Fund’s staff on future fund commitments. It wasn’t disclosed just how the $900 million separate account would be split between co-investments and secondaries, on the one hand, and regular fund commitments on the other.

To ramp up its push into private equity in 2010, the School Fund awarded two $650 million separate accounts, one going to Neuberger Berman and the other to the Credit Suisse Customized Fund Group. Those two separate accounts gave each manager full discretion to make all investment decisions on behalf of the School Fund. The two accounts are fully committed and still actively managed.

The new Neuberger Berman separate account saves substantially on fees over the old arrangement. Smith said the new account would have a fee structure that would cost just “20 percent or less of the estimated total fees” compared to Neuberger Berman’s $650 million separate account from 2010.

Because fund decisions will be made through a joint committee, the new mandate, which both Neuberger Berman and Credit Suisse competed for, will help train the School Fund’s investment managers, bringing them one step closer toward making private equity investment decisions on their own.  Decisions made through the joint committee will be made without any fees charged to the School Fund, although the co-investment and secondaries part of the mandate does has fees involved. Those fees were not disclosed at the meeting.

The School Fund was established with a $2 million grant from the Texas legislature in 1854.