Texas Teachers continues to gradually tilt portfolio toward directs

The value of Teachers Retirement System of Texas’ direct investment program grew by 3 percentage points last year, reflecting the system’s continued focus on building its direct investing capabilities.

Direct investments, which the pension calls “principal investments,” made up 26 percent of the market value within the program last year, up from 23 percent in 2017, according to a July memo from the investment management committee.

Texas Teachers set a 35 percent target for direct investments in its private equity principal investments program. Principal investments in PE has increased year-over-year since 2012, when direct investments made up 9 percent of the program, according to the committee document.

Direct investments, or principle investment, make up 35.2 percent of Texas Teachers’ private markets portfolio in the energy, natural resources & infrastructure; private equity; and real estate sectors.

Large public pensions have boosted their direct investment capabilities to save on fees and get better exposure to investments. Texas Teachers sourced 212 opportunities, representing $22.6 billion in deal flow, throughout Europe, since opening its London office in 2015, Active LPs reported.

“You’re cutting out the middleman,” Chris Hayes, senior policy counsel at Institutional Limited Partners Association, told Active LPs. “You are no longer paying a GP to do this investment and you’re essentially trying to bring those functions in-house at the LP. You won’t be paying the same cost to make investments directly in privately held companies.”

Canadian pensions have divided their private markets portfolios between direct investing and fund investing, a strategy that the California Public Employees’ Retirement System, the largest public system in the U.S., is considering. CalPERS is reportedly working on creating two direct investment funds targeting late-stage venture and long-hold investments, Buyouts reported.

Principal Investments make up a smaller percentage of the Texas Teachers portfolio than fund investments, but bring in larger annualized returns, the investment management committee document shows.

Fund commitments in private equity make up 74.2 percent, or $15.9 billion, across 190 funds, with an annualized internal rate of return of 11.1 percent over five years. Private equity principal investments account for 25.8 percent of the private markets portfolio across 55 funds and returned an annualized IRR of 13.1 percent over five years, as of Dec. 31.