Texas Teachers’ PE commitment seen up 11 pct in ’17

Teacher Retirement System of Texasexpects to commit around $4.2 billion to private equity in 2017, an 11 percent increase from what it allocated to private funds and other PE-related investments in 2016, board documents show.

The $125.3 billion retirement system committed $3.8 billion to PE last year, including $507 million across a variety of direct, co-investments and sidecar investments that give Texas Teachers’ access to private-equity-like returns at lower costs.

Texas Teachers’ originally sought to commit as much as $1 billion to those strategies, which it refers to as “principal investments,” but opted for a more conservative approach as the market for privately held assets showed signs of peaking last year.

Prices and leverage on new deals “remain historically high,” according to Texas Teachers’ materials, which also note the PE market is “predominantly overvalued” for long-term investors like public pensions.

Texas Teachers’s principal investment portfolio, valued at a little more than $3.5 billion at year-end, has generated a 17.8 percent internal rate of return and 1.5x multiple since inception. The bulk of its returns came from its $2.2 billion portfolio of co-investments — direct stakes in companies owned by private equity managers — which netted a 20.2 percent IRR since inception.

In addition to its co-investment activity, Texas Teachers’ also committed $3.1 billion across 15 new PE funds last year, along with $150 million for commitments to emerging managers.

Separate from its core private equity program, the system will allocate around $2.6 billion to new investments through its separate accounts with Apollo Global Management and Kohlberg Kravis Roberts, to which it has committed $10 billion in total since 2011. The accounts invested around $2.3 billion last year, meeting materials say.

Texas Teachers’ held a little less than 13 percent of its assets in PE as of Dec. 31. The portfolio was valued at almost $17 billion and has generated a 13 percent IRR since inception.

The private equity portfolio is part of Texas Teachers’ $40 billion private markets program, led by Eric Lang. The private equity team is led by Neil Randall.

Action Item: More about Texas Teachers: www.trs.texas.gov