Texas Teachers’ pioneering Apollo separate account off to sluggish start

Teacher Retirement System of Texas’s $5 billion strategic partnership with Apollo Management has netted a 2.59 percent internal rate of return, underperforming a long-term benchmark, according to a report Buyouts obtained through an open-records request.

Five years into the 20-year fund, Apollo’s performance has fallen well short of its 13 percent target return.

The pension has contributed about $1.6 billion so far to the long-term vehicle, which delivered an investment multiple of 1.03x as of December 31, according to Buyouts analysis of TRS’ return data.

In an email, TRS spokesman Howard Goldman said analysis of the fund’s performance would be premature.

TRS launched its strategic partnership with Apollo in November 2011 after beginning the search for partners in 2010. The $125 billion retirement system originally committed $3 billion to Apollo, offering the firm a wide mandate across PE, real assets, energy, credit and opportunistic strategies, according to TRS board materials.

In 2015, TRS grew its commitment to Apollo to $5 billion, allocating $1 billion for an expansion of the core account and $1 billion for tactical investments in strategies like non-traditional credit. The tactical portion of the account is designed to generate a 10 percent return, Goldman said.

“Both strategies are less than 50 percent invested and have a duration of less than two years,” Goldman said. “It is clearly too early to reach any final conclusions as many of the investments are still held at cost. We are, however, pleased with the overall portfolio of investments made.”

The pension’s other strategic partnership, with Kohlberg Kravis Roberts & Co, has been a strong performer. The KKR relationship, announced at the same time as Apollo, has realized a net IRR of 12.46 percent and a multiple of 1.20x as of December, according to a Buyouts analysis of TRS data.

Texas Teachers’ partnerships with Apollo and KKR were among a wave of separate accounts formed by major public pensions in the early part of the decade. California Public Employees’ Retirement System formed a $500 million account with Blackstone Group in 2012, which it has since expanded. Blackstone also formed an account with New Jersey Division of Investment.

Separately managed accounts like those in Texas often come with choice economics for LPs. Pensions commit large amounts in exchange for reduced or below-market fees. In many instances, pension staff and private equity executives also gain from the exchange of information with the GPs.

For example, one component of TRS’s partnership with KKR and Apollo allows retirement-system staff to relocate from Texas to receive as much as three months of in-house training with the firms.

“The goal was for the staff to bring back their experience to share with the [Investment Management Division] and use the experience to advance returns of the trust in the long run and enhance the partnership capabilities between TRS and the firm,” according to pension documents.

“Both sides have also benefited from substantially greater collaboration, shared market information, increased productivity, greater control, and improved clarity,” Goldman told Buyouts.

Apollo’s relationship with TRS dates to 2006. Two years later, the pension contributed more than $700 million to Apollo Investment Fund VII, which generated a 24.67 percent net IRR, according to pension documents. TRS also allocated $397 million to Apollo Credit Opportunity Fund II in 2008, netting the pension a 32.03 percent IRR.

“Over the full period and across all investments, the annualized return earned for the members of the TRS Fund has exceeded 15 percent,” Goldman said.

Apollo declined to comment.