Texas Teachers works to smooth path for emerging managers into core portfolio

As Teacher Retirement System of Texas gears up for its 13^th annual emerging-manager conference, it is expanding its own program to smooth the transition for young managers into its core private equity portfolio.

The system, a pioneer in EM programs, will inject $1 billion into what it calls its Emerging Manager Select program.

Texas Teachers wants to create a path for newer GPs who have outgrown the emerging manager program but have not yet achieved the scale they need to be part of the main fund, Matt Halstead, senior investment officer with the pension system, said.

The system will invest $1 billion into the Select program over the next five years and expects to make its first commitment of $50 million to $100 million in 2019, he said.

“But even that is flexible,” Halstead said. “Our expectation is that only a handful are likely going to be candidates for us who can deliver at scale and still perform at the level that made them an attractive target for us in the first place.”

Some managers in the Select program would cover holes in Texas’s portfolio or provide new strategies the system wants to further grow and enhance, he said. “Others will be replacing poor-performing managers in our portfolio,” Halstead said.

Last year, the system’s board of trustees approved an amendment that changed the target allocation for the emerging-managers program from a fixed amount to 1.1 percent of the fund.

“That will allow the allocation to grow with the [system] over time,” Rob Maxwell, spokesperson for Texas Teachers, said.

In addition, Texas created a new director-level position for the enhanced EM program that would report to the deputy chief investment officer.

The new director will work with investment advisers across asset classes to ensure “we have a consistent message and coordinated approach to the market,” Halstead said.

Texas Teachers expects to hire someone into the role this quarter, Halstead said.

GCM Grosvenor will continue to manage the original $2 billion Emerging Manager Innovation Program by finding new teams and making commitments between $10 million and $20 million, Halstead said.

Almost 1,600 people are expected to attend Texas’s Feb. 7 emerging-managers conference, which has has become an industry benchmark for EMs to build relationships and find capital, Halstead said.

“A lot of what we have been doing is to innovate and understand how we can capitalize good ideas,” Halstead said.

Success at finding stars

One of the program’s primary purpose was, “to find the next Vista Equity Partners, the next Blackstone, the next KKR or Apollo. They’re out there, and we’ve found a few of them along the way,” Jerry Albright, chief investment officer, said during a keynote address at Buyouts Insider’s PartnerConnect Southwest conference in December.

Indeed, of the 158 emerging managers Texas had backed since inception, 12 managers, including Vista Equity Partners, Wayzata Investment Partners, Roark Capital and Crestview Partners, graduated to the main fund and were added to the TRS Premier List, documents said.

(Wayzata chose to wind down its franchise after raising three funds, Buyouts reported in 2017.)

Barry Volpert retired from Goldman Sachs in 2003, where he spent 18 years and was co-founder and finally co-chief operating officer of the global private equity business.

He decided to set up Crestview Partners with several other former Goldman Sachs partners, including co-founder Tom Murphy.

“One day we received a cold call from Texas TRS,” Volpert recalled. The system had heard Volpert was raising his debut fund and wanted more information.

The Texas team dug deep into the track record Volpert and his team generated at Goldman Sachs, what role each had played and the value each member had added to the investments, he said.

They also asked detailed questions about how Crestview was organized, its culture, strategy and track record, Volpert said. In addition, toward the end of the first round of diligence, TRS brought in Credit Suisse to double check, he said.

“It was quite an intensive process despite the fact that we were not a ‘flyer group’ and they were betting on a group that had been doing this since 1986,” Volpert said.

Texas made an $8 million investment to Crestview’s debut fund and committed $200 million or more in each of its subsequent two funds, plus co-investments to its second fund, Volpert said.

Texas added Crestview to its premier GP list and the pension system is a member of Crestview’s LP advisory committee.

“They have an intimate knowledge of our portfolio and have great judgment,” Volpert said.

Last year, the Texas team reviewed 323 co-investments and 297 funds in private equity for the emerging manager program. It also reviewed 257 investment opportunities and 114 funds in real estate, Maxwell said.

The pension system meets around 150 to 200 new emerging managers each year. The rest were the ones where Texas TRS was considering a re-up investment or co-investment, he said.

Action Item: Read more on the Emerging Managers program here https://bit.ly/