Texas Teachers’ separate-account program with KKR and Apollo hits rough patch

A pioneering separate-account program formed by Texas’ state teachers’ pension fund with KKR & Co. and Apollo Global Management took a dive in private equity performance over the past year, although long-term returns appear stable, Director of Strategic Partnerships and Research Michael Pia told the board at its September meeting.

Private equity in the program returned 4.7 percent over a one-year period as of Mar. 31, 2019, according to Pia’s presentation. That return is below the total trust’s 11.9 percent private equity benchmark. The entire Texas Teachers trust had PE returns of 10.7 percent for the 2018-2019 fiscal year, as Buyouts has reported.

Pia attributed this decline to outsized exposure in the portfolio to mega-buyouts and private credit investments, which he said “under-performed the broader index significantly” in the fourth quarter. He cautioned these strategies would continue to impact performance, though the portfolio had seen improved results in the second quarter.

“Half the under-performance you see can be attributed to a structural asset allocation tilt by the strategic partners,” Pia said.


Long-term private equity returns within the program, called the SPN-Strategic Portfolio, were better. Five-year PE returns were 11.5 percent, slightly above the total SPN-Strategic Portfolio’s five-year returns of 11 percent. Its three-year returns were even better, at 13.2 percent.

Texas Teachers declined to comment on whether it was worried about the one-year returns, or if the system would make any changes to SPN-Strategic Portfolio.

“[Texas Teachers] is a long-term investor whose investment horizon is well beyond the shorter-term, one-year performance,” Texas spokesperson Rob Maxwell wrote Buyouts. “The KKR and Apollo strategic partnership has been accretive to the Trust.”

“Apollo greatly values its successful long-term partnership with [Texas Teachers] and believes the customized investment approach will deliver best-in-class risk adjusted returns across market cycles,” Apollo spokesman Charles V. Zehren told Buyouts in an email.

“We are very gratified by our partnership with Texas Teachers, which was created seven years ago and has expanded through the course of time,” a KKR spokesperson told Buyouts in an email. “Importantly, this is a long-term partnership which allows us to take advantage of different investing environments for the benefit of the Trust.”

History of program

The $156.4 billion Teacher Retirement System of Texas created the private equity separate-account program in 2011, according to its website.

It is part of a larger “Strategic Partnerships and Research Group” that consists of two Strategic Partnership Networks (SPNs) for public and private markets and another team dedicated to “Market Intelligence.” The Private SPN team consists of Courtney Villalta, Dan Judd and Mikhael Rawls.

Buyouts has reported the private strategic partnerships with Apollo and KKR were intended to be “giant separate accounts”aimed at “leveraging the pension’s huge piles of cash in exchange for favorable fees and terms” and a GP-LP relationship that was “deeper, more interconnected and more collaborative.”

The Private SPN has two implementations: the SPN-Strategic Portfolio and the SPN-Tactical Value Portfolio. As of June 30, SPN-Strategic had a net asset value of about $4.4 billion, with private equity making up about $3.3 billion of that. SPN-Tactical Value had a NAV of about $1.8 billion, according to Pia’s presentation.

The Private-SPN has fewer than 40 “investment strategies,” according to Pia’s presentation. Texas Teachers declined to elaborate further.

About $8 billion has been committed to the SPN-Strategic Portfolio as of June 30, or about $4 billion each to Apollo and KKR. Only 57 percent of that has actually been invested, with around $3.8 billion in available capital remaining “inside existing investment structures” with KKR and Apollo.

The SPN-Tactical Value Portfolio has $3 billion committed to it, bringing the total Private SPN commitment to about $11 billion. The SPN-Tactical Value portfolio is used for opportunities that fall outside the trust’s long-term strategic asset allocation, the trust said. In his presentation, Pia said it is “essentially performing private credit.”

As of June 30, SPN-Strategic Portfolio exposure is 69 percent private equity, 17 percent real estate and 14 percent energy, natural resources and infrastructure (ENRI). The portfolio is 75 percent in domestic, 14 percent in international emerging markets and 11 percent in international developed markets. Beyond the mega buyouts and private credit Pia mentioned, Texas Teachers declined to say what else is in the private equity strategy.

Action item: Read Michael Pia’s presentation here and watch it here.