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Texas TRS forms $4 bln worth of separate accounts for credit, PE

  • Creates two new $1 bln separate accounts with Apollo and KKR for credit
  • Also re-ups $1 bln to existing accounts from Apollo and KKR
  • Adds to $6 bln of separate accounts created in 2011

The Teacher Retirement System of Texas’ board of trustees cleared the way for two new $1 billion separate accounts managed by Kohlberg Kravis Roberts & Co. and Apollo Global Management in March.

The funds of funds vehicles will invest in credit and debt-related opportunities, including funds and co-investments managed by Apollo and KKR, according to copies of the board’s resolutions made available by spokeswoman Juliana Fernandez Helton.

Apollo and KKR are currently marketing new funds to invest in credit or debt-related strategies. KKR recently disclosed it is raising follow-ups to its debut direct lending and special situations funds. During Apollo’s Feb. 5 earnings call, Apollo co-founder Josh Harris said his firm is growing existing managed accounts for investments in credit.

“The overall credit performance we have had continues to be top quartile … across virtually every strategy we manage, and so we see a good fundraising pipeline for our credit efforts,” said Scott Nuttall, KKR’s Head of Global Capital and Asset Management, during the firm’s Feb. 10 earnings call.

The Texas Teachers’ resolutions do not address the specific investments KKR and Apollo will make with their respective $1 billion accounts.

Harris and Nuttall will be the $130 billion pension’s primary relationships at Apollo and KKR, Helton said in an email. Senior Investment Managers Michael Pia and Courtney Villalta will manage the accounts on the TRS side.

“All investments with strategic partners are made through a collaborative process,” Helton said in an email. Fund terms on the accounts remain subject to negotiation.

Texas TRS and PE

Teacher Retirement System of Texas was an early adopter of broadly mandated separate accounts with bulge-bracket private equity firms. In 2011, the retirement system’s board allocated $6 billion across two separate accounts managed by Apollo and KKR, which it refers to as strategic partnerships. Those partnerships invested in private equity, credit, real estate and special opportunities and delivered an annualized return in excess of 15 percent since inception, Helton said in an email.

Texas threw more chips into the pot on March 26. In addition to allocating $1 billion to Apollo and KKR for credit-related separate accounts, the retirement system also re-upped $1 billion to each its existing accounts with KKR and Apollo.

The $4 billion overall commitment to new and existing separate accounts will likely address the retirement system’s recent change to its targeted asset allocation mix. In September, Texas TRS approved a 5 percent increase to its private markets allocation, which included raising its target allocation to private equity from 11 percent to 13 percent.

“This is a good program we’ve had, and we think we should allocate a little more capital to it,” said Senior Managing Director Mohan Balachandran in a webcast of the board’s September meeting. “We want to build this platform in such a way that on average the commitments and withdrawals our managers make are funded by the disbursements that we make, so it’s a self sustaining process.”

Within private equity, Texas Teachers has carved out a 15 percent target allocation for investments in credit and special situations funds. The retirement system stood 2 percentage points short of that target as of year-end 2013, according to retirement system documents.

Besides credit, Balachandran previously indicated Texas Teachers’ will likely pursue investments in fund strategies outside large-market private equity.

“Our concerns on the large-buyout market [are that] we think it’s overvalued at this point in time,” Balachandran said in the webcast. “I think a lot of our primary managers think similarly.”

Teacher Retirement System of Texas had an 11 percent allocation to private equity as of Dec. 31, according to retirement system documents. The portfolio is valued at $14.8 billion.

INFO BOX

TRS commitments to Apollo, KKR accounts: $10 bln

Number of accounts: 4

Annualized Return: 15 pct-plus

Strategies: Private equity, credit, real estate, special situations

TRS managers: Michael Pia, Courtney Villalta

TRS AUM: $130 bln