Leader: Britt Harris, CIO
Size of Private Equity Portfolio: $6 billion
Current Private Equity Asset Allocation: 6 percent of $108 billion
Target Allocation for Private Equity: 10 percent of overall holdings
Private Equity Consultant: Hamilton Lane
The Teacher Retirement System of Texas may be ratcheting back a tad on U.S. buyouts in favor of international markets. But the $108 billion pension fund remains bullish on private equity and has set out to make itself more attractive to general partners.
, CIO, has a variety of strategies for this, including identifying a “core group” of private equity managers that it will have especially close relationships with; making his team more stable by lowering turnover; and committing to private equity funds using a measured yet opportunistic pace to achieve the target allocation, which he recently raised from 6 percent to 10 percent. TRS, he said, has “the goal of being one of the top 20 LPs in the world.”
To achieve this, Harris, who oversees the investment division of the sixth largest U.S. public pension plan, said he is looking to build closer ties with the most accomplished investors in the asset class. Within the next six to 12 months he wants to identify a core group of up to 15 private equity managers, out of the 40 to 50 managers worldwide TRS already has relationships with.
This core group would be allowed to provide additional input into TRS’s long-term strategic planning and shorter-term reactions to opportunities that may require closer and quicker collaboration to effectively access. The thinking is that Harris and his team already know these people; know how they’ve produced their results and handle their resources; know how they are expanding their strategies and the directions they want to go in; know how consistent those directions are with the way TRS wants to go; and know how aligned they are regarding what they and TRS want to accomplish; and know how committed they are to partnering with TRS.
“We will continue to fund a wide universe of high-quality and very professional managers, mostly those with whom we already have successful investment relationships. Core relationships will be a part of that overall group,” said Harris.
In part to strengthen and manage those core GP relationships, Harris has greatly increased his staffing, adding 26 professionals to an investment division that now contains 45 MBAs, 25 CFAs and seven PhDs. He has also made changes to maintain and motivate his investment team, including the introduction of an incentive compensation plan that gives his staff an opportunity to earn bonuses if TRS exceeds investment performance benchmarks. Harris has also tried to put in place a different sort of culture that focuses on identifying each investment professional’s “personal genius,” meaning what it is that he or she does uniquely well.
In other GP-friendly moves since his appointment in November 2006, Harris has worked to raise the target allocation to private equity, and to revamp laws that were limiting the ability of the portfolio to perform at the highest level. “We’ve changed the way we think about private equity. First, we think about it much more strategically than we did before. The purpose of private equity is to generate a very long-term, relatively high rate of return. We expect our portfolio to return at least 15 percent based on attractive valuations and operational skill,” said Harris. Last year the target allocation to private equity expanded from a range of 2 percent to 6 percent to a target of 10 percent, with a range of 5 percent to 15 percent. And with an actual private equity allocation of only 6 percent now, a lot of capital needs to be committed to reach the new goal.
Of course, not all of that capital will go to U.S.-based buyout funds, which now compose about 75 percent to 80 percent of the private equity portfolio. That percentage may shrink a little as the program grows, and as the investment division globalizes the program, committing more to growth equity investors overseas. That said, TRS has no plans to dramatically reduce its exposure to U.S.-based general partners.
In June, TRS actually won an award for raising its alternative investment allocation in 2007, reflecting the new emphasis on a more modern, holistic and appropriate diversification strategy. “We are willing to be a leader in a new direction that the pension fund world is going in,” Harris said.
In the year ahead Harris plans to focus on staff development and improving transparency and communication with the pension fund’s members and the outside world. And with about $4 billion needing to be committed to reach the private equity target allocation, there’s still plenty of buyout dollars to go around.