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Texas teacher fund sees ‘consistent’ PE commitment of about $2.5 bln in 2014

  • TRS to stay with existing roster of managers
  • Texas adds Insight Venture Partners, eyes more growth equity
  • TRS commits $1 bln to two funds by Apollo Global Management

Rich Hall, managing director of private equity for TRS’s $13.4 billion private equity portfolio, said the retirement system for about 1.3 million active and retired teachers in the Lone Star state looks to keep its allocation at about 11 percent of the total trust.

“In terms of 2014 and the private equity space, my expectation is we’ll continue to deploy capital largely with our existing manager group,” Hall said in a phone and email interview with Buyouts. “ I expect that the amount we commit will be consistent with what we’ve been doing in recent years, between $2 billion to $3 billion a year.  Assuming that the markets aren’t too volatile, that level of commitments is what is necessary for us to maintain the targeted allocation to private equity relative to the total trust.”

Overall, TRS has an internal target for buyout funds to represent roughly 70 percent of its private equity portfolio. 

“Our plan is to invest roughly half of that 70 percent in the large buyout area – about 35 percent in the larger buyout funds – and 35 percent in smaller buyout funds,” Hall said. “That’s the target and we’ll be around that range [in 2014]. We have no strong preference between large and small funds.”

In the past year, the system committed $150 million to Insight Venture Partners Fund VIII, a first-time investment in the growth equity fund.

“Insight’s strategy is to invest in real companies that are making money and take them to the next level,” Hall said. “We’re excited about starting off a new relationship with these guys, and it’s a part of our portfolio that we do need to build out a little more.”

TRS also committed $1 billion to two Apollo Global Management funds: Apollo Investment Fund VIII, which drew $850 million, and Apollo Credit Opportunities Fund II, which drew $150 million.

TRS also committed $200 million to Blackstone Group’s Blackstone GSO Capital Solutions II; $150 million to Silver Lakes flagship tech buyout fund,  Silver Lake IV, and Wayzata Investment Partners Wayzata Opportunities Fund III, which focuses on distressed debt from smaller issuers.

It has made commitments ranging from $15 million to $30 million to several emerging managers; Live Oak Venture Partners, which is a spinout from Austin Ventures; Mill Road Capital II, New Mainstream Partners Fund II, New Heritage Capital Fund, ICV Partners III, Spire Capital Partners and Trive Capital. Stuart Bernstein serves as manager of the emerging program for TRS. Hamilton Lane remains the private equity consultant for the system.

The TRS allocation to private equity moved down to 11 percent from 12 percent of the trust in 2012, because pension system took 1 percent of its assets invested in energy-specific private equity funds and contributed those as a portion of the assets to seed TRS’ new, separate energy and natural resources portfolio, which has a long-term target allocation of 3 percent of the trust, Hall said. TRS also hired Vaughn Brock last year as a director to lead the ENR effort. Prior to TRS, he founded American Ventus Energy as a developer of wind farms in Texas, Oklahoma and Colorado.

TRS has 50 to 55 managers with active commitments, but it’s looking to “pare that back a bit”, not necessarily through sales in the secondary market, Hall said.

“It doesn’t make sense to us to sell a fund interest at a discount to net asset value,” he said. ”TRS doesn’t have any liquidity issues that create pressure for us to sell, so we would rather hold an asset and let it run through the normal course of its fund life,” he said. “We prefer to manage our GP relationships through the commitments we make to subsequent funds with a manager. We are fortunate that we don’t have an oversize book of managers to start with and we’ve been getting good performance from the vast majority of them, so we’ll concentrate on the guys who have been winners for us.”

While the bull market in equities in 2013 helped boost returns in private equity – via higher values of public companies and the estimated value of private firms in buyout funds – it’s also driven up the cost of co-investments, he said.

“We’ve been very fortunate in the co-investments we’ve elected to do and they have contributed very strong performance to our private equity portfolio,” he said. ”Our long-term target is for 20 percent of the private equity portfolio to be invested in co-investments.  We’ve been very selective this year because most of the quality assets we’ve seen in the the market have been fully priced.  As a result, we’ve been conservative in deploying co-investment capital.”

In a bright spot for the Texas teacher private equity program, a recent study by the Private Equity Growth Capital Council ranked the Teacher Retirement System third among big pension funds with a 10-year annualized private equity return of 15.5 percent and a five-year annualized return of 6.3 percent.

Hall attributed the performance to his colleagues, the selection process for investments and leadership.

“We have a great team of very thoughtful, very capable people. We work passionately on behalf of 1.3 million teachers here in Texas – those teachers are a cause we believe in and we think our efforts serve a greater good which motivates us to take our game to a higher level,” Hall said.

Among the top performers in the history of TRS, the vintage 2001 First Reserve Fund IX ranks at the top with an IRR of 47.2 percent as of June 30, 2013. The vintage 2001 CVC European Equity Partners III holds the No. 2 slot with an IRR of 41 percent, followed by a 38.4 percent IRR for the vintage 2008 Apollo Credit Opportunity Fund II.

(Corrects spelling of Blackstone GSO Capital Solutions II fund in eighth paragraph)