Retired teacher Richard Cronshey (center) of San Marcos watched from the second floor of the rotunda during the Texas Public Education Rally on March 11 at the Texas capitol in Austin. Teachers pushed for school finance reform and pay raises. (Ashley Landis / Staff Photographer)
Texas’ largest public pension fund has decided to shift almost $10 billion out of private equity investments, a blow to an asset class that has faced heightened scrutiny amid dwindling returns and a slowdown in exits for portfolio companies.
The move by the Teacher Retirement System of Texas — which manages $202 billion of assets — is another setback for an industry that has struggled with dealmaking and fundraising after a prolonged era of easy profits.
Texas Teachers is the second of the largest public pensions to officially reduce its target allocation to private equity. It’s paring that to 12% from 14% — below the average 13% for all US public pensions, pension officials said at its board meeting Thursday.
The pension estimates it will report a 9.3% gain
for its latest fiscal year, Chief Investment Officer Jase Auby said at the meeting. That’s compared to a 3.85% return for the previous fiscal year and will outpace a 7% annual return target.
At the end of March, the fund held $33.7 billion of private equity investments, or 16.7% of its portfolio, meaning it was already over-allocated to the asset class. Reducing that exposure to 12% amounts to pulling roughly $9.7 billion of private
equity investments from the portfolio.
The pension doesn’t have plans to sell private equity investments to the secondary market to achieve the reduced target, Neil Randall, managing director of private equity at Texas Teachers, said at the board meeting. The pension isn’t writing checks to large buyout funds anymore, instead focusing on smaller middle-market funds.
Alaska
Permanent Fund, which manages that state’s $80 billion sovereign wealth fund, began reducing commitments to private equity in 2022 and decreased its target allocation to 15% from 19% the following year. CIO Marcus Frampton said at the time that private equity needed a reset and that he wanted to be cautious. Earlier this year, the Alaska fund opted to lean back into the asset class and re-upped its target to 18%.
Texas Teachers’
decision to pull from private equity and shift that money into public equities was based on the expectation of continued pressure on returns from investing in the asset class. The pension said it will start implementing the reduction in October and that it will take several years to achieve.
Not Alone
Many U.S. public pensions have actually increased private equity allocations recently, partly because their existing exposures are already above
previous targets. Three of the largest have boosted their targets this year, including California Public Employees’ Retirement System, California State Teachers’ Retirement System and New York City’s pension funds.
Pension funds, which have been chronically underfunded, seek to balance their investment decisions with the need to meet future payment promises to thousands of public-sector employees. The Texas fund only has 77.5% of the
assets it needs to pay future obligations.
That means private equity firms might continue to struggle to find interested investors for future flagship funds. Texas Teachers isn’t alone in grappling with how to stretch fewer dollars further. Others are doing so by slowing their pacing, or how much money they invest in a year.
Still others like Colorado’s Public Employees’
Retirement Association, or Pera, have looked to secondary funds as a way to actively manage their private equity portfolios. Pensions are allocating more than in the past to those funds, opting out of some new fundraisings and also looking at strategically selling their existing stakes in private equity funds to free up liquidity.
“It didn’t used to be that LPs would actively manage their private
assets,” Pera Chief Investment Officer Amy McGarrity said in an interview. “With delayed exits and an overhang in capital that hasn’t been called, wanting to gain exposure to future vintage years, there is a sense that there may need to be some more active management.”
Investors like getting into secondary funds because it can help them buy vintage years they might have missed out on, and they can get their money back sooner than they
would with a new fund.
- Marion Halftermeyer for Bloomberg
