Texas Teachers to Slash $10 Billion From Private Equity
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 US 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.
Alright, this caught my attention today so let's delve into it.
Texas Teachers is a well-known US state pension fund that has a sizable allocation to alternatives including hedge funds.
It's considered to be a very decent investor so it's worth tracking their moves.
They're paring back in private equity because the returns haven't been good lately and exits are at multi-year lows. Instead of selling in the secondary market, they decided not to allocate to large buyout funds and focus more on mid-market funds.
Sounds very familiar, Canadian pension funds are doing the same thing in order to secure better co-investment opportunities (see my recent comment on why CDPQ's head of PE is focusing on vintage year diversification and liquidity as well as my recent comment on private equity's creative wizardry).
Texas Teachers said it will start implementing the reduction in private equity in October and that it will take several years to achieve.
Surprisingly, it decided to shift the money into public equities based on the expectation of
continued pressure on returns from investing in private equity.
This is where they lose/ confuse me.
They decide to cut from private equity where admittedly returns are under pressure for all sorts of reasons -- higher for longer, overvalued vintages, terrible exits, overhang of capital -- to put money in public equities where there's a Mag 7 bubble going on and all sorts of concentration risk?
At least put the money in private credit or somewhere with better risk-adjusted returns (like top hedge funds).
I don't know, I'd need to sit down and talk with the CIO of Texas Teachers to figure out their logic and to really understand their approach in private equity (how big is their co-investment program relative to their fund investment program?)
I know back in April, Texas Teachers added another $149 million in alternative investment strategies across its real estate, infrastructure and private equity portfolios. The moves followed the addition of three managers in March to manage a total of $250 million across real estate and private equity strategies.
Again, what's the approach? Are they co-investing with these funds to reduce fee drag and maintain allocations?
You can read their latest annual report here to delve into details.
Lastly, I like what Pera Chief Investment Officer Amy McGarrity said in an interview about using secondaries to actively manage her PE portfolio:
“It didn’t used to be that LPs would actively manage their private assets. 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.”She's spot on, you need to use secondaries a lot more nowadays to properly diversify vintage year risk.
Alright, I know these headlines grab people's attention and everyone tracks what CalPERS and Texas Teachers does but I remind you that Canada's large pension funds have been doing private equity for a long time and they have the right approach, co-investing alongside strategic partners to lower fee drag.
They also know how to properly diversify and maintain liquidity in the asset class to seize opportunities as they arise (again, see my recent comment on why CDPQ's head of PE is focusing on vintage year diversification and liquidity as well as my recent comment on private equity's creative wizardry).
Below, Jase Auby, Teacher Retirement System of Texas CIO, joins CNBC PROs Milken Global Conference to discuss the impact of the ongoing geopolitical tensions and Fed on his portfolio (from 2 years ago).
Also, CBS Texas sat down with a group of teachers who recently left the profession. Here's what they told them about why teachers are leaving the classroom record numbers.
It's really sad that teachers aren't paid well in the United States, listen carefully to their comments.
In my opinion, a veteran teacher in Texas should be pulling in a minimum of $150,000 a year with a gold-plated defined benefit plan. They deserve it.
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