LP Radar: Like a whole other country

Each year, the Texas Teachers Retirement System (TRS) holds perhaps its most influential and comprehensive meeting in February. That meeting is one part board of trustees update, two parts investment conference.

If you think that might be an exaggeration, at this year’s event, the $132 billion pension system had Bridgewater founder Ray Dalio on hand as a guest to provide a brief macroeconomic update.

Late in the afternoon of the all-day gathering, TRS’s CIO Thomas Britton Harris IV announced two major initiatives. These will change the behaviour and arguably the scope of the pension system in the future.

According to Harris, one of the major priorities for TRS is to become the “preferred destination for attractive large investments”. In practice, this means emulating the set-up of sovereign wealth funds.

While the core diversified portfolio will remain, separately managed accounts and co-investments will become an increasingly larger part of board considerations. TRS has attempted these kinds of investments in the past and lost out to actual sovereign wealth funds, which may explain the move toward looking and acting like them.

Indeed, in terms of US pension funds, TRS is well placed to build out this kind of initiative. At $132 billion, it represents one of the largest pension systems in the U.S. And, if you extract the Texas economy from the US economy (a favourite pastime of Texan number crunchers), the state itself represents one of the largest and most diverse economies in the world.

“There are only a few funds in the world that can do investments of $150 million,” Harris noted in a webcast of the board meeting. Part of the reason why it wants deals of this size Harris said, is that smaller co-investments and low interest rates are not making returns in the way a pension system of that size really needs.

So far, approximately $2.2 billion of the system’s $15.4 billion private equity portfolio is geared toward this type of investing, according to data presented in the webcast.

ENERGY INVESTMENTS

Alongside this plan, Harris presented a second strategy that has been in the works since oil prices began to tumble. The system wants to increase its focus on energy investments as asset prices in oil and exploration drop and companies in the sector look for financing.

As PEI reported last month, TRS committed $250 million to the Ridgewood Energy Oil & Gas Fund III in a move that highlights its immediate interest in this strategy. Ridgewood invests in exploration and production of oil projects in the US deep waters of the Gulf of Mexico.

The pension system is working with Wood Mackenzie and Energy Capital Partners as consultants on the new strategy. Exact investment targets for the energy exposures were left out of the meeting’s presentation of the new plan, but Harris did say the team would be considering a mix of credit and equity investments from public and private parts of the portfolio.

In their presentation to the meeting, Wood Mackenzie emphasised the significant investment opportunity within Texas alone for opportunistic capital support, as well as in shale regions such as Pennsylvania and northward in the Dakotas.

Harris said in the webcast that energy investments represent one of the pension’s top five investment ideas over the next three years. He placed some $100 billion in credit for energy being in play this year owing to the slowdown in financing, and wants the pension to be in a position to take advantage of that opportunity.

In the webcast, Wood Mackenzie and Energy Capital Partners seemed upbeat about the longer-term investment opportunity. It is an opportunity that may take a little more time to materialise than previously thought because oil prices hit six-year lows in March.

In addition to these big initiatives, the pension also used the February meeting to approve $700 million in new private equity commitments, including most notably, a $250 million mandate to Texas-based TPG.

As a blue-chip GP and local outfit, TPG might seem an obvious choice for a tie-up, but has been under pressure in recent months. It has had to work through the ramifications of lacklustre buyout bets and a very public lawsuit involving a former communications staffer.

The mandate will go to the firm’s third growth fund. That fund is currently in the market and targeting $3 billion, as PEI reported last month.

Another $150 million will go to Baring Asia Private Equity VI. That fund closed on $4 billion in February, PEI reported at the time. And finally, $300 million will go to two Oaktree funds, the Opportunities Fund X and Opportunities Fund Xb. Both vehicles will focus on distressed private equity and debt investments.

Big moves are on the horizon for TRS. If the pension is successful in becoming something akin to a sovereign wealth fund, it could prove to be a blueprint for other sizeable pension systems in the US, especially if it allows pension officials to be more proactive and less reactive.