Investor Base: Texas State Board of Education's new plan

At its 11 September meeting, the Texas State Board of Education (SBOE) voted to adopt a new private equity programme structure for its Permanent School Fund (PSF).

NEPC, the investment advisor which presented the plan, called the structure a non-discretionary advisory model in which SBOE staff would continue co-fiduciary duties with Neuberger Berman, SBOE’s investment manager, but would become the only group able to vote at meetings. The new model also allows the staff to directly handle contracting deals, a task previously carried out by Neuberger Berman.

This model, the third to be adopted by PSF, will give Neuberger Berman the discretionary account to invest in direct, secondaries and co-investments, and the non-discretionary account to invest in primary private equity investments, which the NEPC terms “core” funds.

Its first private equity investment model began in 2010 with discretionary accounts through Neuberger Berman and Grosvenor Capital Markets and ended the same year with the start of the second phase hybrid programme.

NEPC told SBOE that a switch to the third, non-discretionary advisory model is “evolutionary” and wouldn’t be a “shock to the system”.

It said it recommended the new model because staff had not previously been involved in the contracting process, while Neuberger Berman would still be retained on an advisory basis.

The SBOE acknowledged that its hybrid model had worked well, but was an unusual institutional structure which had resulted in some confusion.

The fund manages $36.2 billion in assets as of 31 August 2014, and its private equity portfolio returned 22.5 percent in 2014 and an annualised 17.9 percent over three years.
Its allocation to private equity as of 31 August 2014 was 3.48 percent ($1.07 billion), well below its 10 percent target. In the previous year, it allocated 2.67 percent ($724.5 million).

The PSF is no stranger to Neuberger Berman. In 2013 it committed $900 million to the NB/TPSF – Separate Account (2nd Tranche). This followed $720 million in 2011 to the NB Crossroads 2010 Fund and $650 million in 2010 to the NB/TPSF 1st Tranche.