Texas ERS lowers expected PE commitment for 2017

The $25bn pension fund is pulling back its commitment level to private equity to avoid the denominator effect as its overall fund is growing more slowly than expected.

The Employees Retirement System of Texas (ERS) has decreased its private equity commitment level for the 2017 fiscal year to stay at its 10 percent target allocation.

At a board meeting earlier this month, the $24.9 billion pension proposed to invest a scaled back $750 million in six to 10 private equity funds and co-investments for the 2017 fiscal year starting 1 September and ending 31 August 2017.

Texas ERS had previously planned to commit $950 million for the year, the same amount planned for 2016. The actual 2016 commitment, however, has reached has only $744 million as of 30 June.

ERS’s deputy chief investment officer Shar Kassam told Private Equity International that the $950 million planned commitment was based on ERS’s assumption of an 8 percent growth rate of its fund per year, but due to market returns being lower than expected across asset classes for pension plans, that growth level hasn’t been sustained. 

If ERS continued to commit about $950 million to private equity per year despite the more subdued growth rate, it would surpass its 10 percent allocation target for private equity.

The $750 million planned commitment – based on a scenario where ERS assumes a 4 percent growth rate a year for its fund – will maintain this allocation level.

“In the beginning, it was all about reaching our target allocation, but now that we’re there, it’s about managing to stay within the target,” Kassam said.

The Austin-based pension set a new long-term target in February 2013, increasing its target allocation to private equity from 8 percent to 10 percent. It met that target during the 2015 fiscal year, ended 31 August 2015, when its exposure to private equity grew from 8.9 percent to 10.4 percent, according to the August 2015 board meeting minutes.

Since the beginning of calendar year 2016, ERS’s commitments included $5 million to a separate co-investment fund with Blue Wolf Capital Partners and $7 million to another separate co-investment fund with The Riverside Company. It also committed to primary funds, including $47.5 million to the $200 million Industry Ventures Special Opportunities Fund III and $40 million to the $500 million Industry Ventures Secondary VIII, according to PEI data.
ERS’s private equity consultant, Altius Associates, did not respond to requests for comment.