The Employees Retirement System of Texas is turning bearish on emerging markets, including Asia, as uncertainty around the coronavirus crisis remains high.
“Overall, we are being very careful where we allocate capital,” said Ricky Lyra, director of private equity at Texas ERS on the pensions’ investment advisory committee meeting on Wednesday.
“I think that before we make any large bets in emerging markets or riskier markets, we will try and see where the chips will fall.”
Asia-Pacific made up 17.1 percent of the pension’s $4.1 billion private equity portfolio as of end-June. In the past three years, Texas ERS had deployed more capital in both Asia and Europe as part of its re-allocation plan. Lyra noted the pension had grown its PE portfolio in Asia-Pacific over the years “driven by our belief that a lot of the global growth is coming from Asia”.
With the economic uncertainty brought about by the pandemic, Lyra said the pension’s PE team was being “very diligent about where their commitments are going” and “how they are co-investing”.
“It is a delicate time still of volatility,” he added. “It’s one of the reasons why we are in the lower range of our commitment goal for this year. Not only did some managers delay fundraises that were coming around, but we also stepped back and [needed to] see where things are going to fall … so we can make our bets.”
As of 30 June, Texas ERS closed on nine fund investments and one co-investment totalling $534 million, and staff expects to commit an additional $100 million before the end of the fiscal year ending on 31 August. The pension plan had an $800 million commitment target for the year.
Private equity was singled out as the “largest detractor” to the pension’s overall performance, as the asset class that underperformed the most in the three months to 30 June, according to meeting materials prepared by investment consulting firm NEPC. The asset class delivered a weighted actual return of -8.8 percent in the quarter ended 30 June, contributing to the fund’s overall performance of -3 percent.
“The PE portfolio was impacted by the covid-19 pandemic and the energy crisis, which significantly drove down valuations in the first quarter of the 2020 calendar year,” according to additional meeting materials presented to the board.
Up until the end of the calendar year 2019, the PE portfolio had seen value growth of almost 4 percent, excluding capital calls. All private equity strategies had seen growth, except for energy and natural resources, which had already seen a drop in value of 9.8 percent.
That changed in the first half of the year. Its portfolio lost almost 8 percent in value over the past 10 months to 30 June due to the global pandemic, said Lyra. Buyouts, the largest strategy in the portfolio, accounting for 43 percent, saw the largest reduction in value of $244 million, which represented a 15.7 percent drop in value.
The PE portfolio’s net internal rate of return fell by 2.14 percent for the 10 months ending 30 June.
The pension’s PE exposure was 15 percent as of end-June 2020, against a long-term target of 13 percent.
Roadmap for 2021
Despite the deceleration in the performance and value of its PE portfolio, Lyra noted the numbers presented at the meeting represent valuations only for the first quarter of the year and any capital calls that took place over the second quarter. He added the PE team had started receiving Q2 updates over the past 10 days and “the numbers have been looking a lot more promising”.
Going forward, the pension will place particular emphasis on the buyout segment of the portfolio, co-investments and growth equity, according to materials. Texas ERS has a target of 20 percent of annual capital commitments for its co-investment programme and will continue to scale this over time “as a core structure”.
As the portfolio continues to mature, “secondaries funds will be de-emphasised and used primarily as a tactical tool on a more opportunistic basis”.
ERS staff indicated in the plan that it will build out the growth equity segment of the portfolio, as access to high-quality managers and deployment at scale in the venture capital market remain challenging.
Texas ERS’s target commitment pacing plan for fiscal 2021 beginning 1 September 2020 to 31 August 2021 is $800 million (+/- 25 percent), unchanged from the prior fiscal year, according to its 2021 private equity tactical plan, published in July. It plans to invest in eight to 12 new funds and between three to eight opportunistic co-investments over the next fiscal year.