Texas ERS sets course to increase exposure to PE

The system's PE chief does not foresee major disruptions despite staff concerns about potential impacts of the covid-19 Delta variant.

Employees Retirement System of Texas plans to increase its exposure to private equity as distributions flood in from the US pension’s PE programme.

After deploying $800 million in the 2021 fiscal year, the board of trustees this week approved the 2022 fiscal PE plan that calls for another $800 million of commitments to PE.

The plan has a range of $600 million to $1 billion to allow for flexibility in the pacing.

Capital by way of PE distributions flowed into the system’s coffers this year, according to Ricky Lyra, director of private equity at Texas ERS.

“We had a very active year, saw about a $1 billion of capital being called or money being deployed to private equity, and money was also distributed back to ERS,” said Lyra. “We had a great year when it comes to liquidity as over $1.2 billion was returned to ERS between September 2020 and June of this year and we expect to close this year with $1.6 billion in distributions.”

Lyra and the rest of the PE staff expect to commit an additional $65 million before the end of this fiscal year, bringing total PE committed capital for FY21 to $864.6 million. The system has a 13 percent target to PE, with an actual allocation of 17.4 percent. Staff have some concerns about what impact the Delta variant of covid-19 might cause, Lyra said at the board meeting this week. Lyra is confident the team can successfully execute the tactical plan for 2022, just as they did in 2021.

“We are worried about [the] Delta variant but don’t foresee major disruptions to the overall recovery trend in PE and the level of distributions that we have gotten,” Lyra said. “We have seen great value growth, with distribution outpacing capital calls.”

Specific details of the plan for the 2022 fiscal year were not discussed. Information technology made up 15 percent of the PE programme’s net asset value, with industrials at 14 percent, healthcare at 11 percent, consumer discretionary at 8 percent and energy at 8 percent.

As of 30 June, the ERS PE strategy diversification plan had buyouts at between 35 percent and 60 percent of policy guideline and 44 percent of NAV. Secondaries accounted for 5 percent to 30 percent of the policy guideline and 20 percent of NAV.

The 2021 plan also included geographic diversification. About 54 percent of the NAV came from North America, 27 percent from Europe, 16 percent from Asia, 2 percent from Latin America and 1 percent from central Europe, the Middle East and Africa.

According to the presentation and accompanying slides, PE activity for 2021 includes eight commitments to existing managers, four new relationships and 10 co-investments that together total $799.6 million. The co-investments accounted for $186.1 million of the fiscal year 2021’s commitments through June.

According to the presentation, Texas ERS has closed on 125 PE funds and 67 co-investments with commitments totalling $11 billion since its inception in the 2008 fiscal year – 105 funds and 57 co-investments are active, representing $9 billion in committed capital with $2.9 billion unfunded.

The Texas ERS portfolio metrics as of 30 June have a total of $10.94 billion in commitments, $8.92 billion in capital calls, $6.7 billion in distributions and $2.89 billion in uncalled capital.

Texas ERS was able to achieve a 300 basis point margin above public markets, and Lyra said that was unlikely to be obtainable going forward.

“Right now there is lot of dry powder in the market,” he said. “As the industry matures, we will see that 300 basis point margin of public markets, it will start diminishing because there is so much money chasing deals, so the returns will start to be squeezed a bit. But do I think it will ever get to zero? No, I don’t – there will always be a premium, but we might have to start looking at the 300bp margin and re-evaluate.”

– This report was originally published on affiliate title Buyouts.