Texas: PE allocation could reach 10%

If current deployment levels continue, Texas Municipal Retirement System could double its target allocation to private equity, says director of private equity Christopher Schelling.

The Texas Municipal Retirement System, which has $26 billion in assets under management, could increase its target allocation for private equity from 5 percent to 10 percent.

In an interview with Private Equity International, Christopher Schelling, director of private equity said there was the “possibility” that the target allocation could be doubled “at the discretion of our board”.

Texas still has a relatively new private equity programme, having made its first investment only 18 months ago. Its current allocation stands at “around 0.75 percent in the ground,” but the fund has a target allocation of 5 percent – roughly $1.3 billion.

“Our models are currently assuming we will get to 5 percent invested sometime over the next 18 to 24 months, should deployment continue around current levels, which might be optimistic,” Schelling said. 

“We will continue to pace our annual commitments around $450 million and should hit 100 percent committed later this year.”

Texas is not alone in its plans to increase its exposure to private equity, as institutional investors worldwide plan to allocate more capital to the industry, following strong returns.

The University of California Board of Regents plans to double its private equity exposure by 2020, increasing its target allocation from 11.5 percent to 22.5 percent. New Zealand’s Government Superannuation Fund Authority is aiming to raise its allocation by approximately $69.47 million before May 2018. South Korean pension fund manager the Public Officials Benefit Association will gradually increase its overseas exposure from 24 percent to more than 30 percent within three years.

Within Texas’s private equity portfolio, its target for special situations is roughly 30 percent, while venture and growth together make up around 25 percent. The remainder is in buyout.

Schelling said that special situations is likely to shrink on a relative basis. 

“This isn’t necessarily a tactical move away from credit-oriented strategies, but rather a strategic shift to move the private equity portfolio into more pure equity cost of capital strategies,” Schelling said.

“As our total fund has matured, we have added other credit strategies similar to the private equity special situations bucket to other asset classes, and it makes sense to modulate the exposure in my bucket downward to adapt to that.”