Texas TRS to co-underwrite co-investments

The pension system is in the process of expanding the direct investment portion of its private equity portfolio from 26% to 35%.

Teacher Retirement System of Texas intends to co-underwrite private equity deals instead of investing in them as syndicators.

Syndication in co-investments is becoming “commoditised”, the pension fund’s managing director for private equity Neil Randall said at a board meeting on 18 July.

“Increased demand for co-investments – and more LPs following through on these opportunities – has made deal sourcing increasingly competitive,” Randall told Private Equity International in an earlier interview.

Co-underwriting will allow the pension system to look at a transaction in “real time” alongside the GP. However, the process is more labour-intensive and comes with the inherent uncertainty of the opportunity finally becoming available to the pension system.

Randall likened co-underwriting to getting a seat at the dinner table. “Co-underwriters eat till they are full, and syndicators eat the leftovers,” he said.

Of the 10 potential co-underwriting opportunities, Texas TRS would invest in one or two, according to Randall.

Co-underwriting would bring the $153 billion pension into competition with the Canadian pension plans and sovereign wealth funds that make such investments. However, Texas TRS would focus on the smaller end of the market, writing cheques in the range of $200 million to $400 million, stretching on occasion to $500 million. Randall noted that it is early, and Texas TRS is still building up its resources and working on its go-to-market strategy.

The pension system’s $21.46 billion private equity portfolio is made up of fund commitments and principal investments, which include co-investments, directs and sidecars.

Texas TRS intends to ramp up its principal investments from 26 percent to 35 percent of the private equity portfolio in the next few years, “to optimise returns and compound billions of dollars back to the pension system’s coffers,” Randall said.

The $5.5 billion principal investments portfolio is generating higher returns than Texas TRS’s fund investments, returning 10.7 percent over one year, 15.1 percent over three years, 13.1 percent over five years and 17.4 percent since inception, as of 31 December.

Fund investments returned 7.6 percent over one year, 11.5 percent over three years, 11.1 percent over five years and 12.7 percent since inception during the same period.

Texas TRS’s private equity portfolio returned 8.4 percent over one year, 12.3 percent over three years and 11.5 percent over five years, as of 31 December.