UTIMCO shifts to large buyouts to scale PE portfolio

The endowment will trim its private equity manager list by almost 50% and increase cheques to core GPs to maintain its $3bn annual investment target.

University of Texas Investment Management Company (UTIMCO) is in the process of reorganising its private equity portfolio to focus on large buyout funds, a smaller manager list and larger cheques to a premier GP group.

The reorganisation – which will happen over the next five years – was prompted by a need to scale up private equity to keep pace with UTIMCO’s rapidly growing endowment assets under management, up from $17 billion 10 years ago to $46 billion today, senior director for private equity Brad Thawley said at a 27 June board meeting.

UTIMCO’s $7 billion private equity portfolio is expected to grow by more than 50 percent in the next five years. It returned 12 percent in fiscal 2018 and generated 160 basis points of alpha; it returned 14 percent over the last decade, Patrick Pace, senior director of private equity, said at the board meeting.

With an annual investment pacing target of almost $3 billion, the current strategy of $50 million commitments (except to venture capital funds) and commitments to small managers will not help scale the private equity portfolio, according to Thawley.

For the last nine months, UTIMCO has focused on integrating the buyouts, growth, venture capital, emerging markets private equity and private credit portfolios into a single portfolio with an integrated team. Now, the endowment will shift the focus to large buyout funds and allocate more dollars to cycle-tested managers; it will continue to maintain its alpha-generating strategies, such as venture capital, Thawley added.

“There will always be small players that do well. But there are so many of them, and it takes a lot of intensity to find really good ones,” Pace said of the decision to shift the focus away from small-cap and lower mid-market funds.

UTIMCO’s large buyout funds have outperformed most of its small buyout funds, according to Pace.

A new roster

Under the new strategy, the private equity manager list will change significantly, Thawley said.

Currently, UTIMCO’s 148 private equity managers are split between 86 premier managers that account for almost 79 percent of the $7 billion private equity portfolio, and 62 managers that account for 21 percent, or $2 billion, according to a UTIMCO 27 June board presentation.

The 148-manager list “unequivocally is too large” for the team to manage, Richard Rincon, senior director for private equity, said at the meeting. The manager count will come down to about 70 or so, and the portfolio will be further concentrated with high-performing managers over the next five to 10 years.

UTIMCO evaluates opportunities to sell stakes in the secondaries market to maximise value; some of its legacy positions are still yielding attractive returns in the low teens for the overall portfolio, according to Pace.

Strategic partnerships

Another way UTIMCO intends to establish a closer relationship with core managers is through its strategic partnership initiative.

The goal of this initiative is to invest between $1 billion and $2 billion across two to four managers in private equity, real estate, natural resources and credit. Such a relationship will bring fee advantages and access to co-investments, Ken Standley, chief of staff, said at the meeting.

Much work remains on this initiative. UTIMCO evaluated 15 prospective partners and found that few organisations can engage in a strategic partnership. There has also been plenty of innovation in such structures that the endowment must examine further.

UTIMCO expects to present the proposal for private strategic partnerships at the February 2020 board meeting, according to board documents.