Before the pandemic, the Employees’ Retirement System of Texas’s private equity portfolio was performing well, delivering 7.6 percent in net internal rate of return last year.
Then things changed.
The $4.4 billion private equity portfolio has lost 2.14 percent, as measured by net IRR, for the 10 months ending June 30, new meeting materials show. Private equity was the “largest detractor” from the most recent quarter’s performance, losing 1.9 percent.
The retirement system’s top private equity managers by committed capital include LGT Capital Partners ($975 million committed), Riverside Company ($602 million), and Landmark Partners ($600 million), per fund documents.
During Wednesday’s meeting, the board will consider whether to approve a private equity tactical plan for 2021, which proposes that ERS place a greater focus on buyout vehicles and co-investments, among other changes.
“The buyout segment of the market has been and will continue to be the key driver of co-investment deal flow for the portfolio,” per the plan. At present, ERS has committed 49.2 percent of its private equity portfolio to buyout funds, with a target allocation of 35 to 60 percent.
ERS would prioritize co-investing and continue to target 20 percent of capital commitments to such arrangements under the plan. This would reduce management fees to “enhance net returns,” the proposal argued.
Accessing high-quality venture capital managers at scale is challenging, the retirement system pointed out. Instead, under the tactical plan, ERS would emphasize growth-equity exposure. Right now, ERS has committed 16 percent of its private equity portfolio the strategy but can go up to 30 percent.
“Growth equity strategies are particularly relevant when it comes to international diversification where buyout markets in certain jurisdictions are less mature and growth equity represents the primary way to participate in those countries,” the plan said.
The private equity team said it is looking to hire a senior analyst in fiscal year 2021, which begins at the end of the month. ERS has yet to post the role on its website.
As of June 30, ERS managed $27.44 billion, down from $28.67 billion in the previous fiscal year. The retirement fund returned 0.3 percent for the year ending June 30, underperforming its benchmark by 2.9 percent, meeting materials show.
For the three-year and five-year periods ending June 30, the fund returned 5.1 percent and 5.4 percent respectively, just below its benchmark.