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How Texas Investors Viewed Private Equity Before the Pandemic Struck

Almost all buyout funds were predicting 20 percent gross returns before markets began tanking, according to the former CIO of the Memorial Hermann Health System. Now they’re probably even more optimistic, he told II.

Heading into the pandemic, institutional investors in Texas were expecting their private equity portfolios to produce double digit gains exceeding the stock market, according to a recent paper published by the Journal of Applied Corporate Finance.

Tom Tull, chief investment officer of the Employees Retirement System of Texas, remarked during a private equity conference at the University of Texas in mid-February that the state pension fund anticipated annual returns of more than 10 percent from private equity over the next two decades, surpassing expected public equity returns of seven percent to eight percent. 

Texas Teachers Retirement System similarly was assuming a 10.5 percent return from private equity, Shelby Wanstrath, the co-head of private equity funds at Texas Teachers, said at the same event in Austin. But Memorial Hermann Health System had seen a lot of new private equity funds and none were proposing returns as low as 9 percent to 11 percent, then CIO Chris Halaska said at the event, adding that almost all were predicting gross returns of about 20 percent.

“What’s funny to me is that although my general partners usually tell me they expect returns to the industry to be somewhere in the high single digits, they also expect the gross returns to their own funds to be 20 percent,” Wanstrath said, according to the paper. “I’m not sure how to square their view of themselves versus the entire industry.”

Halaska, who has since left Memorial Hermann to become CIO of Houston wealth manager Avalon Investment and Advisory, told Institutional Investor in a phone interview Tuesday that he continues to see buyout fund managers targeting 20 percent gains. Avalon expects to invest in private equity, he said, adding that his industry views haven’t changed since mid-February.

During the pandemic, Halaska has seen quarterly private equity marks ranging from “modest” declines to positive performance. After spotting opportunities to profit from the downturn, buyout firms probably have become more optimistic about their ability to produce high, gross internal rates of return, he told II.

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Employees Retirement System of Texas CIO Tull did not reply to an email seeking comment on his private equity views or the performance of the pension's private equity portfolio during the Covid-19 pandemic. A spokesperson for Texas Teachers declined to comment on the performance of its private equity portfolio or any change in Wanstrath’s views since mid-February.

A spokesperson for Memorial Hermann Health System did not return a phone call seeking comment on its private equity performance and strategy. II reported last month that Kris Chikelue is now leading its investment group after Halaska left for Avalon.

“One of the consequences of the growth of private equity — traditionally an asset class for institutions and very rich people — at the expense of public equity may be that we will see different ways for retail investors to invest in private equity,” Halaska said at the conference, according to the paper. 

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