Texas pension embraces co-investment strategy

The Employees Retirement System of Texas has launched a co-investing programme to take advantage of its existing relationships with general partners as it expects to slow down on forming new relationships with managers.

The $23 billion pension system’s board of trustees approved the programme this week. No more than 20 percent of the total private equity allocation – based on net asset value and uncalled commitments – can be used for co-investments. Also, no more than 30 percent of any individual year’s investment activity based on combined commitments and co-investments can be used for the programme, according to pension documents.

Co-investments “provide a large economic incentive as most pay no fees or carry to the sponsor”, the pension system’s investment staff said in internal documents. “While the savings are specific to the sponsor and individual deal results, this is typically a savings of 40 to 50 percent of a limited partners’ invested capital.”

Co-investments also “provide a more efficient vehicle for capital allocation than do limited partnerships as every dollar is invested fully, versus roughly 85 cents per dollar invested through limited partnerships,” investment staff said.

Co-investing gives LPs the power to decline to enter an investment with a GP and also provides LPs with more transparency into the deal, staff said.

The pension does not plan to pull back on more traditional LP fund commitments, though it expects to form fewer new relationships going forward. For the fiscal year 2012, the system wants to spend $625 million on private equity, with a range of up to $781 million. The target commitment is an increase of $125 million from last year’s target, an increase partly driven by an actual and projected rise in distributions, the pension said.

The pension projects spending $3.7 billion on private equity by 2016.

Investment staff will target “six to 10” new relationships and co-investments this year in strategies including buyouts, turnaround/restructuring, growth equity, venture capital, energy and media and communications. The portfolio will focus mainly on the US, Europe and Asia.

The pension system launched its private equity programme in 2008 when the board approved an 8 percent allocation to the asset class. To date, the system has committed to 24 private equity funds with commitments totaling $1.85 billion.

Fiscal year through 30 June, the system has committed an additional $421 million to funds. The recent commitments include Baring Asia V, which closed on $2.46 billion earlier this year; Argos Soditic – Euroknights VI, which closed on €400 million in December; Gores Group’s third fund, which closed on $2 billion earlier this year and KSL Capital Partners II, which closed on $2 billion in June.

The pension’s private equity staff experienced some turnover this year when its chief, Patrick O’Hara, left to join Brazos Private Equity. Portfolio manager Wesley Gipson was named director of private equity in June. Brad Demicco is also a member of the private equity staff, and the pension system is searching for an analyst to join the team, pension documents said.