The Teacher Retirement System of Texas is looking to issue a collateralized fund obligation of private equity interests by the end of the year, according to market players. (Private Funds CFO refers to such deals as “fund ABS” or “fund interest ABS” to avoid confusion with chief financial officers, also known as “CFOs”).
Private Funds CFO reported in May that at least one major pension fund was looking to break open the market for fund interest asset backed securities issued by pension funds. Ohio STRS has been close to mandating one, and is continually inquiring about the market, but has pulled back due to costs. The first pension fund to issue such a deal would likely pay a premium for access to investors.
Ohio STRS has repeatedly denied that it is issuing a fund interest ABS. Texas TRS declined to comment.
Texas TRS has nearly $180 billion in assets under management, according to data from affiliate title Private Equity International.
As Private Funds CFO reported in May, one of the largest potential buyer bases for fund-interest ABS is insurance companies, but US insurers may not wish to participate in the market until the National Association of Insurance Commissioners, their regulator, decides on a risk-weight requirement for the top-rated bonds. That may not come soon, and when it does it may well destroy the economics of buying triple-A rated fund-interest ABS. Market players understand that the NAIC isn’t well disposed to the idea of these deals and may be more inclined to treat them as equity investments, rather than debt, since the bonds will be backed by equity interests in private equity funds.
Should Texas TRS be the same issuer Private Funds CFO in May reported to be planning to hit the market, the structurers are aiming to have the bonds be publicly rated, traded and DTC-cleared. And due to the uncertainty on US regulatory capital treatment for insurers, they are being marketed to insurers and other institutional investors abroad.
If a pension fund succeeds in offloading the desired risk, it could open up the market to other pension funds and institutional investors in dire need of liquidity, as exits remain difficult and distributions have slowed. It may also represent a boon for PE managers, who are facing a difficult fundraising environment, by releasing new investment capital.
Other kinds of institutional investors have already tapped the market, including asset managers. GPs also issue fund interest ABS, but with a different aim: to raise further investment capital for future funds, using proceeds from the bonds sold.