US pension fund aims $400m at private equity deals

The Texas Municipal Retirement System is making a big push into private equity co-investments after voting to double its private equity investment pace earlier this year.

The Austin-based pension system, which manages $29.99bn in pension assets for city employees across Texas, has set up a $400m separate co-investment account with alternative asset manager HarbourVest Partners, giving the firm up to $100m to co-invest every year over the next four years, the pension’s director of private equity, Tom Masthay, confirmed.

Boston-based HarbourVest had deployed more than $16bn in co-investments since 1989, with more than $6bn of that capital invested through separately managed accounts since 2011, according to documents prepared for a 17 September meeting of the pension trustees.

Six of HarbourVest’s 53 co-investment professionals would have a formal role working on the Texas Municipal Retirement account, the documents said.

Backing co-investments, which allow limited partners to invest alongside general partners directly in deals, was “about getting closer to the assets we commit capital to,” Masthay said.

He added that such deals also help the Texas Municipal pension system develop better relationships with the fund managers in its private-equity program, reduce costs associated with the portfolio and enable the pension to better reach its new 10% target allocation for the asset class.

Earlier this year, the pension system doubled its private-equity target from 5% to 10% of its total assets. Private equity investments represented 3.36% of the total fund assets as of 30 June.

Masthay said the pension system opted to partner with an investment manager in part to help navigate what has become a competitive environment for co-investment deal flow.

“There wasn’t a way we were going to be able to compete and get much capital out the door on our own,” he said. “We’re not reinventing anything but following in the tried and tested footsteps of the bigger, more sophisticated institutions,” Masthay said. “We have been able to watch the industry develop and we may have been able to skip a step here to getting there.”

Eventually, the Texas Municipal pension system would also likely graduate to establishing an internal co-investment program managed by the staff, which would further reduce costs for the total fund and its beneficiaries, Masthay said.

Most of the capital in the co-investment program is earmarked for investments alongside managers that the pension system has already backed through its fund portfolio, Masthay said. Since 2015, when the pension system began investing in private equity, it has favored midmarket funds as well as backed a number of firms raising their first or second funds.

The pension system will retain veto rights for co-investment opportunities presented by HarbourVest, though historically “our mind-set across the total program has been a bias to say yes to deals because that helps scale the program,” Masthay said. He added that the team only rejects deals that don’t fit the manager’s investment thesis.

Source: Wall Street Journal

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