Texas’ Largest Public Pension Fund Shifts Nearly $10 Billion Out of Private Equity Investments

Texas’ Largest Public Pension Fund Shifts Nearly $10 Billion Away from Private Equity Investments

In a bold move that is sure to send shockwaves through the investment world, Texas’ largest public pension fund has decided to shift almost $10 billion out of private equity investments. The Teacher Retirement System of Texas, which manages a whopping $202 billion of assets, is reducing its target allocation to private equity from 14% to 12%.

This decision comes at a time when the private equity industry is facing increased scrutiny due to dwindling returns and a slowdown in exits for portfolio companies. Texas Teachers is the second of the largest public pensions to officially reduce its target allocation to private equity, signaling a potential shift in the investment landscape.

Chief Investment Officer Jase Auby announced at a recent board meeting that the pension estimates a 9.3% gain for its latest fiscal year, outpacing its 7% annual return target. With $33.7 billion of private equity investments already in its portfolio, the pension was over-allocated to the asset class, prompting the decision to pull roughly $9.7 billion from private equity investments.

Unlike other pension funds that have turned to the secondary market to achieve reduced targets, Texas Teachers is focusing on smaller middle-market funds and refraining from writing checks to large buyout funds. The decision to shift money from private equity into public equities was based on the expectation of continued pressure on returns from investing in the asset class.

The move by Texas Teachers is part of a larger trend among public pensions, with some increasing private equity allocations while others, like Alaska Permanent Fund, have decreased their targets. The struggle to balance investment decisions with future payment promises to public-sector employees has led many pension funds to actively manage their private equity portfolios.

As private equity firms face challenges in finding interested investors for future flagship funds, the decision by Texas Teachers to reduce its exposure to the asset class could have far-reaching implications. With the implementation of this shift set to begin in October, it will be interesting to see how the investment landscape evolves in the coming years.