Texas ERS mapping out nearly $2bn in alts activity through 2021

The $27 billion Employees Retirement System of Texas unveiled its plans to boost allocations in equity long/short, opportunistic credit and relative value strategies alongside new private equity investments over the next 12 months at an August trustee meeting. This is on top of previous tactical plans to add capital to private real estate and infrastructure assets, approved in May. In total, the new alternative investment allocations could total as much as $1.8 billion overall should staffers push for the maximum number and scale of new allocations. While the exact amount slated for hedge funds was not discussed, officials expected as many as five new allocations could be made, while private equity staff at the pension proposed to invest in 8 to 12 new fund commitments with three to eight co-investments totaling $800 million. The portfolio’s respective tactical plans are viewed simply as a guide and not a set of allocation commitments that are set to be completed over the course of the next year. On the hedge fund side, the $1.8 billion portfolio saw investment gains of 1.6% through the year-to-date through May. Much of the systems’ largest allocations reside in the relative value and event-driven buckets, with the restructuring of the relative value sleeve nearing its completion. Still, officials expect new allocations in hedge funds will be focused on relative value, equity long/short and opportunistic strategies. There is the potential to add one or two new complementary strategies over the coming months with the initial focus being on event-driven strategies as they tend to carry more directional market exposure and will benefit from an improving economic environment. The Absolute Return Portfolio is nearing its targeted allocation of 5% of the overall assets, officials told trustees on August 19. This is in part due to new allocations coupled with a decline in the trust’s performance related to the COVID-19 equity market selloff. Expectations are for the portfolio to exceed its targeted allocation in the coming year and the portfolio has a max targeted allocation of 10%. The pension fund’s hedge fund staff continues to evaluate less liquid credit strategies that are appropriate for the opportunistic credit sleeve with the aim of making up to three new allocations over the next year. On the private equity side, roughly $800 million is at stake in building up the roughly $9 billion-plus portfolio. According to meeting materials, there will be a particular emphasis going forward on buyout funds and new relationships will be evaluated when deemed additive to the portfolio. The buyout segment of the market has been and will continue to be the key driver of co-investment deal flow for the portfolio, officials said. Also, due to the challenge of accessing venture capital managers at scale, the staff expects to increase the portfolio’s exposure to growth equity strategies. All of the discussion follows previous trustee dialogue regarding the real estate and infrastructure portions of the portfolio that could feed up to an additional $1 billion in capital into alternative investment strategies at the Austin-based pension system. The $2.3 billion private real estate portfolio may see its overall target come down but is setting aside commitments in the range of $200 million to $600 million, which should allow flexibility within the uncertainty in the market. Within the $1 billion private infrastructure program another three to six investments with commitments totaling $400 million are expected, including co-investments and direct investments over the next year. Staffers have been charged to continue to seek out sector diversification, opportunistic core assets and to continue to establish key relationships through seed investments and partnerships with other investors.

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