(Bloomberg) — Texas’ largest public pension fund has decided to shift almost $10 billion out of private equity investments, a blow to an asset class that has faced heightened scrutiny amid dwindling returns and a slowdown in exits for portfolio companies.
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The move by the Teacher Retirement System of Texas — which manages $202 billion of assets — is another setback for an industry that has struggled with dealmaking and fundraising after a prolonged era of easy profits.
Texas Teachers is the second of the largest public pensions to officially reduce its target allocation to private equity. It’s paring that to 12% from 14% — below the average 13% for all US public pensions, pension officials said at its board meeting Thursday.
The pension estimates it will report a 9.3% gain for its latest fiscal year, Chief Investment Officer Jase Auby said at the meeting. That’s compared to a 3.85% return for the previous fiscal year and will outpace a 7% annual return target.
At the end of March, the fund held $33.7 billion of private equity investments, or 16.7% of its portfolio, meaning it was already over-allocated to the asset class. Reducing that exposure to 12% amounts to pulling roughly $9.7 billion of private equity investments from the portfolio.
The pension doesn’t have plans to sell private equity investments to the secondary market to achieve the reduced target, Neil Randall, managing director of private equity at Texas Teachers, said at the board meeting. The pension isn’t writing checks to large buyout funds anymore, instead focusing on smaller middle-market funds.
Alaska Permanent Fund, which manages that state’s $80 billion sovereign wealth fund, began reducing commitments to private equity in 2022 and decreased its target allocation to 15% from 19% the following year. CIO Marcus Frampton said at the time that private equity needed a reset and that he wanted to be cautious. Earlier this year, the Alaska fund opted to lean back into the asset class and re-upped its target to 18%.
Texas Teachers’ decision to pull from private equity and shift that money into public equities was based on the expectation of continued pressure on returns from investing in the asset class.
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