Texas Teachers Considers Hiking Public Equity and Lowering Private Equity Allocations

By Muskan Arora

Following the need for liquidity in the current ecosystem, Teacher Retirement System of Texas (TRS) may increase exposure to their public equity sleeve by decreasing private equity allocation.

Mike Simmons, director of trust strategy at $193 billion TRS presented a reduction in private equity by 2% (from 14% to 12%) in favour of increasing the “all country global equity” allocation by 3%, in the recent board meeting.

The system may add an additional 4th public equity bucket which is called all country equity, which would make the TRS public equity portfolio look more like “the investible public opportunity set”.

The proposed benchmarks would likely be MSCI ACWI IMI.

A final recommendation will be presented to the board in July for consideration in September.

While the change serves to lower both the expected return and expected risk to the portfolio, Simmons stated that the shift would increase both “the historic drawdown and improve trust liquidity”.

“A majority of the increase to the historical drawdown is due to the fact that private equity returns are smooth and lagged relative to public equity,” said Simmons.

Further, Simmons also said that it would take them a long time to get to 12% as private equity takes a long time to divest.

“You (board member) have typically seen our peers who are increasing their private equity allocations, which they are doing from a lower base.  However, we have actually seen recent reductions in private equity allocations which tend to be the ones who are coming from a higher base,” he added.

“We are kind of seeing both sides meet in the middle and we have largely been in the middle with this reduction as well, as our average is 13%,” he presented to the board.

The system allocates $32.5 billion to their private equity sleeve, as compared to $69.7 billion to their public equity sleeve, as of December 2023.

Mike McCormick from Aon spoke about how reducing the private equity sleeve would reduce the size of the vintage years.

“This would be a way to reflect benchmarks and hold the team accountable to more recent decisions they are making and also the small funds that they don’t have the ability to allocate to,” said McCormick.

With the potential change, the consultant suggested considering modifications to the current SSPEI benchmark through weight by vintage year and excluding funds smaller than 1 billion.

The system might undertake another deep dive, behind the scenes on an ongoing basis, in private equity benchmark to better understand what drives the outcome of the portfolio.

If all these changes were enacted, the result would be a modest reduction to expected return and an increase to expected risk.

Additionally, the system may also remove direct allocations from China and Hong Kong within their public equity sleeve to move closer to their benchmarks.

This change may come in due to economic weakness, political and geopolitical distress.