By Muskan Arora
During a recent investment board meeting, Texas Permanent School Fund’s chief executive officer and chief investment officer Robert Borden attributed the plan’s exposure to private credit as one of the main reasons the endowment outperformed its one-year benchmark at 4.16% against the actual one-year return at 4.65%.
Over three- and five-year time periods, Texas Permanent’s total portfolio returned 3.65% and 9.18%. Within private credit, the team allocated $4.1B across 12 managers with an expectation to increase commitments over the next four years. Around 60% of the total private debt allocations were made to commingled vehicles, while the remaining 40% was made to fund-of-one deals.
In 2024, the pension plan restructured its credit portfolio, shifting focus to higher-excess returns and consolidation of all debt investments to the credit team. Further, it shifted its debt program to an external core fixed-income mandate, which freed up staff to pursue higher-return strategies, said vice-president John Newell, during the meeting.
“If you recall in the fourth quarter of last year, private credit — similar to private equity and real estate — you make commitments, they draw down on that,” he said. “It takes time to grow the private debt allocation, and so, in order for us to get up to our policy relatively quickly, we started that liquid substitute.”
Since the fund’s allocation to private credit has reached its policy target, the team will work toward reducing exposure to bank loans, which was set up as a proxy asset class. The private debt team has also established a co-investment program that has made a total of five deals to date.
“What we’ve done is we’ve laid the foundation for the past twelve to fifteen months. We are really excited about what we’ve done here,” said Newell. “I think we’re set up really nicely to take advantage of volatility as we have got the right partners and teammates too.”
The five-person private debt team is led by Newell. An analyst and intern will be joining the team this month, with another intern set to join later this year.
With a target of 28%, the fund allocated 28.4% to private debt, including 9% to core fixed income, 9.3% to private credit with liquid substitute, 4.1% to bank loans, and 2.3% to cash transactions and 3.7% to high yield, as of March 31.
Most of the fund’s peers were focused on investing in commercial real estate, which has “been the falling knife over the last 24 months,” said Borden, considering the downsizing of office spaces following the pandemic, which has led to less favorable returns.
He noted, through the introduction of the private debt bucket in 2024, the endowment was able to “increase the expected rate of return on a magnitude with no change in risk.”
Since the restructure, Texas Permanent has become the third best performing endowment, just below Regents of University of California and University of Texas Investment Management Company, as confirmed by the CIO/CEO, at the meeting.
