The $105B Texas Treasury Safekeeping Trust Co. has been under-allocated to private equity, especially within the newer endowments, allowing its chief investment officer, Anca Ion, to leverage secondaries to fill the gap with top-tier managers at attractive valuations.
The Texas Trust Co. manages different capital pools, including $10B in endowments whose main beneficiaries are public universities and hospitals in Texas.
“One of our newer endowments, Texas University Fund, is significantly under-allocated to private equity by close to 15%,” said Ion in an exclusive interview with Markets Group. “Another is around 5% under the policy target.”
She believes the under-allocation puts her team in a position of strength. “We are actively deploying into the secondaries market,” said Ion. “We’ve seen attractive pricing on high-quality assets, and we are capitalizing on it.”
What’s more, the capital being deployed is fresh, not recycled. “We have the ability to write checks. We’re not constrained,” she added.
The Texas University Fund was developed with $3B cash infusion, which the pension initially invested in public markets to provide liquidity while gradually building toward its target allocation of 20% in private equity. As capital calls come in from its private market commitments, the CIO noted these public market investments serve as a ready source of funding that it can deploy into private equity without the need to sell other private assets at potentially unfavorable prices.
When looking at opportunities within the secondaries market, the investment team is inclined toward investing in North America. “We are looking at managers that have a history of investing at lower entry prices and avoiding aggressive financial engineering,” said Ion, “We’re building conviction in managers operating in the lower middle market and mid-market, where operational value creation drives returns.”
Further, TTSTC has acquired limited partner interests from liquidity-constrained LPs/sellers, often unlocking access to difficult general partners. “In one transaction, we were able to take over a commitment from an LP that needed to sell due to liquidity pressure,” Ion shared. “It gave us access to a manager who otherwise wouldn’t have opened capacity.”
With more general and limited partners approaching her team directly, Ion is leveraging her flexibility and reputation as a serious buyer. “The inbound volume has increased because people know we have capital and conviction,” she said. “That’s getting us a seat at the table.”
Although open to both LP- and GP-led secondary market opportunities, Ion is selective on structure. “We’re not chasing complexity,” she said. “We are looking for simplicity, alignment, and attractive pricing. If those three things aren’t present, we’re not interested.”
Ion increased TTSTC’s private equity target from 15% to 20% in 2022 and has maintained steady pacing. “We haven’t slowed down,” she said. “This is not a trade. It’s a long-term strategic allocation to private equity.” “Secondaries allow us to build exposure to mature assets and great managers while mitigating the J-curve.”
With record levels of LP-led supply and limited natural buyers, Ion views the current market as a structural entry point. “There is a real supply-demand imbalance,” she said. “If you’re a buyer with patient capital and no liquidity pressure, this is your moment.”
Diving into the challenges within the secondaries space, including higher cost of capital and deal valuation, Ion said TTSTC prioritizes managers who are disciplined with entry valuation and leverage. “We look for investments with only modest multiple expansion and with strong margin visibility. That’s how we’re navigating the higher cost of capital environment.”
The CIO remains bullish toward lower middle market and mid-market buyout strategies and sees opportunities in managers “who can thrive in complexity, either operational or structural.”
“We are building this into our cash-flow models and shifting more capital towards buyout managers that have more exit options, or with proven distributions to paid on capital ratio,” said Ion.
In venture capital, the endowment is focused on capturing “venture beta,” while identifying significant alpha. To achieve this, the plan is to build a concentrated portfolio that has better chances to outperform and avoid over-diversification for beta-like returns.
“We build out our venture capital portfolio through three types of VC managers: first, emerging managers with small fund sizes; second, established and focused managers with strong networks; and finally, established managers with long track records who can consistently deliver high-quality venture beta.”
