No drama: Texas TRS CIO says private asset losses unlikely to be ‘dramatic’

CIO Jase Auby says Teacher Retirement System of Texas's private holdings are unlikely to decrease significantly once valuations catch up with the public markets.

Teacher Retirement System of Texas Chief Investment Officer Jase Auby told his board that the $148 billion pension’s private holdings are unlikely to decrease significantly once valuations catch up with the public markets — but he warned there was no way to know for sure.

“They are likely to be down, but it’s unlikely to be a dramatic draw down,” Auby said at the pension’s April 17 meeting, which was conducted via teleconference. “The time horizon at which they are reflected can be a number of quarters, sometimes as long as a year to reflect, and so… it is possible that some of those assets might not in fact mark down due to the crisis, but others will.”

Auby said TRS had 35 percent of its assets in private markets, which includes private equity and real estate, energy and natural resources and infrastructure. According to its website, its target allocation for private equity is 14 percent with a range of between 9 percent and 19 percent.

Under the private equity umbrella, TRS allocates to three strategies: buyouts, growth equity/venture capital and credit/special situations. It doesn’t break out a specific target for venture capital.

Out of the 12 fund commitments TRS made in 2019, two were for venture capital/growth funds: It committed $150 million to Insight Partners’ Insight Venture Partners XI, which invests in technology, media and telecom companies in North America, Asia-Pacific and Western Europe; and $200 million to Baring Private Equity Asia’s BPEA Bluebonnet Partners, which invests in diversified companies in Asia-Pacific.

So far this year, TRS has made two commitments, including a $75 million commitment to Lightspeed Venture Partners’ Select IV fund, which invests in a variety of sectors in Asia-Pacific, Western Europe, Middle East/Africa and North America.

Auby said he was “not prepared at this point” to provide the board with any estimates for how much private holdings would decrease in value—and said many of the pension’s managers did not know, either.

“We are in active discussions with all of our managers that manage these assets and they have not yet determined what kind of a process they might need to mark down at this point in time,” he said. “So, it’s hard enough for us to gauge that. Common sense does say that they will be down some but to my mind it’s unlikely that they would be down as much as, for example, the public markets.”

Reacting to the market chaos

Texas Teachers was following its “battle plan,” as outlined in December 2018 by Chief Risk Officer James Nield, Auby said. The battle plan includes reducing equity as the market enters a late cycle, identifying strategies that can be “upsized to take advantage of dislocations,” building a “dislocation monitor” and researching investment opportunities.

As of March 31, the Texas Teachers’ fund value was $148 billion, down from $157 billion on August 31, 2019. He estimated the return for the first quarter would be -8.3 percent, but warned it would be months before that was calculated exactly.

The pension’s investment teams were “actively rebalancing” asset allocations to stay within proper benchmarks, he said. A separate presentation by Executive Director Brian Guthrie said the pension had done $7 billion in “rebalance trades” in March. Spokesman Rob Maxwell said most of those trades were in the public equity and bond markets.

Guthrie’s presentation also said the asset allocation committee was meeting daily to “review positions and initiate trades.”

“As long as the current high level of uncertainty around the covid crisis remains in the market, we will continue to implement these battle plans and monitor the market to begin to prepare for opportunities going forward,” Auby said. “The bottom line is our plans are working exactly as we intended.”

Lawrence Aragon contributed to this story