The Texas Municipal Retirement System (TMRS) has announced a significant strategic shift, planning to commit as much as $15 billion over the next five years to a new co-investment program. This initiative will allow the $44 billion pension fund to invest directly in private market transactions alongside its external fund managers, aiming to reduce costs and increase returns for its members.
The program involves individual commitments ranging from $10 million to $200 million in various opportunities, including secondary transactions and growth capital investments. According to the pension system's leadership, this move is expected to generate substantial savings and provide more direct control over its investment portfolio.
Key Takeaways
- The Texas Municipal Retirement System (TMRS) will commit up to $15 billion to a new co-investment program over the next five years.
- This strategy allows TMRS to invest directly into private companies and assets, bypassing traditional fund structures.
- The primary goal is to save "hundreds of millions in fees" annually and enhance net returns.
- TMRS plans to increase its co-investment allocation to nearly 30% of its private markets portfolio, up from 9% currently.
- This move follows a growing trend among large pension funds, such as CalPERS and CalSTRS, to pursue direct investment strategies.
Details of the $15 Billion Initiative
The Texas Municipal Retirement System, which manages assets for municipal employees across the state, has formalized a plan to significantly expand its presence in private markets. The $15 billion commitment is designed to be deployed over a five-year period, marking a substantial increase in its direct investment activities.
Under this new framework, TMRS will participate in co-investment deals, which involve investing capital directly into a specific company or asset. This differs from the traditional model of committing capital to a blind pool fund managed by a private equity firm. The individual investment sizes will be substantial, ranging from a minimum of $10 million to a maximum of $200 million per deal.
The scope of the program is global and covers a wide range of private market sectors. TMRS will seek opportunities in venture capital, buyouts, real assets, and structured equity. This diversification allows the pension to access various stages of company growth and different asset classes, from early-stage technology firms to established industrial companies.
What is Co-Investing?
Co-investing is a practice where an institutional investor, like a pension fund, invests directly in a specific deal alongside a private equity fund manager. Instead of paying fees on a large pool of capital, the investor contributes to a single transaction. This approach typically involves lower or no management fees and carried interest, which can significantly improve net returns. It also gives the investor more transparency and control over where its capital is deployed.
Strategic Goals and Expected Fee Savings
The primary driver behind this strategic pivot is the potential for significant cost savings and improved investment performance. By co-investing, TMRS can bypass some of the hefty fees associated with traditional private equity funds.
Yup Kim, the chief investment officer for TMRS, stated that the move will allow the system to deepen its relationships with managers and save "hundreds of millions in fees" each year.
This direct investment model has become increasingly popular among large institutional investors. The ability to avoid the typical "2 and 20" fee structure—a 2% annual management fee and 20% of profits—is a powerful incentive. The savings can directly boost the net returns delivered to the pension's beneficiaries.
Beyond cost reduction, the program is intended to give TMRS more strategic control. By selecting individual deals, the pension can align its portfolio more closely with its long-term investment themes and gain deeper insights into specific industries and companies.
Investment Themes and Manager Selection
TMRS has identified five broad investment themes to guide its co-investment decisions. This thematic approach ensures that its direct investments are targeted toward areas with high growth potential. The key themes include:
- Digital transformation
- Health care innovation
- Energy modernization
- Other strategic areas aligned with global economic trends
The pension system plans to partner with both existing and new fund managers. According to Yup Kim, TMRS will consider managers already in its private markets portfolio but will remain "open to others too." This flexibility allows the system to partner with best-in-class managers for specific deals, regardless of whether they have a pre-existing relationship.
Rapid Growth in Co-Investments
According to pension documents, TMRS's allocation to co-investments has already seen significant growth. As of June 30, 2024, co-investments represented 9% of the total private markets net asset value. This is a sharp increase from just 5% at the beginning of the year, signaling the pension's growing confidence in this strategy.
Projected Growth and Industry Context
The new program sets an ambitious target for the role of co-investments within the TMRS portfolio. The pension expects co-investments to account for nearly 30% of its private markets net asset value within the next five years. This would represent a more than threefold increase from its current allocation and position TMRS as a major direct investor among public pensions.
TMRS is not alone in this strategic shift. Other major U.S. pension funds have been expanding their co-investment programs to capture similar benefits of fee reduction and enhanced returns. This trend reflects a broader move by large asset owners to become more sophisticated and proactive in their investment management.
Examples from Other Large Pension Funds
The California Public Employees’ Retirement System (CalPERS), the nation's largest public pension fund, relaunched its co-investment strategy in December 2022. According to a CalPERS document, the fund expects to save approximately $400 million in fees over the life of each $1 billion deployed in co-investments. Over a decade, with an annual deployment of $15.5 billion, this could translate into cost reductions of around $25 billion.
Similarly, the California State Teachers’ Retirement System (CalSTRS) recently announced a co-investment partnership with Carlyle AlpInvest specifically for climate-related investments. This highlights how co-investing can also be used to target specific environmental, social, and governance (ESG) objectives.
By launching its own large-scale program, the Texas Municipal Retirement System is positioning itself to compete for attractive deals and leverage its scale to the benefit of its members. The success of this $15 billion initiative will be closely watched by other institutional investors considering a similar path.
