Texas ERS ups infra target and plans $400m in 2018 commitments

Texas Employees Retirement System will seek to commit $400 million to infrastructure for the 2018 fiscal year after increasing its target allocation from 4 percent to 7 percent.

Trustees for the $28.5 billion pension accepted recommendations from their infrastructure portfolio advisor Pavilion Alternatives Group to increase commitments to the asset class from the original target of $250 million. At the end of last year, the net asset value of Texas ERS’s infrastructure portfolio was $503 million, 1.76 percent of the total portfolio, and the new target projects that to reach $2.62 billion by 2023.

The recommended tactical plan calls for infrastructure commitments to increase to $450 million in fiscal year 2019 and to $500 million for each of the three years thereafter. Pavilion wrote in its recommendation that this plan “is a guiding reference only, and it is not intended to overrule prudent infrastructure investment decision-making”.

Since launching its infrastructure portfolio in 2012, Texas ERS has committed $863 million to 10 private funds and eight co-investments, alongside inheriting three legacy co-investments with a cost of $150 million.

Private funds are generating a combined 15 percent net internal rate of return, while co-investments are at 10 percent.

In 2017, Texas ERS allocated $300 million to infrastructure and committed to four funds and two co-investments.

Pavilion recommended the pension’s infrastructure portfolio allocate 50 percent of investments to value-added opportunities and 25 percent each to core and opportunistic. Currently, value-added assets make up 55 percent of the portfolio, opportunistic 38 percent and core 6 percent.

“Core strategies have attracted plenty of capital and core assets are generally fully priced. This makes it difficult to profitably deploy capital in core strategies,” Pavilion wrote in its recommendation.

Texas ERS will seek to reduce exposure to renewable energy assets, which currently comprise 50 percent of its portfolio, with telecoms the next highest at 11 percent and utilities third at 8 percent. Forty five percent of current investments are in the US, 10 percent in Europe and the UK, and 3 percent in Australia, with the remaining 42 percent in emerging markets.

The pension will look for opportunities in developed, non-US markets, such as Canada, Europe and Australia.