AMERICAS NEWS: Texas not messed with

Despite all the talk about the denominator effect, one US pension argues it has not seen any effects on its real assets and private equity investment portfolios. PERE Magazine December 2008/January 2009 issue

As the public markets continue to experience volatility on a nearly daily basis, some LPs are seeing over-weighting of their alternative investment portfolios as their public equities portfolios continue to shrink. But one US pension is arguing it has not been affected by the so-called denominator effect.

For the $96 billion Teachers Retirement System of Texas (TRS) alternatives including real estate and private equity are solid asset classes for the pension. Steve LeBlanc, TRS senior managing director of private markets, recently told PERE his pension is “in the forever business”.

We are not experiencing a denominator effect for real estate or private equity. We may be one of the few public pension plans not seeing a denominator effect.

Steve LeBlanc, TRS senior managing director of private markets

According to LeBlanc, unlike its peers, the Austin-based pension – which manages funds for the 1.3 million employees and retirees in the Texas education system – has not seen any significant effects of the denominator effect. As it stands, the pension has a 15 percent target to “real assets”, LeBlanc said, including real estate, infrastructure, farmland and timber. Since its board approved a revised investment policy last year, its asset allocation mix has had a heavier focus on the alternatives space.

As of August this year, the Texas pension had an actual allocation to private equity of 5.8 percent – with just 3.1 percent of its investment portfolio in real estate. However, LeBlanc said updated numbers have still yet to be released.

In comparison, in an effort to counterbalance its over-weighted real estate and private equity portfolios, the $146 billion California State Teachers' Retirement System (CalSTRS) – one of the largest public pensions in the US – recently increased its acceptable real estate allocation to between 5 percent and 17 percent, up from its previous allowable allocation range of 4 percent and 13 percent. Its actual allocation to real estate stood at 14.4 percent – well above its long-term target of 11 percent.

“We are not experiencing a denominator effect for real estate or private equity,” adds TRS' LeBlanc. “We may be one of the few public pension plans not seeing a denominator effect.”

Meanwhile, the Texan pension has been making moves in the global property markets, with its €200 million allocation in November to The Blackstone Group's latest European property fund, Blackstone Real Estate Partners Europe III. It is also beefing up its investment division, recently hiring LeBlanc – formerly president and chief executive of multifamily REIT Summit Properties – as well as appointing former Principal Global Investors professional Nigel Lewis as the pension's new managing director of strategic research and risk management.

Despite the trials at other large US pensions in battling and compensating for the denominator effects in their investment portfolios, it seems it is business as usual for the Austin-based TRS.