The Texas Municipal Retirement System (TMRS), which manages approximately $44 billion in assets, is embarking on an ambitious new strategy that will see it allocate up to $15 billion over the next five years for co-investments in private market transactions. This initiative aims to enhance TMRS’s direct investment capabilities by allowing the pension fund to invest alongside its external fund managers in a range of private market opportunities, including secondaries and growth capital.
Under this program, TMRS will make co-investments ranging from $10 million to $200 million per deal, which could involve various asset classes such as venture capital, buyouts, real assets, and structured equity. Chief Investment Officer Yup Kim emphasized that this strategic move is designed to strengthen relationships with existing fund managers while also potentially saving the pension fund “hundreds of millions in fees” annually. By opting for co-investments instead of pooled funds, TMRS can avoid management fees and carried interest, allowing for more targeted investment strategies.
TMRS has identified five key investment themes to guide its co-investment strategy: digital transformation, health care innovation, energy modernization, and others. The shift towards co-investments is already showing evidence of success; as of June 30, 2024, co-investments accounted for 9% of TMRS’s total private markets net asset value, up from 5% at the start of the year, with expectations that this allocation could grow to nearly 30% over the next five years.
This initiative aligns TMRS with a broader trend among U.S. public pension funds that are expanding their co-investment programs. For instance, the California Public Employees’ Retirement System (CalPERS) relaunched its co-investment strategy in 2022, projecting savings of $400 million for every $1 billion co-invested over the fund’s life. Similarly, the California State Teachers’ Retirement System has recently announced a climate-focused co-investment partnership with Carlyle AlpInvest.
Looking ahead, TMRS’s co-investment program is expected to foster deeper partnerships with both current and new managers, enhancing its investment portfolio while navigating the complexities of private markets. As this initiative unfolds, it will be crucial to monitor its impact on TMRS's performance, as well as the broader implications for institutional investors engaging in similar co-investment strategies.