Key Takeaways
- • Kohlberg Kravis Roberts (KKR) and Apollo Global Management each will receive $3 billion from the Teacher Retirement System of Texas, for a combined $6 billion in separate accounts managed solely for the pension fund, according to The New York Times.
- • The Teacher Retirement System, which manages more than $107 billion for 1.3 million employees and retirees, gives both firms wide latitude to deploy capital across leveraged buyouts, real estate and debt investments.
- • The mandates, which the parties call "partnerships," follow years of deliberation and a survey of more than a half dozen private equity firms before selection.
- • The deal reflects the shift of large private equity firms from leveraged buyout specialists toward broader asset managers collecting steady management fees, and gives them added capital for deals.
- • Analysts at placement agent Triago projected that one-quarter to one-half of general-partner private equity firms may disappear over the next half-decade, a consolidation that could favor the largest buyout shops.
Summary
The arrangements resemble the fund's agreements with traditional asset managers three years earlier to invest in stocks and bonds. The pension fund reportedly spoke with more than a half dozen private equity firms before choosing KKR and Apollo, according to people briefed on the matter who were not authorized to speak publicly. The Teacher Retirement System praised both firms as "among the most reputable and successful private management firms in the world," citing their track records over decades. Apollo and KKR already manage more than $1 billion each in their conventional private equity funds.
The deals come as large private equity firms seek to grow their asset bases. The new assets add to the steady management fees that shareholders value and provide additional firepower for deal-making. KKR is also raising a new fund that may reach as much as $6 billion. More broadly, pension funds facing pressure to raise returns are turning to private equity and hedge funds, even as they reduce the number of firms they use. Poor returns at some firms and constrained investor resources are driving consolidation, and Triago analysts wrote in a research report that month that one-quarter to one-half of today's general-partner firms may disappear over the next half-decade.
KKR co-chairmen Henry R. Kravis and George R. Roberts said the arrangement "reflects the deepening of a longstanding relationship" with the retirement system. The New York Times also reported that Apollo president Marc Spilker told analysts the prior week that the firm had closed a $500 million strategic account with an unnamed sovereign wealth fund, and that Apollo was in talks with several other investors about similar arrangements. The newspaper characterized the Texas mandates as likely to be only the first of many.
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