Texas Endowment Increases Stakes in Private Equity Funds

  • CEO Zimmerman says he sees opportunity in natural resources
  • Investment company is hosting two-day conference in Austin

The University of Texas Investment Management Co., which oversees about $35 billion of assets, is increasing stakes in private equity and venture capital funds, said Chief Executive Officer Bruce Zimmerman.

The nonprofit company, which manages money for the University of Texas and Texas A&M University, expects to increase its allocation to private investments that include buyout, venture capital and real estate funds to 40 percent of its portfolio over the coming years, up from around 35 percent, Zimmerman said.

“We think we have more illiquidity risk we can expend,” the CEO said Thursday in an interview in Austin, where Utimco is hosting a two-day conference.

Increasing Allocations

While private equity funds have on average delivered returns in recent years that are no better than publicly traded stocks, endowments and other institutional investors have still sought to increase exposure by seeking out the top alternative asset managers. One-third of school business officers surveyed at an industry conference last month said they anticipate increasing allocations to such strategies in the coming year.

The Texas endowment manager has been building the portfolio over time, increasing it from 12 percent of assets about eight years ago, Zimmerman said. It has invested $1.25 billion in venture capital funds, which as a percentage is about half as much as its peers own, he said.

Among the investments are private energy funds that are seeking out distressed opportunities in the sector that has been pummeled by falling petroleum prices.

‘Leaning In’

“We view the current energy environment as one of those where leaning in a little bit probably makes some sense,” Zimmerman said. “We’re finding some good opportunities.”

In terms of overall market performance, investors should expect a “challenging” environment for the next three to seven years, Zimmerman said.

“When we signaled a return in the three, three-and-a-half percent range, we were trying to signal that we were in for a more difficult environment,” he said.

The University of Texas’s endowment gained 4.1 percent in the year ended June 30 while its value shrunk by 5.3 percent to $24.1 billion because the value of the land where the oil and gas fields are located declined.

Lagged Peers

The returns have lagged its peers, in part because its allocation to private markets is low, according to a Utimco staff report included in materials for a board meeting on March 2. Returns have been hurt by high allocations to commodities, including gold, non-U.S. fixed income, emerging markets equity and hedge funds, along with smaller allocations to venture capital and other private markets, U.S. equities and fixed income, the report states.

The endowment was “shut out” of venture capital due to its disclosure requirements, according to the report. The endowments should consider whether to “accelerate our build-up of the private investment portfolio,” it states.

Utimco reviewed 10 potential private-market co-investments in 2015 worth a total of $150 million and committed to two worth $33 million, according to a second report for the meeting. Two more worth a combined $19 million are in process. Since the inception of its co-investment program, the endowment has invested $194 million in 13 transactions. It has earned a 1.51 times multiple of capital and an internal rate of return of 18 percent on those, according to that report.

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