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Texas Teachers bumps up private credit strategic partnerships by $1 billion

Texas Teacher Retirement System, Austin, committed an additional $500 million each to strategic partners KKR & Co. and Apollo Global Management for tactical investment in private credit.

The $146 billion fund established the Strategic Partnership Network – Tactical Value separate accounts in March 2015 and $1 billion allocations were deployed to each manager in December that year, said Jerry Albright, chief investment officer, in a report presented to the fund's board of trustees at its Feb. 15 meeting.

The fund's "original thesis" for the separate accounts was "the post-crisis evolution in banking created a favorable investment environment for non-traditional credit," Mr. Albright said in his report.

He noted targeted net returns for private credit are between 10% and 12% and are "accretive to the trust" adding "performance to date exceeds expectations and (is) on track" to meet the desired return.

The addition of $1 billion to the collective portfolio was made by the fund's investment committee in January because the "original thesis continues to hold," Mr. Albright said, stressing "the market opportunity is structural and expected to persist (for) another three (to) five years."

The net internal rate of return since inception as of June 30 for each firm's initial $1 billion private credit commitment was 18.7% for Apollo and 20% for KKR, Mr. Albright's report showed.

In 2011, Texas TRS set up private equity strategic partner portfolios with KKR and Apollo with commitments of $3 billion each. As of Sept. 30, Apollo's total commitment from the fund was $4 billion, while KKR's commitment was $4.2 billion. Apollo's private equity net IRR since inception as of June 30 was 9.7% and KKR's was 13.2%.

Both firms also manage private equity co-investment separate accounts as part of the strategic partnership. About $463 million has been committed to Apollo and $662 million to KKR as of Sept. 30. Apollo's net IRR since inception as of June 30 on private equity co-investments was 25% and KKR's, 14.8%.