Texas State Board of Education, Austin, approved renewing the contract of Neuberger Berman when it expires in July 2016, but the firm’s private equity assignment will be much different.
During a meeting Friday, the board approved a new private equity structure based on the recommendation of the Committee on School Finance Permanent School Fund, which met on Thursday.
The new structure shifts discretion for investment decision-making on core private equity funds to staff of the $30.1 billion Permanent School Fund. Neuberger Berman will continue to act as a source for new core opportunities, but its role will be as a non-discretionary adviser, according to a webcast of the finance committee. The new three-year contract will start Aug. 1, 2016, with a possible three-year extension.
Under Neuberger Berman’s current three-year contract, the money manager and PSF staff have joint discretion for core private equity commitment decisions in what Rhett Humphreys, the fund’s lead consultant and a partner at NEPC, called a “hybrid model” on the webcast of the meeting.
Neuberger Berman and staff will continue to have joint discretion over co-investment and secondary private equity investment decisions.
PSF’s commitments and investments in core private equity totaled $2.5 billion as of July 31 and its co-investments/secondary fund assets were $1.1 billion.
The move to the new model is “highly evolutionary for the fund. It’s not a shock to the system,” Mr. Humphreys said, noting PSF staff have been using the same model very successfully with the fund’s real estate consultant, Courtland Partners.
John Grubenman, director of private markets for the school fund, said during the meeting that the move to the new private equity structure “puts us in a model comparative to what our peers do.”
Neuberger Berman offered extremely competitive pricing for the new contract, Mr. Humphreys said, adding “We think you are getting an unbelievable deal.”
Neuberger Berman will not charge a management fee for its core private equity fund advisory work.
For private equity co-investment and secondary fund work, Neuberger Berman’s management fee (averaged over 10 years) will be 27 basis points. Carried interest for co-investments will be 10% after the 8% preferred return and 7.5% for secondary funds, Mr. Humphreys said during the meeting webcast.
Also, the fund’s custodian, BNY Mellon, provided the finance committee with gross-of-fees returns for the educational fund for periods ended June 30: three months, 0.1% (benchmark, 0.08%); one year, 1.1% (1%); three years, 9.6% (9.4%); five years, 10.3% (10%); and 10 years, 6.7% (6.4%). Multiyear returns are annualized.
