Bloomberg News

Apollo’s Black, KKR’s Roberts Say Texas Fund Can Reach 8% Return

February 17, 2012

Feb. 16 (Bloomberg) -- Wall Street private equity leaders Leon Black and George Roberts told Texas’s largest public pension it can meet an 8 percent annual return target by investing in distressed European assets and commodities.

Regulators are forcing sales of more than 1.5 trillion euros of assets, offering the chance to “cherry pick” the best investments, Black, 60, said yesterday at a Texas Teacher Retirement System board meeting in Lubbock.

The $104.3 billion fund agreed in November to invest $3 billion each with Apollo Global Management LLC, where Black is chairman, and KKR & Co. Roberts, a KKR co-chairman, joined Black in outlining their views on global markets, investments and the pension’s goal of achieving an 8 percent return.

“You are really in a good position to do that,” said Roberts, a 68-year-old Houston native who started KKR with Jerome Kohlberg and Henry Kravis in 1976. He cited energy investments that provide returns of as much as 5 percentage points more than high-yield bonds, with less risk. The fund is working with the firms on investing in Europe, real estate and energy, said Steve LeBlanc, a senior managing director.

Roberts’s bullish view contrasts with the actuary adviser to the $234 billion California Public Employees’ Retirement System, the largest U.S. public pension, who has suggested reducing its assumed rate of return on assets from the current 7.75 percent. The benchmark is used to estimate how much money will be needed from contributors to cover promised benefits.

2.6 Percent Return

The Texas fund had a five-year return of about 2.6 percent through September, according to estimates from Hewitt EnnisKnup Inc. included in board documents.

Large funds have more leverage to bargain with outside managers for lower fees and more investment options. Public pensions provided 25 percent of assets managed by private equity firms from 2009 to 2011, according to Preqin Ltd., a London- based researcher.

Blackstone Group LP, the world’s largest private equity firm, agreed to manage as much as $1.5 billion in New Jersey pension money under a fee structure that includes 1 percent of invested assets and an average of 15 percent of gains each year, Robert E. Grady, chairman of the New Jersey Investment Council, said in December. That’s lower than the industry’s traditional “2 and 20” arrangement that pays a 2 percent management fee and 20 percent of profits.

The Texas teachers’ fund has refused to disclose fee agreements with KKR and Apollo, citing state law that permits it to withhold such information from public view. Yesterday, Roberts alluded to fees in commenting on the new agreement.

‘Painfully Better Terms’

“It gives you substantially, painfully better terms than many of your competitors,” he said. Along with Blackstone, KKR and Apollo rank among the largest publicly traded private equity firms. All three are based in New York.

The pension system began broadening its commitments to hedge funds, private equity and other outside managers starting in 2006, when Britt Harris became chief investment officer. Harris oversaw changes that led to a doubling in such partnerships to 200 last year, while its asset allocation targets shifted away from stocks.

The Teacher fund’s target allocation of assets in U.S. stocks fell to 20 percent in 2011 from 47 percent in 2006. The amount invested in private equity, hedge funds, commodities and real estate rose to 36 percent from 8.7 percent in 2006, plan documents show.

The pension’s overseers spent $658.1 million on investment fees and expenses last year, or 0.542 percent of assets, up from $120.9 million, or 0.117 percent, in 2006, according to documents prepared for today’s meeting. The system said the industry median for such costs was 0.535 percent in 2011.

For the most recent 12-month period, ending in September, the fund gained about 3.6 percent. By comparison, the Standard & Poor’s 500 Index of U.S. equities returned about 1.1 percent in that time, including reinvested dividends.

--Editors: Ted Bunker, Pete Young.

To contact the reporter on this story: David Mildenberg in Austin, Texas, at dmildenberg@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.


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