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Teacher Retirement System of Texas On Being 'A Top-Performing Institutional Investor' | Will Carpenter, Senior Portfolio Manager | Q&A

by trusted insight posted 2years ago 2208 views
Will Carpenter is a senior portfolio manager for private equity principal investments with the Teacher Retirement System of Texas (TRS) in Austin, Texas. He serves the organization by leading deal teams in investment due diligence, valuation and ongoing portfolio management for private equity co-investments. In addition to his role with TRS, Carpenter teaches a course on Investment Theory and Practice at the McCombs School of Business at the University of Texas at Austin. 

In this interview, he discusses his experience moving back to Texas to serve that constituency after spending years in New York City, the positive impact that veteran investor Britt Harris had on TRS and the organization's next steps in being a top-performing institutional investor.

Will Carpenter was recently named as one of Trusted Insight's 2018 Top 30 Public Pension Institutional Investors. This interview has been edited and condensed. 

Trusted Insight: Can you tell us more about the investment team at TRS of Texas and your role within it?

Will Carpenter: TRS is a state pension plan that supports the teachers and administrators in the education system, impacting more than 1.5 million employees and retirees across the state. As a native Texan, coming back to serve that constituency after my time in New York was a big draw for me. Through the middle of this year, TRS had assets under management of about $154 billion. Private equity, as an asset class, is currently a 13 percent target allocation in the trust, with a current NAV just over $20 billion across both private equity funds and principal investments. Our private equity team is made up of 15 people, and within that, we have two groups within the team.


"Since I joined TRS about three and a half years ago, the private equity principal investments portfolio has roughly doubled in size and in terms of team members as well."

One is more focused on fund investing, where we make commitments as an LP to our general partners. The other is more focused on co-investments, or what we call principal investments, where we invest in deals directly alongside of our general partners. I'm one of the senior portfolio managers that helps oversee this co-investment portfolio, which is around a $5 billion portfolio today. As one of the portfolio managers, I help to lead due diligence on deals at the portfolio company level, mostly in leveraged buyouts, and occasionally in venture capital or distressed situations, but almost always where we are co-investing alongside one of our GPs.

Within principal investments, we spend most of our time vetting these transactions for those we think are good stock picks compared to other deals we are seeing in the private equity universe, and are aiming to build a diversified high-performing portfolio. Since I joined TRS about three and a half years ago, the private equity principal investments portfolio has roughly doubled in size and in terms of team members as well. Through this growth, it has been great to be a part of a team and platform that is a key focus area within the Trust, and one that we are looking to continue building out over the coming years.

Trusted Insight: How did you go from working at a private equity, asset management firm to a public pension?

Will Carpenter: If I went back to when I first pursued a job on Wall Street, I never in a million years would have expected to work in a public pension. I really wanted to move towards a career within a PE fund, and really made every career decision along the way trying to get closer towards that goal. In that pursuit, each of the steps I took gave me exposure to a diverse career trajectory. I was a management consultant, an investment banker and worked at two different private equity firms, the first one focused on distressed investing and then one focused more on traditional leveraged buyouts. Each of those experiences gave me exposures to different types of problem solving and analysis, but more importantly allowed me to broaden my network of relationships across geographies, industries, and functions within the financial industry.


"As a Texas A&M grad who had spent time around Britt, the culture and values that had been instilled in this organization were very compelling, and I truly believe that Texas Teachers had become one of the more sophisticated state pension plans in the country."

After many years in New York, I reached a point in my life where my wife and I had our second child and we began to question if the pace was sustainable during the phase we were in as a family, which in addition to a handful of other factors at the time precipitated a search for career opportunities back in Texas where we were both born and raised. While in NY, I worked on a co-investment transaction to invest in a chemical business where the Texas Teachers co-investment team invested into the transaction. Throughout that processes, I got to know the team as a counterparty to the co-investment and was impressed by the caliber of the people and intrigued by the idea a group investing directly into large LBOs across various sectors out of Austin. As I began to think hard about what I wanted out of the next phase in my career, the opportunity to slow down the pace of life for a period of time, expand my network and perspective on the industry through an LP lens while also leveraging investment judgment to make an impact was quite appealing.

Trusted Insight: TRS is a well-regarded institutional investor. What’s next?

Will Carpenter: At the time I decided to join TRS, I also had loosely known about the type of positive impact that (former CIO) Britt Harris had on the organization. As a Texas A&M grad who had spent time around Britt, the culture and values that had been instilled in this organization were very compelling, and I truly believe that Texas Teachers had become one of the more sophisticated state pension plans in the country. Much of that came from improvements to governance, compensation, and processes under Britt's leadership. Britt has since moved on to The University of Texas/Texas A&M Investment Management Company (UTIMCO), and we now have our new CIO Jerry Albright and Deputy CIO Jase Auby leading TRS on the next step in its journey as a top-performing institutional investor.


"What becomes very exciting to me about TRS as I evaluated opportunities back in Texas several years ago was the chance to leverage my diverse career background and direct GP experience to have an outsized positive impact on a growing team."

A lot of what we're doing in the current planning and execution of our mission at TRS is continuing to think about the next evolution in the pension industry. A lot of that happens to center within private markets and more specifically being able to enhance our principal investment capabilities. I feel really fortunate to be in an area that is part of the strategic efforts of the Trust. For private equity, much of this entails continuing to build out our team, resources, and our processes to continually improve upon our principal investing efforts.

Trusted Insight: In an interview with us, Britt shared more about his ambitious goal of leading one of the top endowments in the country. He touched on the importance of attracting and retaining highly-talented and high-character investment professionals who are energized by a mission. What are your thoughts on this?

Will Carpenter: What becomes very exciting to me about TRS as I evaluated opportunities back in Texas several years ago was the chance to leverage my diverse career background and direct GP experience to have an outsized positive impact on a growing team. As a native Texan and product of the public school system, generating value for pensioners is a meaningful mission. And in getting to know more about the team and platform at TRS, it was clear there was an exciting value proposition: the opportunity to work in an amazing city--Austin, Texas; the opportunity to invest out of a large stable pool of capital, and the chance to work closely with some of the highest quality PE managers globally. Last but not least, the private equity team at TRS was clearly both highly talented and high-character people.

Trusted Insight: What about your GP background specifically helps you in your role as an LP?

Will Carpenter: If there's one thing that has been particularly valuable in terms of bringing skills to the team, it was the diversity of experiences that I had in New York. Coming from a GP background to an LP background has been valuable because I can speak to what it’s like other the other side, from sourcing a deal to working start to finish on a transaction to working alongside management inside of portfolio companies. Leveraging these experiences and my network has allowed me to help shape new processes for both deal execution and investment monitoring since I joined, and improve in a small way on what was already a great team and platform. The GP background brings a skill set that we will continue to try to bring more of into our team as we grow.

Trusted Insight: Is hiring investment professionals that have a GP background an existing and growing trend within the pension industry?

Will Carpenter: I believe it's a trend that's growing. The obvious tradeoff that people make when moving from a GP towards an institutional investment role is between compensation and better work-life balance. The limiter for many state institutions in attracting direct investing talent has been that they're not willing to invest enough in their people. I think Texas Teachers is striking a decent balance of being willing to invest in people with direct investing backgrounds and offering a value proposition for people also motivated by other factors. If you look at Canadian pensions or sovereign wealth funds, they've taken it much farther and have built some very impressive teams as a result. In order for state pensions to stay competitive, there needs to be the willingness to invest in people with the right backgrounds, not only to attract that caliber of person to come to an LP role but perhaps more importantly, to retain them.

I believe it's a trend because there are clear needs within the pension system to close funding gaps, and one of the best ways to do that is in the private markets asset classes. And within private markets, increasing the percentages of your assets that are in reduced fee principal investments is a key driver for returns. It's this focus that is creating more demand for direct investing talent. You just have to have institutions willing to create governance structures for investment decision making and a compensation system that's compelling enough to move in this direction.

Trusted Insight: TRS beat its 1-,3- and 5-year benchmark return for the private equity portfolio. What’s your investment strategy or approach for keeping that momentum?

Will Carpenter: I've been here three and a half years, so by no means can I claim much credit for the success of these returns, but we've done a great job in the last few years and the team has really been outstanding going back to the inception of the program with top decile performance versus peers and as a consistent alpha driver for the Trust.

We look at returns on 1-,3- and 5-year basis just to have a sense for the performance, but we also look at performance from a longer-term perspective which is actually most important given the nature of the asset class. For the private equity program as a whole, we are trying to outperform the SSPEI benchmark plus an alpha target over that, and we're also trying to outperform our state pension and other institutional investing peers. The foundation of our program is a strong funds portfolio, one where we hope to invest with high quality managers for the long-term. But a key part of our funds' strategy is also having managers where we can be a meaningful partner in their co-investing needs given this has been a large alpha driver for the PE program.

Within the co-investment portfolio, we're looking to generate a return over and above the underlying funds portfolio that is at least commensurate with the fee savings, and hopefully more than just fee savings if we are successful in leveraging our investment discipline and our network of different GP relationships to generate good security selection alpha as well.

Historically, we've had a great return spread from principal investments above the various benchmarks, and it's been a real team effort around first picking the right managers, and then in building out a diversified portfolio of high-quality private equity co-investments that in aggregate have performed well so far during the current equity cycle.

To maintain the momentum, we will need to continue to partner with the right funds where we are a valued co-investment partner, exert above average selection on co-investments, and maintain discipline through cycles in our capital deployment to the asset class.

Trusted Insight: What investment themes do you see shaping the private equity space today?

Will Carpenter: There's a lot going on now. There's the cyclical and the secular. In the cyclical, I would argue we're quite late in the economic and credit cycle. We have elevated valuations across asset classes, aggressive leverage and deal dynamics within private equity, and an uncertain economic outlook for deals that have a 5-year hold period as the Fed continues to raise rates and signs of economic pressures are emerging outside of the U.S. As a result, we’ve been extra cautious this year in our co-investment program with regards to the sizing of our co-investments and tried to build a more diversified portfolio with limited exposure to any single bet. We are also well aware of specific areas that appear to be relatively overheated and are conscious of how much exposure we will build into any single investment theme. And lastly, we are cycle conscious and ask ourselves in every deal we underwrite how the company and capital structure of a co-investment will perform through a recession as part of our base case underwriting.

In terms of the secular trends in private equity, there's clearly been a huge push into the asset class by institutional investors with increasing allocations that has led to an overhang of dry powder which continues to drive up valuations. For the industry as a whole to generate returns anywhere near the levels that have attracted this capital, the economy at the end of the day has to have demand for that capital. We need more underlying innovation and productivity across the economy as a starting point. Within private equity GPs, I think the real winners of the future are going to be firms that are able to tap into secular growth or consolidation in areas with less competitive tension, firms that leverage technology and analytics in both their sourcing and decision making, and given elevated valuations that may persist for some time, those GPs that can generate meaningful operational improvements within their portfolio companies as a key driver of returns.

The industry is also clearly maturing in terms of some of the ownership structures of the oldest and most successful firms. You've got GPs that really built the industry who have either gone public or are now selling off ownership stakes to outside firms. You have brand new funds that are out there facilitating this transition of ownership in selling GP stakes directly to LPs, so you're clearly at a point of some degree of generational transition in the industry. I think finding what’s next on how this impacts the persistence of GP performance is still an unknown.

And lastly, I believe LPs are becoming more sophisticated and conscious of a lot of different variables that may not have been focused on as clearly in the past. LPs are expecting greater transparency from GPs in terms of fees, expenses, and exactly where the dollars are flowing in transactions. Additionally, many LPs are beginning to expect GPs to deliver more than just great returns, but to also generate returns in a sustainable way that is positive for society and does not harm the environment. As we’ve discussed, many LPs are trying to reduce the all-in cost of exposure to the asset class through direct investments and building in-house teams, with some sovereign investors being more aggressive on this dis-intermediation of GPs than others. And lastly, as public market investors are better able to measure and attribute returns to various “equity factors,” I think CIOs will continue to demand a stronger sense behind what exactly is driving returns in the PE asset class, and perhaps if the balance of power ever shifts back in favor to LPs, they will demand greater alignment for the true alpha created by PE managers.

Trusted Insight: To pivot the conversation a bit, you also teach at The University of Texas at Austin. Can you tell us about your experience there and how you got into teaching?

Will Carpenter: It's been a really rewarding experience for me to do that, and in many regards has been my only personal “hobby” other than chasing my kids around over the past two years. First of all, I'm incredibly thankful that TRS has been supportive of my teaching efforts. One of my TRS colleagues who was teaching at the McCombs School of Business several years ago first introduced me to the opportunity when he had to wind down his commitment to teaching. His introduction to the head of the finance department as a potential replacement opened the door for me to begin teaching.

For me, the teaching experience has been interesting in that it has forced me to have to zoom up a few levels from private equity where I’m immersed day-to-day, and to think about issues from a portfolio management and markets perspective in a way that might be relevant to more of a CIO. I think preparing to teach lectures and case studies on areas like portfolio theory, fixed income, and derivatives have actually helped me develop into a better private equity investor, to be more conscious of the holistic portfolio approach and context. In developing a weekly email on macroeconomics that was first prepared for my students--but now has a few hundred people on a distribution list--I have been forced to broaden my awareness of big-picture macro trends as well.

And in terms of relevance for TRS, whether it's improving awareness of conferences and guest speakers available at McCombs, sharing research with the team, or recruiting new team members, I think it’s also been a great opportunity to improve our connectivity to McCombs, a top-ranked business school right in our backyard. We've already had a couple opportunities where I've been able to connect with students that we were able to bring in for internships or even to hire full-time, and I’m hoping it can continue to be a good funnel for us for talent as we expand our team.

Overall, it's been fun and very demanding at the same time. The first semester I was teaching was quite a challenge, as I had a lot of days that started at 4:30-5:00 a.m. and had to assemble new class materials. Butut now that I am a couple years into teaching I am finding it’s more sustainable and I am really enjoying the chance to invest in the students. It also constantly reminds me how hard it actually is to be an educator, which is a good reminder when thinking about who we work for at TRS.

Trusted Insight: What are your final thoughts?

Will Carpenter: Being in a pension is a fascinating world, because one hand you're a state employee, but on the other, you're on the front line in dealing with Wall Street and investing into some of the largest and most high-profile transactions in a given year. You're constantly dealing with people who make multiples of what you earn as a state employee, but at times you're also stretched to work the more intense hours of a private financial sector worker. One of the things that was really eye-opening for me a couple years back, was getting to know someone who worked on Capitol Hill in Washington, and seeing how that person put in incredibly long work weeks as a government employee. I came to the realization that to thrive in a state pension role, you needed to find talent that could arguably be working on Wall Street in an investing role, but are committed to leveraging their investment abilities for the sake of public service, even if only for a period in their careers.

To really thrive in this environment that is part government, part high-finance, you have to have a deep commitment to the mission of the institution that you're a part of. You have to actually have that public service mindset where you know that you're doing your best day-in and day-out to sit between the marketplace and your constituents to maximize values on their behalf.

When someone asks me what I do for a living, I usually share that I'm in the business of trying to help the taxpayers of the greatest state in the nation, Texas, to invest in education by securing retirement for our educators. Private equity investments that generate a superior return are just a tool to accomplish this end goal, and it’s rewarding to remember that good decision-making on investments actually has a tangible impact on real people. I have three children, one of whom is now in the public education system. It is important for me to know that doing good work here is helping the people who are really serving and educating my own children with a great deal of passion. I love my work, and would only imagine doing something else if I thought I could have a more outsized impact for good.

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