WSJ: Private Equity Keeps Public Pensions Sound

Private Equity Keeps Public Pensions Sound

The Wall Street Journal

By Steve LeBlanc

Thursday, February 16, 2012

Presidential politics has shown a spotlight on a financial sector that was previously unknown to many Americans. It’s called private equity and, from my perspective, it has provided a very public good.

Private-equity firms raise money from many pension funds, as well as from charitable foundations and college and university endowments. They pool the money and buy companies to improve their performance, add jobs, and increase their value. When the firms succeed in this, the beneficiaries we serve — including public-sector and union employees across the country — reap the rewards.

In my capacity as the head of the private-market team for the Teacher Retirement System of Texas (TRS), I’ve invested tens of billions of dollars in private equity for a very simple reason: The investment returns they generate are critical to TRS’s ability to provide the retirement benefits we have promised to the 1.3 million teachers, bus drivers, custodians and cafeteria workers we serve. In fact, our private-equity portfolio returned 22% in our 2011 fiscal year. This compares to the S&P return of 13% over the same time period. I am fortunate to lead a team that has consistently outperformed the market and our peers.

At TRS, in fact, we’ve steadily increased our allocation to private equity and real estate. In addition, we recently struck an innovative strategic partnership with the firms KKR & Co. and Apollo Global Management that affords us greater flexibility and more control over our investments. The partnership has also given TRS the opportunity to closely inspect the practices of these firms and get a grasp for how they consistently outperform the public-equity markets and just about every other asset class in which we invest.

What I found was striking, and highly relevant to the current debate about the industry. The best private-equity firms don’t simply invest capital in a company. Rather, they become hands-on owners. They partner with management to drive business decisions. They put in place aggressive incentive programs for managers and employees to ensure that everyone is driving toward the same goal: to grow the company and increase its value.

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