Monday, May 30, 2011

Texas Legislature Lights Way for PEU Profits

The Dallas Morning News reported:

The House and Senate approved a transportation bill that would give the Dallas area more bonding capacity for road projects and allow leaders to pursue new private toll road deals .

The measure, a sunset bill reauthorizing the Texas Department of Transportation, was stripped of a provision that would have banned the installation of red-light cameras on state roads unless the state approved.

Both provision potentially benefit private equity underwriters (PEU's) with billions in infrastructure funds ready to go to work.  The Carlyle Group recently lost a bid for Redflex, a red light camera maker.

Senator Robert Duncan (R-Lubbock) offered a bill that would increase the percent the Teacher Retirement System of Texas could invest in hedge funds.  SB 1666 would increase the amount from 5% to 10%, providing Duncan's bill passes in special session.  The Carlyle Group invested in hedge fund Clarion Road.  Carlyle lost two funds before the 2008 Fall financial crisis, BlueWave Partners (hedge fund) and Carlyle Capital Corporation (publicly traded CMBS fund).

Here's how the Senator Duncan sold the change (in Rovian fashion):

S.B. 1666 grants additional flexibility to TRS in its ability to invest in hedge funds. This would help it to further diversify its investments, further insulating TRS's assets from the negative effects of an economic downturn.

Insulating?  More like amplifying any negative effects.  Carlyle made $681 million in capital calls to CalPERS in September 2008.  What might hedge funds ask of TRS in capital support in the next implosion?  That wasn't in the financial analysis.

How might PEU affiliates benefit from Texas independent school districts investing in corporate bonds?  I'm sure they'll find a way, especially the folks at Carlyle.

Update 5-31-11:  Public pension funds continue to invest in PEU's, according to Preqin. The article cites an appetite for investing with a relatively small number of general partners in influential PEU firms.