Chicago Teachers’ pension plots its private equity future

The $12.2bn public pension would consider increasing its current 5% target allocation to PE as part of a future asset allocation review, says CIO Angela Miller-May.

It took three years of research and several trips to Africa before Chicago Teachers’ Pension Fund made its first direct primary commitments to domestic African private equity managers in 2019.

Almost two years later, the $12.2 billion pension’s chief investment officer, Angela Miller-May, is looking to replicate those efforts in other emerging markets.

Angela Miller-May, Chicago Teachers' Pension Fund
Miller-May: Chicago Teachers plans to “move a bit away from buyouts” and increase allocations to VC firms

“This is the first endeavour to invest directly in funds. We want to look to the future, and that means diversifying a little more around geography and industries,” Miller-May told Private Equity International. “By next year, we’ll consider more aggressively more opportunities in Africa and looking at other emerging markets.” 

“This means that we need to think about how to best diversify investments in our home market, to watch Europe over the next two years, to look at how Africa, Latin America and the rest of the world recovers from the covid-19 pandemic, and what opportunities are arising in Asia,” she added.

“I’m always in favour of having all sorts of diversified exposure to emerging markets. And we have to take advantage of where the best opportunities are and in getting the best returns for Chicago teachers.”

Transparency and better value are two reasons behind the pension’s plans to explore more direct investing.

“While fund of funds investing has its benefits by adding a layer of oversight and expertise, direct fund investing offers better transparency for us,” Miller-May said. “Previously, we’ve had to wade through more information from fund of funds managers to monitor the underlying investments. By investing in direct funds, we’re also avoiding layers of fees and we’re able to negotiate better terms for ourselves.”

Miller-May noted that through “small and nimble” GPs in emerging markets, the pension will also be “more knowledgeable about the regions and better positioned for future allocations”.

The pension has a 5 percent target allocation to private equity and had an actual allocation of 4 percent as of January this year, according to PEI data. Its $540 million-plus PE portfolio consists of two programme mandates: a developed manager programme that focuses on established managers that invest globally and an emerging manager programme that targets minority and women-owned managers in Illinois and the US Midwest.

The US makes up about two-thirds of Chicago Teachers’ geographic exposure in private equity, while Europe accounts for about 20 percent and Asia makes up the remainder. The pension recently made commitments to KKR North American Fund XIII, Aberdeen Standard Venture Partners XII and EQT IX.

Chicago Teachers plans to “return to Africa” in its next fiscal year, Miller-May said at an April African Private Equity and Venture Capital conference. The pension made its first direct commitments in Africa in 2019, investing $10 million each in Development Partners International and Advanced Finance and Investment Group.

The commitments to DPI and AFIG marked the first time in 20 years that the pension invested directly in emerging markets managers and not via fund of funds managers. Its commitments to emerging markets-focused GPs are typically made through funds managed by Adams Street Partners and HarbourVest Partners, according to PEI data.

Beyond buyouts

Along with diversifying allocations to markets outside of the US, Miller-May said the pension plans to “move a bit away from buyouts” and increase allocations to venture capital firms because of the sheer number of investment opportunities in the space globally. The pension’s private equity portfolio is heavily invested in the buyout space and “shifting even a little bit will provide more diversification”, she said.

Buyouts accounts for 67 percent of the pension’s PE portfolio, while venture represents 27 percent, special situations is 4 percent and distressed for control/mezzanine combined stand at about 2 percent, according to Chicago Teachers’ latest PE performance report prepared by Callan in June 2020.

In venture capital, Chicago Teachers is particularly interested in women-owned and minority-owned venture capital firms that are trying to gain access to capital and opportunities similar to established, mainstream firms.

“We’re following these entrepreneurs and asking ourselves: ‘What does it mean for venture capital and for the lower and mid-markets?’” Miller-May said. “We are completing due diligence and research and we want to make sure that if there are opportunities available that we are taking advantage of them.”

The CIO and her nine-person investment team want to gain the capacity for investing with venture capital funds directly on their own, and not just through funds of funds, she added.

“Our overall goal is to capture the growth and outperformance in private equity by maintaining a diversified exposure to investments that are reasonably valued with competitive fees and terms,” Miller-May said.

Asked about the importance of private equity in the portfolio, Miller-May noted that it has been one of the pension’s top performers. Since inception to the end of February, PE delivered returns of 18.5 percent net of fees. For the most recent five-year period, private equity returned 12.7 percent for the pension.

“We are pleased with the long-term performance of private equity in the Chicago Teachers’ portfolio, and as part of a future asset allocation review we would consider increasing the 5 percent target allocation,”  she said.

Importance of diversity

The pension is also vigorously pursuing a commitment to diversity and inclusion. Under Miller-May’s leadership, the pension has increased its investment of assets in managers owned by minorities, women and persons with disabilities from 33 percent to 48 percent of its overall portfolio.

While Chicago Teachers does not have a target allocation to invest with women-owned and minority-owned firms, Miller-May noted that Illinois legislators have led the way in their commitment to diversity. “They are very serious about it here in Illinois,” she said.

“There’s a 20 percent aspirational target in our pension code, which we follow, and it trickles down from the legislators to our trustees, our organisation, our members and our staff.”

“Diversity and inclusion is driven by our members,” she said. “They want to see their money invested by people that are reflective of them.”