Illinois politicians to ‘examine’ private equity

Private equity, along with other alternative asset classes, will be under the microscope in Illinois, where politicians have formed a committee to determine if the pension systems are taking on too much risk.

Politicians in Illinois are going to get their chance to dissect private equity.

The Illinois State House of Representatives will be examining the investment strategies of five of the state’s pension funds to find out if the systems are assuming too much risk through exposure to alternative investments like private equity and hedge funds.

The state House has formed a Special Committee on Pension Investments to examine the investment strategies of the state pension funds. Representative Tom Cross, a Republican, was appointed chairman of the committee. The committee will likely not start hearings until at least February, if not longer, according to a spokesperson for Cross.

The idea of the review was spurred by Cross, who wrote a letter in December requesting the creation of the committee. The Teachers’ retirement system, with about $38 billion in assets, increased its targeted allocation to private equity to 12 percent last year. Cross cited the increased allocation target at the Teachers’ pension as a reason to examine the strategy.

The committee will hold hearings and invite investment officials from the teachers’, state employees’, state universities’, judges’ and the General Assembly retirement funds, as well as the Illinois State Board of Investment. The committee will also invite investment manages that work with the pension to the hearings.

“We plan to invite the systems, their investment managers, outside investment experts and others to examine the state’s systems’ current investment strategies and make sure they are in the best interest of all parties,” Cross said in a statement last week.

If the [teachers' pension] strategy fails, the result would place far more financial strain on the already burdened resources of the state and the … pension fund's ability to meet its financial obligations to annuitants and future retirees.

Tom Cross

A spokesperson with Illinois Teachers' pension said there is no anticipation that the committee hearings will lead to restrictions on the pension funds' ability to invest in private equity.

“[The teachers' pension] will provide all the information they need to describe the system's investment strategy and to understand that [the pension fund] investments are not overly risky,” the spokesperson said in an email.

Blasted in the headlines

Private equity has been making headlines in the US media more than ever, as former head of Bain Capital, Mitt Romney, battles other Republicans for the nomination to take on President Barack Obama in November’s general election.

Romney’s rivals, including candidate Newt Gingrich, have attacked his private equity past, accusing him of excessive greed and destroying  jobs in the name of profit.

As Romney works to fend off the charges, the private equity industry itself has taken some collateral damage from the attacks, with pundits in the main stream press analysing the impact of private equity on the broader economy and trying to decipher the difference between the asset class and other types of investment strategies.

The Private Equity Growth Capital Council, along with some firms like The Riverside Company and Blue Wolf Capital, has gone public touting the ability of the asset class to grow businesses and create jobs.

However, in Illinois, the suspicion surrounding alternatives goes beyond the national political debate. Earlier this year a Chicago business journal revealed that a state programme in which parents pre-pay and lock in tuition for their children was grossly underfunded and highly exposed to alternative investments.

After the market collapse in 2008, the administrators of the College Illinois Prepaid Tuition Program “tried to do a u-turn and went heavily into alternatives, which made legislators nervous”, according to Maura O’Hara, executive director of the Illinois Venture Capital Association.

Suspicion about alternative investments “is more of a local thing here than a national thing”, O’Hara said.

Worst case scenario

Cross, who led the charge to launch the pension fund investment review, wants to make sure politicians understand the risks of alternatives.

“If the [teachers’ pension] strategy fails, the result would place far more financial strain on the already burdened resources of the state and the … pension fund’s ability to meet its financial obligations to annuitants and future retirees,” Cross wrote to Speaker of the House of Representatives Michael Madigan when requesting the formation of the committee. “Although the General Assembly is not in the business of giving investment advice, I believe it is an issue worth examining due to the impact this could have on every aspect of government.”

Cross said he was moved to request an examination of the investment strategy because of “recent media reporting”, which “has brought to our attention that the Teachers’ Retirement System has adopted an investment strategy that is considered far too risky for a public pension plan,” Cross wrote.

At least one pension investment officials welcomes the chance to explain private equity to politicians and clear up any misconceptions about the asset class.

“Any effort or opportunity to meet with the General Assembly and explain why we use things like hedged equities and real estate and private equity is not a bad thing,” William Atwood, executive director at the Illinois State Board of Investment, told Private Equity International in an interview Monday.

“What I can basically show is that our private equity portfolio has contributed to our overall portfolio returns,” Atwood

My hope is that legislators will listen with open minds and decide to let professionals do their job.

Maura O'Hara

said. “We only have a 5 percent allocation to private equity but it has more than beat the 500 basis points premium to the public markets we can hope for.”

The biggest concern is that the committee will feel the need to craft restrictions on investment officials’ ability to make decisions.

“That would be a problem,” Atwood said.

The investment board has maintained exposure to private equity since 1984, Atwood said.

O’Hara, whose members rely on the state’s pensions for funding, said she is concerned that politicians are taking on a massive project. Some people spend whole careers learning and understanding the complexities of asset allocations, she said.

“I find it hard to believe legislators will be able to get well versed in it,” she said. “My hope is that legislators will listen with open minds and decide to let professionals do their jobs.”