Social benefits, competitive handicap

Illinois is one of the few states that have passed into legislation a law banning state money from going into Sudan-linked businesses. The rule has already gotten some state pension money banned from certain partnerships. Ken MacFadyen reports.

The ongoing civil war in the Darfur region of Sudan has sparked little in the way of international intervention despite claims of genocide pointed at the National Islamic Front regime in Khartoum. While the United Nations has largely sat idle, some US states have begun imposing restrictions on the pensions within their domain as a way to help spur change or at the very least not support the status quo.

Among the more notable, Illinois passed legislation late last year, preventing the state’s pensions from investing in companies doing business in Sudan. The $36 billion Teachers’ Retirement System (TRS) and the $13.3 billion Illinois State Universities Retirement System (SURS) are among those affected.

According to Eva Goltermann, the public information officer for TRS, the new decree has had little impact on the pension’s private equity portfolio so far. However, that doesn’t mean there isn’t some worry that the “social” benefits could morph into a competitive disadvantage. And Goltermann tells PEO that the pension does harbor such concerns.

“None of the private equity firms in our portfolio invest with Sudan companies, and to date we haven’t had any groups reject our commitments because of the new law,” Goltermann says, but adds, “There is some concern that in the future some of the more successful funds, which are hard enough to get into, will pass up our commitment because the compliance component of the new law is too onerous.”

The law makes us non-competitive. That’s the unfortunate part.

Eva Goltermann, public information officer, Teachers’ Retirement System of Illinois

Specific to the Illinois law, which went into effect near the end of January, general partners have to obtain sworn affidavits confirming that they have no holdings in Sudan, as well as affidavits from the businesses under the GPs’ control.

The extra paperwork did not stop the likes of Carlyle/Riverstone, Madison Dearborn Partners, Energy Capital Partners or Belvedere Capital from receiving commitments from TRS, as all four took in a combined $260 million from the pension in February.

However, SURS – TRS’s university counterpart – has already encountered negative feedback from some of the more notable fund of funds. A story in Pensions & Investments last week quoted the system’s COO, Daniel Allen, as saying that Adams Street Partners has blocked the pension from investing in certain partnerships, while Pantheon Ventures has also presented some “challenges” as well.

“The law makes us non-competitive. That’s the unfortunate part,” TRS’s Goltermann cites. “Companies that have no intention of investing in Sudan are faced with these onerous regulations, and while we don’t necessarily think it will impact our ability to invest…it may impact the smaller funds.”

Illinois is not the only state dealing with new regulations over investment in Sudan-linked businesses. New Jersey, Louisiana and Arizona have passed their own version of the Sudan-divestment laws, while a number of other states have introduced similar legislation.

The difficulty pensions have getting their arms around the new laws has nothing to do with the motive of the initiatives. Most agree the situation in Sudan is untenable. What has been difficult is finding a point at which businesses are absolved from potential Sudan links.

“It’s convoluted. One company sells to another, who sells to another, and ten links down, the company may be doing business with Sudan. It’s very hard to track,” Goltermann says.

Meanwhile, GPs share the same frustrations. Kevin Landry, the CEO of TA Associates, said in a recent PEO story that at the advice of its lawyers, the firm had to pass over potential commitments from Illinois because of the new rules.

“I think it’s a law with great intentions but is probably poorly written,” he says.