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Chicago Treasurer Considers Using Pension Money To Make Direct Investments in Local Black Communities

Newly appointed Chicago Treasurer Kurt Summers last month announced his plans to invest portions of the city’s pension money locally.

Last week, he met with some local business owners and residents and talked further about his ideas, which include making direct investments in Chicago’s predominately black neighborhoods.

Heard by Progress Illinois:

Summers told the crowd that his office manages a combined $50 billion in investments as well as employee pension funds and retirement plans. He said he would like to see some of that money invested in neighborhoods like Bronzeville.

“I don’t view a neighborhood investment strategy as a risky strategy,” said Summers, a product of Bronzeville. “I don’t view that as any more risky than investing in Korea’s debt, which we do, or investing in a cement company in Mexico. I don’t believe investing in Bronzeville is any riskier than that.”

In fact, investing in neighborhoods makes good business sense, he said. It would boost the local economy, create jobs and a stronger tax base from new businesses and the entrepreneurs those investments would generate, Summers pointed out.

To invest in neighborhoods, changes need to be made to the city’s investment policies. Currently, Summers said, there is no mandate to invest pension fund money back into the city, even though cities in other states like New York, California and Florida already do so.

“City Council gives me an investment policy and parameters that I can invest with,” he said. “I likely will be proposing a new one to allow me to do some of the other things I want to do like invest in this community, which it doesn’t have a mandate for today.”

The plan doesn’t come without controversy. As a pension trustee, Summers has a fiduciary duty to make the city’s pension funds as healthy as possible. That means maximizing investment returns – a concept that may or may not square with local economic development.

Illinois Teacher’s Pension CIO Talks Investing in Hedge Funds, Reaction to CalPERS’ Pullout

Stan Rupnik, CIO of the Teachers’ Retirement System of Illinois, sat down with Chief Investment Officer magazine for an extended interview this week.

He talks about how he increased the fund’s exposure to hedge funds and how he reacted to CalPERS’ high-profile decision to pull out of hedge funds.

Rupnik on how he increased TRS’ exposure to hedge funds after he took the CIO job in 2003:

When Rupnik arrived in 2003, he inherited control of a portfolio with no hedge fund exposure. After gaining board approval in 2006, he started with funds-of-funds. Later, after the hiring of Musick, direct investments commenced (one pities the poor funds-of-funds).

“It was the right way to start the program,” Rupnik now says. Likening it to co-investments in private equity, he comments that “with the first of anything, you feel an extra level of pressure.”

When you only have a few investments, Musick adds, it’s naturally not as diversified as it will end up, leaving the program’s future vulnerable to any upset. With a diversified hedge fund portfolio, he says, you can lose money in one or two funds and still have a phenomenal overall portfolio. Funds-of-funds solved this—for a time.

Letting go of the middlemen required “professionals on staff,” Rupnik says. Once they were in place, Illinois “could flip the model and go direct. You’re still always nervous when you change models and have one or two hedge funds in the direct portfolio—”

“—but don’t view it as sticking your neck out when you’re really behind it,” Musick adds.

“Agreed, entirely agreed,” Rupnik responds.

Rupnik on how TRS reacted, from an investment standpoint, to CalPERS’ hedge fund pullout:

No discussion of direct public plan hedge fund investing would be complete without mentioning the headwinds: namely, the California Public Employees’ Retirement System (CalPERS). In September 2014, the fund announced that it was abandoning its Absolute Return Strategies portfolio. “Our analysis, after very careful review, was that mainly because of the complexity of the hedge fund portfolio and the cost, we weren’t comfortable scaling the program to a much greater size than it currently held,” explained newly appointed CIO Ted Eliopoulos. The reaction was swift: Hedge funds rushed to the defense, some public plan trustees hurried to follow suit, and CIOs everywhere—who know the symbolic value of CalPERS’ move—cringed.

But for Illinois Teachers’—a rose in a bed of weeds, given the state’s general public plan funding situation—the reaction was carefully judicious. “My worry isn’t so much investments or the plan or the team. What I worry about is some external force that causes some skittishness,” Rupnik says. This worry, both he and Musick assert, is decidedly present.

“I’m terrified every day,” the latter says. “I think it’s what makes us good at what we do. We’re just estimating things at the end of the day. We blend our estimates, monitor them as best we can, and structure investments to protect us as best as we can. As far as the cold sweats—I’m just super freaked out about anything. No one thing keeps me up at night.”

Read the full interview here.

General Partners Gain Upper Hand Over Pension Funds As Raising Capital Becomes Easier

Pensions & Investments released an interesting report yesterday outlining the balance of power in the private equity world between general partners and pension funds.

In the last few years, the balance of power has shifted dramatically towards GP’s, according to the report.

From Pensions & Investments:

Until the 2008 financial crisis, general partners pretty much set the rules, leaving most limited partners little say on terms, including on fees and expenses, when they committed to funds. Then fundraising got harder, and even the most popular private equity managers had to accept investors’ demands for lower fees and expenses and a greater degree of transparency.

Now, the highest-returning general partners are regaining the upper hand.

“Certainly, the pendulum has swung more toward the GP compared to 2009,” said Kevin Campbell, managing director and portfolio manager in the private markets group at fund-of-funds manager DuPont Capital Management, Wilmington, Del. The firm was spun out from the pension management division of DuPont’s pension plan in 1993.

[…]

Said DuPont’s Mr. Campbell: “I’ve seen the pendulum of power change positions several different times during the last 15 years,” where private equity fund terms are determined by the GP and sometimes they are more influenced by the LP.

Strong-performing managers that retain the same team and the same investment strategy used when they earned their strong returns have the most influence over fund terms, Mr. Campbell said. These managers also are raising a fund that is similar in size to their last fund and they have a “good investor base,” meaning investors who routinely commit to their funds, he said.

[…]

Some are increasing their negotiating clout by getting large capital commitments from sovereign wealth funds before the first close, enabling them to give other interested institutional investors a take-it-or-leave-it deal, said Stephen L. Nesbitt, chief executive officer of Marina del Rey, Calif.-based alternative investment consulting firm Cliffwater LLC.

Part of the reason GPs have power over LPs has to do with fundraising. GPs are having an easy time raising capital, which means they don’t have any incentive to negotiate terms with LPs. From P&I:

It’s easier to raise capital now; funds are raised more quickly and general partners have more influence on terms, he added.

Indeed, some private equity funds are closing very quickly, with access to much more capital than they need. Instead of holding several fund closings — giving general partners the ability to invest the capital commitments before the final close — a number of firms are having “one-and-done” closings. Because there are asset owners willing to invest on those terms, the GPs have little reason to give in to limited partners demanding changes to fund terms.

For example, Veritas Fund Management in August held a first and final close at $1.875 billion for its latest middle-market private equity fund, after just three months of fundraising. And private equity real estate manager Iron Point Partners LLC in November closed the Iron Point Real Estate Partners III LP at $750 million, well above its $450 million target.

And KPS Capital Partners LP held a first and final closing last year of its $3.5 billion KPS Special Situations Fund IV, above its $3 billion target. It was KPS’ third oversubscribed institutional private equity fund, according to a statement from the firm at the time.

Read the full report here.

Ontario Teachers’ Pension Chief Explains Why Fund Looks Outside of Canada For Direct Investment Opportunities

The Ontario Teachers’ Pension Plan (OTPP) is among the growing number of pension funds making large direct investments in companies – buying stakes in companies directly as opposed to working with private equity firms.

But the vast majority of the OTPP’s direct investments are made in foreign companies, not Canada. Why is that?

OTPP chief executive Ron Mock explained on Wednesday the methodology that leads the fund to leave Canada behind when making direct investments. From the Financial Post:

The Ontario Teachers’ Pension Plan may prefer to make its direct investments outside of Canada, but don’t interpret that as a sign the institution isn’t confident in the country’s economy, chief executive Ron Mock said on Wednesday.

Mr. Mock made the remarks at The Canada Summit 2014, a conference hosted by The Economist magazine in Toronto. Mr. Mock discussed the biggest opportunities and challenges facing the pension fund.

In the early 2000s, the teachers’ pension plan shifted away from a traditional mix of bonds and equities into direct, private investments, a move Canada’s other major pension plans followed. Mr. Mock, who has been on the job for about a year, said the shift in strategy was necessary to generate the returns it needed to provide retirement income for 300,000 working and retired teachers.

Today, about 70% of the pension fund’s direct, private investments are outside Canada, Mr. Mock said.

[…]

The strategy has come with challenges. Mr. Mock said one of the biggest difficulties is navigating the legal systems and governance requirements of foreign countries when buying large stakes in their companies.

Mr. Mock cited Asian companies that have not yet gone public among investment opportunities he’s keeping an eye on. He said the pension fund doesn’t typically make venture capital investments in Canadian companies because those types of investments are generally in the tens of thousands of dollars, while he’s looking to invest hundreds of millions at a time.

“As a fiduciary, we really do have to focus on earning the returns on behalf of the teachers,” he said.

Another opportunity he’s keeping his eye on is infrastructure investments in Europe and Canada. He said pension funds have a role to play in helping Canada address its crumbling infrastructure problem over the next 10 years.

“I think that is a vital opportunity in Canada,” he said.

The OTPP manages $140 billion in assets.

CalSTRS Sells Stake In Texas Skyscrapers

CalSTRS has sold its stake in two buildings in Austin, Texas.

The first, One Congress Plaza, is the 8^th tallest building in Austin and a city landmark. The second, San Jacinto Center, is a 21-story office building also located in downtown Austin.

From IPE Real Estate:

Parkway Properties said it has unwound its joint venture with CalSTRS in Austin, Texas, taking the latter’s 60% interest in San Jacinto Center and One Congress Plaza.

The deal gives Parkway full control of the two properties.

Parkway also said it has transferred its 40% interest in Frost Bank Tower, 300 West 6th Street and One American Center to CalSTRS.

Overall, the deals resulted in net proceeds of around $43.6m (€34.7m).

CalSTRS could invest up to $2bn in global real estate over the next 12 months, as reported earlier this year.

The US investor is planning to deploy between $1bn and $2bn in core and value-added strategies in the US, Latin America, Western Europe and Asia.

During the same period – the 2014-15 fiscal year – CalSTRS will reduce its exposure to opportunistic real estate investments.

CalSTRS manages $22 billion in real estate assets.

Photo by Stephen Curtin

PE Executive To Become First CIO of Japan’s Largest Pension Fund

Japan will appoint a private equity executive, Hiromichi Mizuno, to the newly created Chief Investment Officer post at the Government Pension Investment Fund, the largest public pension fund in the world.

Hiromichi Mizuno is a partner at private equity firm Coller Capital.

More details from the Wall Street Journal:

The appointment would put the 49-year-old from central Japan in control of the world’s biggest fund of its kind as it tries to boost returns with more aggressive investments.

Mr. Mizuno would be a big catch for the fund, which has struggled to attract outside talent because of low salaries and a small budget. Despite its size, the GPIF’s roughly 80 employees are squeezed into one floor of a 1970s office building in downtown Tokyo and most of its investments are managed by outside asset management firms.

Mr. Mizuno was educated in the U.S. and speaks fluent English, which addresses concerns of foreign investment firms that had trouble working with GPIF.

[…]

The GPIF is headed by its president, Takahiro Mitani, who has ultimate decision making power under the current law, but Mr. Mizuno would be de facto in charge of overseeing important investment decisions. Rather than make investments himself, Mr. Mizuno will spend more time choosing professional fund managers to oversee portions of the fund’s investments.

Mr. Mizuno joined the GPIF as an adviser and a member of its investment committee, an eight-member group that advises the fund part-time, in July. At a news conference last month, Mr. Mitani said described Mr. Mizuno’s expertise in private equity as “invaluable.”

The Government Pension Investment Fund manages $1.1 trillion in assets.

Photo by Ville Miettinen via Flickr CC License

South Carolina Pension Seeks Smaller Hedge Fund Managers

The South Carolina Public Employee Benefit Authority (PEBA) allocates a large portion of its assets towards hedge funds – 17 percent, as of June 30.

But PEBA is looking for a change. It isn’t considering moving away from hedge funds, but it is looking at different kinds of hedge funds. Namely: smaller ones.

From Bloomberg Briefs:

South Carolina’s pension is interested in allocating to smaller hedge fund managers to enhance diversification and capture increased returns as it reduces holdings in larger funds, according to state treasurer Curtis Loftis.

The $30 billion pension had 14 investments in “strategic partnership funds” of $1 billion or more at the start of this year, of which it has “unwound about half,” Loftis said in a speech at the Alternative Asset Summit in Las Vegas last month. It is “very interested in emerging managers” to help with this “fear of non-diversification, and to enhance returns” he said in the Oct. 28 speech. The pension has already made “several or so investments of $50 million or less the last few of months,” he said. This includes a commitment of $25 million to $50 million last month to a small manager that Loftis declined to identify.

“I love alternative investments. I love Wall Street. I don’t mind paying fees,” Loftis said in 2013. “But I want returns.” The pension last year had investment fees and expenses of 1.59 percent of assets, compared to a national average of 0.57 percent, according to a presentation on its website.

[…]

The state treasurer suggested emerging hedge funds to “come show up” at public meetings of public pension plans, including the South Carolina Investment Commission. “If I were an emerging manager and I wanted to understand how public pension plans work, I would attend the meetings, shake hands and pass out cards.”

The move is interesting because there is data out there suggesting pension funds can get the best returns by investing with newer, smaller hedge funds.

Dr. Linus Wilson writes:

Most institutions and their consultants implicitly or explicitly limit their manager selection criteria to hedge funds with a multi-year track record (three years or more) and assets under management in excess of $250 million. The AUM screen is probably higher; $1 billion or more. Unfortunately, all the evidence shows that choosing hedge funds with long track records and big AUM is exactly the way to be rewarded sub-par returns.

A recent study by eVestment found that the best absolute and risk-adjusted returns came from young (10 to 23 months of performance) and small (AUM of less than $250 million) hedge funds. My anecdotal evidence is consistent with this fact. My young and small fund, Oxriver Captial, organized under the new JOBS Act regulations, is outperforming the bigger more established funds.

Dr. Wilson believes pension funds are ignoring data that suggests newer, smaller managers perform better than the older, larger hedge funds that pension funds typically prefer

Read Dr. Wilson’s entire piece here.

CalSTRS Stepped Up “Green” Bond-Buying By 300 Percent In 2014

CalSTRS released its Green Initiative Task Force report on Wednesday. The report highlights the pension fund’s “environmental-themed investments” and risk-management efforts related to climate change.

The report reveals that it increased its purchases of “green bonds” by 300 percent in 2014. Investopedia defines a “green bond”:

These bonds are created to encourage sustainability and the development of brownfield sites. The tax-exempt status makes purchasing a green bond a more attractive investment when compared to a comparable taxable bond. To qualify for green bond status the development must take the form of any of the following:

1) At least 75% of the building is registered for LEED certification;

2) The development project will receive at least $5 million from the municipality or State; and

3) The building is at least one million square feet in size, or 20 acres in size.

From a CalSTRS press release:

California State Teachers’ Retirement System’s (CalSTRS) eighth annual Green Initiative Task Force report shows an almost 300 percent increase in green bond purchases within the Fixed Income portfolio. This year, the Teachers’ Retirement Board identified sustainable investing as a key, strategic priority, which is reflected in the report and other initiatives.

The growth in green bonds aligns with a commitment that CalSTRS Chief Executive Officer Jack Ehnes made during his participation in the 2014 Climate Summit where he announced that CalSTRS will more than double the fund’s clean energy and technology investments of $1.4 billion to $3.7 billion over the next five years. The move is in response to United Nations Secretary-General Ban Ki-moon’s call for bold action to build resilience to the impacts of climate change.

“Targeting the clean energy and technology sector provides a good investment opportunity while positioning CalSTRS for a low-carbon future,” noted Ehnes. “But more importantly, we hope our actions will help catalyze incentives for comprehensive climate change policies that ultimately lead up to a global agreement in Paris in 2015.”

CalSTRS sees a growing number of investment opportunities in low-carbon solutions, especially as renewable technology costs come down and regional clean energy policies take hold.
“Our growth of green-related investments is a good example of successful engagement on environmental and climate risk issues,” said CalSTRS Chief Investment Officer Christopher J. Ailman. “Looking forward, we hope to bring more attention to the role large institutional investor’s play in financing green bonds, clean energy and climate change initiatives.”

The entire Green Initiative Task Force report can be read here.

Photo by penagate via Flickr CC

HarbourVest May Be Last Party Interested in Buying CalPERS’ Stake in Under-Performing Healthcare Fund

CalPERS announced this summer it was looking to exit the Health Evolution Partners (HEP) Growth Fund, a private equity fund specializing in healthcare companies.

HEP is run by David Brailer, a world-renowned physician who had no previous private equity experience before starting the firm.

The fund promised returns of 20 percent. But its IRR as of March 31 was just 2 percent.

According to Reuters PE Hub, HarbourVest Partners is interested in buying CalPERS’ stake in the fund. From Reuters PE Hub:

HarbourVest Partners appears to be the last bidder interested in buying CalPERS’ stake in a healthcare fund run by a former Bush Administration official, according to two sources.

The California Public Employees’ Retirement System since summer has been trying to sell its stake in a growth fund managed by Health Evolution Partners (HEP). Evercore Partners is running the sales process, sources said.

Landmark Partners was also a bidder until recently, a secondary market professional said.

CalPERS is the sole limited partner in the fund and committed $505 million at its inception in 2008. So far, the GP has drawn down just over $430 million, as of March 31, according to CalPERS.

The fund’s performance has not been stellar. It produced an internal rate of return of 2 percent and a 1x multiple as of March 31, according to CalPERS.

One secondary market professional said bad blood between CalPERs and HEP likely drove away some potential buyers.

Real Desrochers, senior investment officer for CalPERS’ Private Equity Program, recommended the retirement system get out of the investment because he didn’t believe HEP would achieve its goal of a 20 percent IRR, Pensions & Investments reported in August. CalPERS investment staff earlier this year refused to allow HEP to use already-committed capital and told the firm to find a new partner or face liquidation, P&I reported.

[…]

Besides the growth fund, CalPERS committed $200 million to an HEP fund-of-funds in 2007. The sales process has not included the FoF, which had produced a negative 3 percent IRR and a 0.9x multiple as of March 31.

Read more coverage of the HEP Growth Fund here.

Photo by Hobvias Sudoneighm

Chicago Teachers Pension CIO Takes Job at Kellogg Foundation

There has been a big shakeup at the top of the Chicago Teachers Pension Fund over the last two weeks.

First, the fund announced that its executive director would be resigning.

Now, the fund’s chief investment officer says she will be leaving for another job as director of investments for the W.K. Kellogg Foundation.

From Chief Investment Officer magazine:

Carmen Heredia-Lopez, current CIO of Chicago Teachers Pension Fund, has been tapped to lead the W.K. Kellogg Foundation’s $8.3 billion portfolio.

According to the foundation, Heredia-Lopez will begin her post on December 1, 2014. As director of investments, she will report to Vice President and CIO Joel Wittenberg.

At the Battle Creek, Michigan-based philanthropy, she will be responsible for “driving further development of the foundation’s mission-driven investment strategy and managing emerging diversity-owned firm work and diversified assets,” the foundation said.

[…]

Heredia-Lopez has been at the helm of the $10.8 billion Chicago Teachers Pension Fund since January of 2013. Prior to taking over the CIO position, she served as the fund’s director of investments for two-and-a-half years.

She also worked as an investment analyst at the Illinois Municipal Retirement Fund for more than four years after spending a decade in asset management and investment banking.

The fund’s executive director, Kevin B. Huber, has resigned and his last day at the fund will be December 31.

A search for a new chief investment officer may not start until a new permanent executive director is found.

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