The Battle of Illinois: Lawmakers, pension officials square off over PE transparency

  • Illinois bill would open up clawback, management-fee-waiver provisions
  • Position of Gov. former GTCR exec, unclear
  • Pension officials opposed, neutral on bill’s requirements

Private equity firms don’t want the terms they set for public pension investors in the public domain. Neither do pension investment officials. Illinois State Sen. Daniel Biss thinks that’s where they belong.

Unfortunately for Biss, the industry may get its way. A bill he authored to make details of PE-fund agreements entered by Illinois pensions subject to the state’s open-records law is trapped in a House committee as the Illinois General Assembly tiptoes through stopgap measures to address continuing budget woes.

“I just don’t know,” Biss said when asked about HB 6292’s chances of becoming law. HB 6292’s prospects remain frozen until the state assembly reconvenes for a lame-duck session after the Nov. 8 election, he told Buyouts. “It’s not the best time, but every year numerous legislative measures pass in that session.”

Even if the bill clears the Illinois house — hurdling the opposition of certain pension officials — it’s unclear whether Gov. Bruce Rauner would sign the bill into law.

Rauner is a former top executive with private-equity firm GTCR, which counts several Illinois pensions as limited partners. He also raised at least $2.25 million from PE executives while running for governor in 2014.

Rauner’s press office did not respond to several requests for comment.

Biss introduced HB 6292 in May, roughly a year after a public skirmish between investment staffers and board members of California Public Employees’ Retirement System thrust PE fees — and public pensions’ ability to track those fees — into the spotlight.

Since then, state and local politicians, U.S. Sens. Al Franken and Elizabeth Warrenand countless public-pension officials have weighed in on the propriety, complexity and opacity of PE-related fees and expenses.

“I was unaware of it until probably around a year ago,” said Biss, a Democrat representing Evanston. “When I first started reading about [transparency] efforts, and the early stages in California, my first reaction was, ‘What? Huh?’ When I found out the way this works, I just couldn’t believe it.”

The bill

His solution was to craft a bill addressing many of the issues raised by academics and transparency activists, including groups like labor union Unite Here and the Center for Economic and Policy Research.

As drafted, HB 6292 requires PE firms to provide Illinois pensions with annual reports detailing aggregate fees, expenses and carried interest collected by GPs and their affiliates. While many public institutions publish return information relating to individual funds, only a handful detail the amounts GPs amass to that degree of specificity.

Illinois State Sen. Daniel BissThe bill also requires public pensions to disclose specific contract provisions that could influence an investment fund’s return, including details about clawbacks, indemnification provisions and management-fee waivers (see Boxout: The Relevant Provisions). This information is usually included in funds’ limited partnership agreements.

Open-records laws often exempt LPAs, unlike most government contracts. PE firms and LPs consider the specifics of these contracts trade secrets not subject to public disclosure.

Keeping fund contracts secret can improve negotiating leverage for both parties. From a state-pension perspective, it prevents other private-equity firms from seeing where investment staff conceded to GP-friendly terms and fees. By the same token, however, secrecy also keeps beneficiaries from seeing the terms under which portions of their retirement savings are managed.

“When it comes to the LPA stuff, my goal was, ‘look, in most government, the contract the government signs with the entity is public … so the [Freedom of Information Act] exemption is already weird here,’” Biss told Buyouts. He added that he wanted visibility into “things that mattered and were totally above reproach from a FOIA exemption.”

The opposition

Illinois pension officials disagreed, several sources told Buyouts. Staff at the $34 billion Illinois Municipal Retirement Fund  and Teachers’ Retirement System of Illinois balked at the bill’s requirements, arguing that disclosing that level of information could result in state pensions being shut out of top-shelf PE funds.

Reaction among staff at smaller, underfunded Chicago retirement systems was muted or negative, sources said.

“I spoke with one consultant who worked in PE (not under contract with IMRF). He was convinced this would negatively affect IMRF’s opportunities for investing with the best firms,” wrote Louis Kosiba, executive director of IMRF, in an email. “I know Sen. Biss is skeptical and does not believe top PE firms would not turn down money from public plans in Illinois. At IMRF, we believe otherwise.”

Local GPs signaled their opposition through the Illinois Venture Capital Association, a legislative advocacy group that counts Chicago PE heavyweights like Adams Street Partners, GTCR and Madison Dearborn among its members.

“Top-performing VC and PE funds are often oversubscribed and have a choice about which LPs they offer allocations,” IVCA Executive Director Maura O’Hara told Buyouts in an email. “Given the difficult funding situation for almost every Illinois pension fund, we do not believe that Illinois should be leading the charge on the issue of transparency because it will likely result in adverse selection and ultimately lower returns.”

Intricate compromise

Those concerns did not fall on deaf ears. Much as in California, where pension officials successfully lobbied to amend the PE-transparency bill, Biss amended the bill after listening to input from Illinois Teachers’ and IMRF officials at a hearing in late May.

Their commentary led to a compromise in which pension staff would have some say in crafting the mechanism for disclosure. HB 6292 would still require state pensions to release information relating to clawbacks, management-fee waivers and indemnification provisions, but the method by which they adhere to those requirements will hinge on the findings of a new Investment Transparency Task Force.

The task force, composed of representatives from each public retirement system and a variety of state appointees (see Boxout: The Task Force), would have until Jan. 15, 2018, to identify best practices and create a policy for disclosing relevant sections of LPAs.

“If the task force designs a policy, and if the pension funds adopt that policy, and if the legislature doesn’t pass a bill disapproving of that policy, that becomes a rule,” Biss said. Essentially, the bill’s original requirements would stand regardless of the task force’s findings.

Furthermore, the new amendment also introduced a solution for complying with the bill’s fee-reporting requirements: adoption of the reporting template published by trade group Institutional Limited Partners Association. 

ILPA created the template with input from GPs, LPs and service providers in an effort to standardize the way firms disclose management fees, expenses and other investment-related charges collected by their affiliates. So far, Chicago Teachers’ Pension Fund is the only Illinois retirement system to publicly announce its support for the template, though Illinois Teachers’ is said to be considering adoption as well.

The formation of the task force and inclusion of the ILPA template seemed to ameliorate at least some opposition to the bill, sources said.

“That seemed a reasonable compromise. So, IMRF dropped opposition and has taken a more neutral course,” Kosiba said. Like many LPs, however, Kosiba wants disclosure and reporting standards to come from the SEC rather than state law. “The answer is for the SEC to promulgate uniform rules, creating a level playing field,” he wrote.

Similarly, Illinois Teachers’ staff also appears to be putting its faith in national efforts pushed by groups like ILPA, having endorsed the new template on Aug. 29, according to spokesman David Urbanek. He wouldn’t say whether the retirement system reversed its initial opposition to HB 6292.

“We get information from the partnerships now, and that information is fine for our purposes,” Urbanek said, adding that pension officials didn’t want to interrupt ongoing transparency efforts organized by ILPA. “One of the things we don’t want to see in the state legislation is anything that would undermine what’s going on at the national level.”

So far, the SEC hasn’t moved to create a single set of disclosure standards.

According to Urbanek, Illinois Teachers’ remained in conversations with Biss regarding the contents of the bill. Biss disputed that and said the amended version awaiting approval from the Illinois House of Representatives could not be amended. Urbanek declined further comment.

Illinois State Board of Investment, a $15.4 billion pension system that doubled its targeted exposure to PE earlier the year, did not respond to requests for comment.

“There’s a lot of work to be done with the LPs here, saying, ‘hey, I’m your friend here,’” said Biss, describing his efforts to work with the pensions. “Figuring out these fees is somewhere between difficult and impossible, and it’s definitely your job.”

Boxout: The Relevant Provisions

HB 6292 would put three key fund terms in the public domain.

  • Clawback: The mechanism limited partners use to reclaim profits collected by GPs early in a fund’s life that ultimately doesn’t provide investors with their promised 80 percent of profits.
  • Management-Fee Waiver: Rather than commit their own capital to a fund, some PE managers will instead waive management fees paid by their investors in exchange for a priority allocation of carry.
  • Indemnification: The contract provision that explains how GPs and LPs will be compensated in the event of judgments, settlements or other losses.

Boxout: The Task Force

The Investment Transparency Task Force would include representatives from each of the following:

  • Executive director (or designee) of each public retirement system
  • The director of Illinois State Board of Investment
  • One person appointed by each of the state’s four legislative leaders
  • State Treasurer (or designee)
  • One person representing the interests of external managers, appointed by the state treasurer
  • One person representing the interests of public retirement system beneficiaries, appointed by the state treasurer
  • On person representing the interests of Illinois taxpayers, appointed by the state treasurer

Action Item: To read HB 6292, and its relevant amendments, visit