Illinois Defends Doubling Down on PE

Shortly after the heavily underfunded Teachers Retirement System of Illinois announced that it planned to double down on private equity, the man in charge of its portfolio, Greg Turk, said, “We don’t want to reach, stretch right now to try and close that gap. We just want to be prudent with the particular risk we are taking across the fund.”

Illinois Teachers announced June 24 that it planned to spend as much as $7 billion on private equity investments over the next five years. As part of the plan, the pension would commit $900 million to $1.4 billion each year to private equity over the next five years. Already during fiscal 2011, the plan has committed $1.3 billion to the asset class.

Turk, speaking at the Buyouts Chicago conference on June 30, admitted his pension’s “liability structure right now is heavy.” Currently, the $37 billion pension is just 48 percent funded, one of the most underfunded pensions in the United States. Put another way, the pension’s promises to 372,000 members are more than twice the plan’s assets.

Turk’s remarks were made in response to comments made earlier at the Buyouts Chicago conference by Joncarlo Mark, formerly one of the head managers for private equity at the California Public Employees’ Retirement System. Mark said that underfunded pension funds could be taking on unwise risks by jumping more heavily into private equity in a rush to try to narrow their asset-liability gaps.

Yet Turk was optimistic, saying his fund expected to “have a pretty good 300-400 basis point improvement relative to public equities.” Turk said his plan currently allocates about 60 percent of its private equity allocation to buyout funds, and splits the remaining 40 percent between venture capital and “opportunistic” investments.

Illinois Teachers has $3.4 billion of allocated capital in private equity, amounting to 9.1 percent of the pension’s assets. Under the new plan, committed capital to private equity could increase substantially, although the pension’s long-term target allocation would be 12 percent, an increase from the 10 percent private equity target that the pension had until April.

The goal of boosting private equity is part of a “tactical plan” that was laid out by the new head of the Teachers Retirement System, Dick Ingram, who became executive director in January.

In the first three quarters of fiscal 2011, the fund’s private equity portfolio returned 14.5 percent.