Illinois Teachers Keeps PCG, Seeks New GP Relationships

Note to pension fund advisors: it’s tough to beat an incumbent, even one only on the job a year and racked by turnover.

The $39.7 billion Teachers’ Retirement System of Illinois earlier this month voted to retain PCG Asset Management after deciding in December to make the investment advisor fight for its job. The decision came at the last board meeting of TRS Illinois’ fiscal year, which ends June 30. With the new year beginning soon and an appetite for new relationships, TRS Illinois now has $800 million of fresh capital to put to work, largely in buyout funds, over the next 12 months. The pension board next meets in August.

TRS Illinois hired PCG in May 2006, but a string of defections at PCG last fall prompted TRS Illinois to reconsider the mandate. Ten advisors bid for the job, including chief rival Hamilton Lane. But PCG got to keep the business, in part because of its relationship with the pension fund, said TRS Illinois Chief Investment Officer Stan Rupnick. “We’ve done a lot of work to get integrated with them,” he said.

The victory in Illinois caps a resurgent month for La Jolla, Calif.-based PCG, which also retained the business of 15-year client Oregon State Treasury. Like TRS Illinois, Oregon had voiced worries about the loss of several top PCG professionals, including the departure of its chief liaison with public pension clients. According to a person familiar with the process in Oregon, PCG was essentially tied in merit with its competitors, but incumbent status gave it the victory by a nose. PCG also won two $400 million mandates earlier this year from the California Public Employees Retirement System after CalPERS had expressed its doubts about keeping PCG’s business.

Rupnick, like officials at Oregon and CalPERS, lauded the moves made by PCG to stop the turnover, including the establishment of an independent board of directors and the creation of a plan allowing managers to take ownership stakes in the firm. Earlier this year PCG founder Chris Bower relinquished some control by setting up a legally separate advisory division, PCG Asset Management. Bower now concentrates on overseeing PCG’s direct investment business.

TRS Illinois was “very upset with us back in December,” said David Fann, president and CEO of PCG Asset Management. “We shifted our focus from individuals—people who thought they were rock stars—to more of a team approach.”

At its latest board meeting, TRS Illinois committed $425 million to three buyout funds and one venture fund. It committed $200 million to large market buyout fund Carlyle Partners V; $100 million to distressed debt fund MatlinPatterson Global Opportunities Partners III; $100 million to mid-market buyout fund New Mountain Partners III; and $25 million to Evergreen Partners V, a venture capital fund.

Partly due to the high level of recent distributions, TRS Illinois now has only 4.4 percent of its portfolio invested in private equity. Last year it raised its target allocation to 8 percent from 6 percent, and aims to be at 8 percent by 2010, said Rupnick.

While TRS Illinois has in the past year backed brand names such as Leonard Green Equity Investors and Silver Lake, it will also have room to develop new relationships in the next year, said Rupnick. PCG has helped the pension get access to such firms as J.C. Flowers & Co., New Mountain Capital and Providence Equity Partners.

Also this month, TRS Illinois chose a new senior alternative investments officer from its ranks, Lamar Villere. Villere manages the private equity and absolute return portfolios. He has led the domestic equities team since 2005 for the Springfield, Ill.-based pension, and prior to that was an equity analyst at Morgan Keegan & Co. He reports to Director of Investments Greg Turk.—M.C.