Illinois Teachers Spends $720M on PE, Hedge Funds

Pension: Illinois Teachers’ Retirement System

Size: $37.5 Billion (as of June 30, 2011)

PE Investments: $3.6 billion (9.7% of portfolio)

Chief Investment Officer: Stan Rupnik

The severely underfunded Illinois Teachers’ Retirement System has been racing ahead with its plan to increase its private equity and hedge fund investments. At its most recent board meeting, the $37.5 billion fund announced new alternative investments valued at $725 million, including $260 million for private equity and venture capital.

Illinois Teachers pledged $200 million to Leonard Green & Partners’ latest fund, Green Equity Partners VI LP. Leonard Green is well known for its prominent buyouts in the retail sector. The pension also committed $30 million to the latest offering from Trustbridge Partners, Trustbridge Partners IV LP. The fund focuses on Chinese buyouts, particularly in the Internet and health space. Finally, the fund committed $30 million to Longitude Venture Partners II LP, a health-related venture capital fund.

At its current level, Illinois Teachers has only enough money to cover 46.5 of its current and future obligations, among the lowest funding ratios in the nation. If the system were fully funded, it would have $81 billion in assets on hand to serve its 362,000 current and future retired teachers.

Back in April, Illinois Teachers and its new executive director, Richard Ingram, announced plans to increase its allocation to private equity to 12 percent of its portfolio from 10 percent within five years, spending between $900 million and $1.4 billion on private equity in each of the next five years to help make that happen.

As of June, according to David Urbanek, the system’s chief information officer, the pension held $3.6 billion in private equity investments, or 9.7 percent of its total portfolio. The system’s 12 percent target would imply an allocation of $4.5 billion to private equity.

Increasing allocations to alternatives is a common site at pension systems facing funding dilemmas. The potentially higher earnings offered by these investments means less of a burden on strapped state budgets, albeit at greater overall risk.

Yet the increased focus on alternative investments seems to be paying off. During fiscal 2011, which ended in June, Illinois Teachers returned 24 percent, one of the strongest returns among pension nationally. The system’s overall alternative investment target was raised to 34 percent from 29 percent prior to April.

The balance of its $720 million spending spree went to various hedge funds, another area in which Illinois Teachers plans to increase its exposure.