Illinois TRS Changes Investment Policy

After the indictment of a former trustee and an investigation into fees paid to a placement agent, the Illinois Teachers’ Retirement System (TRS) announced last week that it had made several changes to its investment policy.

The retirement system’s board of trustees approved a new policy banning certain third-party payments and mandating that all partnership documents receive legal approval before submission to the board. Plus, any fees allowed must be fully disclosed and approved of by Illinois TRS officials before being submitted to the board of trustees.

The changes are effective immediately and will be formally made part of the pension system’s investment policy at the board of trustees’ next meeting in early November.

The changes came after a federal grand jury in Chicago, investigating alleged corruption associated with the Illinois TRS, handed down indictments in early August against former trustee Stuart Levine and two attorneys (see PE Week, 8/8/05). The three are accused of soliciting kickbacks of hundreds of thousands of dollars from private equity firms seeking investment from the $34 billion pension system.

In a statement delivered by Illinois TRS board President Randy Dunn and Vice President Molly Phalen, the pension fund apologized to its beneficiaries and made assurances that it was cooperating with the investigation and has suffered no financial loss from the alleged crimes.

The grand jury is also investigating the Carlyle Group’s payment of $4.5 million to Robert Kjellander, a lobbyist who helped Carlyle receive a $500 million investment from Illinois TRS. Kjellander is now the Treasurer of the Republican National Committee.

David Rubenstein, Carlyle founding partner and managing director, met with the Illinois TRS board of trustees and said that Carlyle would no longer use placement agents when dealing with the pension system.

Carlyle spokesman Christopher Ullman says that the Washington, D.C.-based private equity firm does not normally use placement agents but decided to use Kjellander’s services to gain access to Illinois TRS. “We approached Illinois Teachers several times and could not gain access and thought that if we used someone who knew them and knew us then it would help,” says Ullman. Carlyle had not used Kjellander’s services before.

Carlyle disclosed Kjellander’s fee prior to investment and neither Carlyle nor Kjellander are accused of any wrongdoing. Carlyle has not been contacted by anyone investigating the Illinois TRS, says Ullman, who adds that the firm would cooperate fully if contacted.

At the same board of trustees meeting, the Illinois TRS approved three private equity commitments:

* The pension system committed $150 million to Apollo Management’s buyout fund, Apollo Investment Fund VI.

* Illinois TRS pledged $100 million to the Warburg Pincus multi-stage venture capital fund Warburg Pincus Private Equity IX.

* And the board also committed $60 million to Welsh Carson Anderson & Stowe’s buyout fund, Welsh Carson Anderson & Stowe X.

Illinois TRS also says it earned 11% on its investments for the fiscal year that ended June 30. Private equity was its best performing asset class with a return of 20.2 percent.