Sudan Restrictions Keep Illinois Out Of TPG

Late last year, Illiniois passed a law preventing the state’s pensions from investing in companies doing business in the Sudan. This past month, the Teachers’ Retirement System of the State of Illinois (TRS) found its hands tied because of the legislation, when the pension was excluded from the most recent fund of Texas Pacific Group (TPG), TPG Partners V.

The law, which became effective at the end of January, requires the divestment of companies doing business with the Sudan—a country that is alleged to be sponsoring genocide in its Darfur region. Federal law already prohibits U.S. companies from doing business there, but the Illinois law goes farther.

Companies found to be doing business with the Sudan can be penalized by the Office of Foreign Assets Control and could be considered sponsors of terrorism. Companies that do not certify under oath that they do not have assets, employees or other ties to the Sudan are forbidden from receiving investments from the state.

The TPG rebuke brings to life TRS’s initial fears when the legislation was first passed into law. The $36.8 billion state pension now hopes that the language of the law can be changed to avoid future conflict with private equity general partners.

TRS Chief Investment Officer Stan Rupnik said that while the efforts of the law are noble, the unintended consequences for private equity need to be addressed.

“The intent of the law is fine,” he said. “The requirements they place on private equity are more onerous than they are for the public market… None of our GPs have a problem with the intent of the law but they have a problem putting their name on the line [that says] they have personal liability.”

Rupnik is confident that a solution can be found that will be satisfactory to TRS’s GPs and still accomplish the divestment that the State of Illinois set out to achieve. “We would like to see modifications so that this will be acceptable to all parties. I think that can be done and still have the desired effect on the Sudan,” he said.

Meanwhile, Illinois TRS Spokeswoman Eva Goltermann noted that while the last legislative effort to change these problematic requirements stalled, there is a possibility that a renewed effort may be underway in the Illinois legislature’s fall session.

TRS learned that Texas Pacific Group, which is targeting $14 billion for the new fund, was excluding the pension about a week and a half prior to its May 19 board meeting. A source close to Texas Pacific Group told Buyouts that the firm simply found the requirements of the Illinois divestment law too burdensome.

Beyond simply divesting investments in companies that do business with the Sudan, the law blocks state money from going to any such businesses in the future and would penalize any investors linked to those investments. Private equity groups would have to certify in legally binding oaths that they and their portfolio companies met the requirements of the Illinois Sudan law.

This has scared off some GPs, especially considering that they’re operating in an increasingly global world where multiple subcontractors and subsidiaries can come attached to even the most simple transactions.

TPG is not the only firm to turn away institutional money due to the onerous restrictions. Adams Street Partners in March told Private Equity Week (Buyouts’ sister publication) that it could not take Illinois pension money in its last fund. The funds of funds investor noted that only one of its 20 general partners would take on the necessary certification measures.

However, other GPs have not been put off by the new law, as TRS has made commitments in Carlyle/Riverstone, Madison Dearborn Partners, Energy Capital Partners and others since February.

Illinois is not the only state that has introduced Sudan divestment legislation. New Jersey, Oregon, Georgia, California, Massachusetts, New York and others have all introduced or passed similar bills. —M.S.