Illinois public pension systems soon may be required to sell off their private equity holdings, due to a state ban on public investment in any companies that do non-humanitarian business in Sudan.
The restrictions were signed into law in May 2004 by Gov. Rod Blagojevich, but didn’t begin receiving attention in the private equity community until such groups as the Illinois Teachers’ Retirement System (Illinois TRS) informed general partners earlier this year.
“We sent letters to all of our private equity partnerships in January, with information about the new law and asking whether they can comply,” says TRS spokeswoman Eva Goltermann. “We have many concerns about implementation of the law… and it is conceivable that we might have to divest.”
The law is designed to put pressure on Sudan to end its alleged sponsorship of the genocide in Darfur.
Federal regulations already prevent U.S. companies from directly doing business with Sudanese companies, but the Illinois law goes further by preventing investment in companies that do business in Sudan, including those based outside the United States.
“This legislation hits the Sudanese government where it counts – in the pocketbook,” State Senator Jacqueline Collins said in a statement. “We are bringing the pressure to bear on an unjust and malicious government to end its policy of genocide and terrorism. Hopefully, our actions will be the pebble that starts an avalanche of reform.”
Illinois TRS, for example, has transferred about $2.4 billion in commingled index funds into specialized funds, and has hired a Boston-based consultant to compile a list of banned companies.
But handling its private equity portfolio is more difficult, in large part because many general partners have indicated an unwillingness to sign the agreement. It’s not necessarily the law’s intent to which the GPs object, but rather the paperwork and potential liability that has them balking.
All general partners receiving Illinois money first will be required to sign certificates under oath that they will not invest in Sudanese companies, or in companies that do business in Sudan.
Next, they must receive sworn affidavits from portfolio company CEOs. Even if both of these requirements are met, any violation would result in liability and an inability to call down capital commitments from Illinois institutions.
Some Illinois politicians have suggested amended language that would say “to the best of a manager’s knowledge…” But Sen. Collins and others believe that such amendments would remove the law’s teeth.
Bon French, CEO of Chicago-based fund-of-funds Adams Street Partners, says that his firm couldn’t take Illinois pension money in its last fund, because only one of its 20 underlying general partners would sign the certificate.
“If the Illinois legislature were willing to have best efforts language, then everyone would sign, but from everything I can see, the Illinois legislature is not going to change anything,” French says.
French says that further complicating the matter is that there is no outside third-party source to verify if private companies are in compliance.
“So, the entire compliance burden falls to the private equity managers, which is a lot more difficult than it might at first appear,” he adds.