When the politicians make pension PE decisions

I don’t think I’ve seen anything quite as strange as the legislation floating in the Indiana statehouse that could have forced the state’s $46.3bn pension system to shed its private equity portfolio.

It’s quite possible that I, as your intrepid LP reporter, watch more pension board meetings than anyone else in the country. This isn’t something I bring up at dinner parties. But I do think it gives me some insights on private equity’s role in the money used to fuel the retirement of public sector workers.

I don’t think I’ve seen anything quite as strange as the legislation floating in the Indiana statehouse that could have forced the state’s $46.3 billion pension system to shed its private equity portfolio.

How did this happen?

At the start of the year, state representative Ethan Manning introduced a bill following the path of other red states that would effectively ban Indiana Public Retirement System from using ESG as a consideration when making investment decisions. The bill gained traction, quickly gaining approval from a committee and the endorsement of the state’s newly elected state treasurer, Daniel Elliot, who also sits on the INPRS board.

But a few weeks later came an official, non-partisan fiscal review that said the bill “may effectively prohibit investment in private markets (e.g., private equity)” and could reduce the system’s returns by $6.7 billion over the course of the next decade.


The bill was quickly redrafted to allow INPRS’s investment team to incorporate private equity in its portfolio if it is signed into law.

But the topic of private equity still came up at a later hearing on the bill where Manning did not know how much money the system allocates to private equity (a 15 percent target).

“I’m not sure that ESG plays much of a role in private equity to begin with. Those guys just want to make money,” Manning also said.

The reason why I illuminate this is not to discuss the merits of ESG in private equity. It’s to highlight an extreme case of something I see quite a bit, which is policymakers not understanding the potential impacts their political whims may have on pension systems that rely so heavily on generating returns from private funds.

We’re still trying to understand the implications of Florida Governor Ron DeSantis’s push back against ESG on the state pension’s private equity investments. Will the state need to divest from PE funds incorporating ESG considerations, or completely unload its stakes in funds like TPG’s ESG-focused Rise funds? Spokespeople have declined to comment about the details.

It doesn’t matter if it’s someone from the right fighting against “woke” investing or those on the left demanding a pension divest from environmentally hazardous assets. Legislators in America’s statehouses seem to believe divestment – motivated by politics or whatever – is a simple process without considering factors like the nuances of secondaries pricing and the cost that might have on beneficiaries.

The Indiana case may be an extreme example. However, I fear that it’s not. Debates about ESG investing are only going to continue. But will policymakers spend more time to understand the impact of their decisions, especially as it comes to private funds? I think we know that answer.