Illinois Teachers' Retirement System: Private Equity Performance

Cinda Klickna, trustee of the State of Illinois Teachers' Retirement System (TRS), was preparing to vote in June 2019 on a proposed $75 million investment in a new fund being raised by First Light Capital (FLC), a midsized buyout firm. Illinois had been under financial pressure for some time, and TRS, the state's largest public pension, was seriously underfunded. In 2012, TRS's board began a plan to strategically increase its allocations to private equity (PE). By 2018, the target allocation to PE had reached 15%, well above the 10% average of other public pensions. The increase in PE was undertaken in an attempt to close the funding gap necessitated by insufficient state funding and the generally low-interest-rate environment. The strategy had not gone unnoticed, and many now openly questioned the higher risk and costs of these investments. In the face of this greater scrutiny, Klickna believed it was important that the pension's PE investments earn a satisfactory return, by looking to invest in funds that had upper-quartile returns and public market equivalents (PMEs) greater than one.This case is appropriate for courses that cover PE investments, such as those typically covering topics on venture capital or PE, or courses on asset management that include alternative assets. It introduces students to some of the commonly used PE performance metrics and the challenges associated with measuring performance for an illiquid asset class. Students are introduced to the Global Investment Performance Standards (GIPS) and their purposes and limitations in evaluating performance. Students are asked to calculate the gross and net since-inception internal rate of return (SI-IRR), DPI, RVPI, TVPI, and PME for the same pending investment in FLC Fund IV and compare how performance is assessed across these metrics. The case also discusses the push for greater disclosure in the PE industry as it grows in its influence and public investors seek to know more about its performance. Excerpt UVA-F-1952 Jul. 6, 2020 Illinois Teachers' Retirement System, 2019: Private Equity Performance Cinda Klickna, former president of the Illinois Education Association, the state's largest teachers' union, and trustee of the State of Illinois Teachers' Retirement System (TRS), had grown frustrated with discussions about the “new reality” regarding teachers' pension benefits. Over the past decade, the benefits promised to public-sector employees and teachers had come under increased scrutiny as states struggled to meet their fiscal obligations. Illinois had been under financial pressure for some time, and TRS was seriously underfunded. In 2012, the board began a plan to strategically increase its allocations to private equity (PE). By 2018, the target allocation to PE had reached 15%, well above the 10% average of other public pensions. The increase in PE was undertaken in an attempt to close the funding gap necessitated by insufficient state funding and the generally low interest rate environment. The strategy had not gone unnoticed: many now openly questioned the higher risk and costs of these investments. In the face of this greater scrutiny, it was imperative that the fund's PE investments earned a satisfactory return. As a member of the board, Klickna voted on all new investments, and at an upcoming meeting in June 2019, the board was scheduled to vote on whether to invest $ 75million in a new fund being raised by First Light Capital. Klickna believed her role on the board was to advocate for the benefits promised to teachers. In preparing for the upcoming meeting, she would review her understanding of performance assessment in PE and examine the materials for the proposed investment. . . .