‘Pension Plan’ is going nowhere, so I’m going to try something new: Invest in a private equity fund
The private equity industry has been a major force in the expansion of private equity funds over the past decade, helping to create hundreds of millions of dollars in new private equity investments and creating dozens of new firms each year.
In 2015, the sector added another $10.5 billion in assets to the global private equity market.
But while private equity is a major player in the global finance industry, its presence in Illinois has been limited.
A decade after Illinois began requiring private equity firms to disclose the value of their investment portfolios, it remains largely unknown in the state.
“In my view, private equity has been underfunded for quite a while,” says Brian Woldman, who has worked in private equity since 2000 and co-authored the book Private Equity and State Labor.
“Illinois has been very slow to do something about private equity.”
And with private equity investing at an all-time low, many of Illinois’s state employees aren’t sure what to do with the funds.
The lack of a “private equity plan” has forced some of the state’s top officials, including Illinois Governor Bruce Rauner, to consider options.
And in recent months, private-equity investors have started pouring into Illinois’s public pension funds, which include a number of publicly traded companies.
In March, the Chicago Public Employees Retirement System announced it would start buying out the bonds of a handful of publicly held companies, including two publicly traded private equity companies.
Illinois Public Employees Pension Fund Director Steve Kranz said the fund would be looking for options for funds that have investments in private-market companies.
“We are going to be looking to evaluate whether it’s possible for us to sell some of our investments and put the funds in a state of good financial health,” he said in a statement.
In Illinois, some public pension plans are being forced to sell their investments to private equity.
For example, the Illinois State Teachers Retirement System, which oversees more than $1 trillion in assets, is about to start selling bonds it holds in private companies and in private hedge funds, said spokesman Tom Rochon.
The Illinois Public Service Employees Retirement Board, which manages about $500 billion in debt, will be taking similar action, Rochonsaid.
“The PSEB is taking the necessary steps to protect the financial health of our pension system and to allow the PSEBs investment portfolio to grow,” Rochsaid.
While Illinois has a wealth of private companies in its private equity portfolio, the companies are owned by large corporations and are not publicly traded.
That means that the funds’ investment returns aren’t necessarily indicative of what private equity can achieve, says Roch.
And because Illinois is the largest private-investment state, some of its private-public-sector funds have historically been outperforming their publicly traded counterparts.
And that trend hasn’t gone away.
Private equity has historically outperformed publicly traded equities, but the industry has grown rapidly since the early 2000s.
Private-equacy firms have made a lot of money off of state pension funds and now have billions of dollars at their disposal, said Woldam.
But he said that isn’t necessarily a good thing.
“Private equity is inherently risky,” he told The Verge.
“But it is a good asset for the state of Illinois, because they have the money to invest in those funds.”
Private equity funds tend to be more risk-averse than publicly-traded companies.
So when the private equity boom ended in the early ’90s, many pension funds started losing money.
For some of them, this investment failure became a source of worry for their managers, says Robert H. Schuessler, a professor of finance at the University of Michigan’s College of Business.
“I think it has a chilling effect on the investments that private equity managers are making,” he says.
Private investors can make money on their investments by raising prices, but this usually doesn’t last for very long.
“That’s what makes private equity attractive,” he explains.
“It’s a way for people to make money.”
Private-public funds, like the state pension plans, can be managed by the state or by the companies they invest in.
Private companies tend to have higher capital expenditures than publicly traded firms, which means that if a private-company stock loses money, that could mean a large part of the company’s future assets could be wiped out.
But private-private equity funds can also raise money through dividends or buybacks, which is what many public pension systems are doing.
In some cases, private firms have taken advantage of a state pension fund’s high pension obligations by buying into the fund at bargain prices and then selling the assets when the fund needs to borrow money.
In other cases, the investment company has taken advantage by raising cash from investors, which can then be used to purchase bonds that are sold at lower prices to raise more cash to buy back the