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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.1 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
$75 million 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.2 In preparing for the upcoming meeting, she would review her
understanding of performance assessment in PE and examine the materials for the proposed investment.
Background on Disclosure
The first instance of public interest in PE investment returns arose during the 1992 US presidential election
with the candidacy of Ross Perot, whose federal election filing included 250 investments in various PE funds.
After that, a few companies attempted to gain access to fund returns through Freedom of Information Act
(FOIA) filings, largely with the intent of gathering the information to sell for commercial purposes. Those
attempts were frustrated, and it wasn’t until 1996, when a potential conflict of interest arose between Tom
Hicks, a University of Texas regent, and Austin Ventures, the largest venture-capital (VC) fund in Texas, that
concerns about disclosure were raised again. Hicks was a partner in Austin Ventures, and speculation centered
on whether the University of Texas Investment Management Company’s (UTIMCO’s) investment managers
were improperly influenced in directing endowment funds to Austin Ventures. Initially, UTIMCO resisted the
pressure to disclose performance information, but then, following the Enron scandal in 2000, UTIMCO
reversed course and disclosed internal rates of return (IRRs) on the funds held in its PE portfolio. The
UTIMCO case gained notice, and following this, in October 2002, the San Jose Mercury News sued the California
Public Employees’ Retirement System (CalPERS) for similar information.
1
2
Stephanie Banchero, “States Faulted over Teacher Pension Shortfall,” Wall Street Journal, December 13, 2012.
Cinda Klickna, “Guest Column: Facts Often Ignored in Coverage of Public Employee Pensions,” Rock River Times, July 10–4, 2012.
This public-sourced case was written by Susan Chaplinsky, Tipton R. Snavely Professor of Business Administration. It was written as a basis for class
discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright  2020 by the University of Virginia Darden
School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an email to sales@dardenbusinesspublishing.com. No part of this publication
may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—
without the permission of the Darden School Foundation. Our goal is to publish materials of the highest quality, so please submit any errata to
editorial@dardenbusinesspublishing.com.
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CalPERS, the largest pension fund in the United States, had, like many pension funds, increased its PE
investments throughout the 1990s and, by September 2002, had $20.5 billion invested in PE. Although
CalPERS had a reputation as a leader in corporate governance and disclosure practices, it did not welcome the
Mercury News lawsuit. Unlike UTIMCO, CalPERS was not accused of any potential conflicts, and it feared that
investors generally familiar with evaluating public-sector investments would find it difficult to comprehend PE
returns. While such returns could be computed mechanically, they had little reliability—especially early in a
fund’s life. For these reasons, CalPERS refused the newspaper’s request.
Undaunted by CalPERS’s refusal, the Mercury News pursued its lawsuit, arguing that, over the course of the
past decade, PE funds had opened to entities with public-reporting responsibilities, thereby inviting more
disclosure. David Yarnold, executive editor of the Mercury News, remarked, “It’s the height of arrogance to say
to the people whose money you’re investing that they’re not smart enough to understand performance results.”3
Having heard both sides, in late November 2002, the court ruled against CalPERS, and required it to
disclose the IRRs and other basic information on its PE funds.4 The court, however, stopped short of requiring
that the individual portfolio company holdings within each fund and their associated values be made public.
These were ruled “trade secrets” and could remain private. Rather than appeal the decision, CalPERS chose to
comply with the court’s decision and, ever since, had reported the required information about its PE
investments (see Exhibit 1 for a sample of its disclosures).5
In the aftermath of the global financial crisis of 2008, the level of systemic risk of the financial sector—and
the inability of regulators to detect it—was a major focus of the Dodd-Frank reforms of 2010.6 Because PE
fund investments could involve high levels of leverage, the US Congress believed these investments had
contributed to systemic risk and the fallout from the crisis. As part of the reforms, PE funds (but not venture
funds) with assets greater than $150 million were required to register with the US Securities and Exchange
Commission (SEC).7 As a byproduct of this, the SEC was authorized to investigate the practices of PE firms
on behalf of investors. In 2014, Andrew Bowden, head of compliance at the SEC, outlined several areas of
regulatory focus for the PE industry.8 These included the lack of transparency around fees, expenses, and
concerns about valuation, especially interim valuations and their role in fundraising. In the wake of the SEC’s
interest, FOIA requests proliferated, seeking greater disclosure from public pensions about their PE
investments under state open-record laws.
The View of General Partners (GPs)
As might be expected, GPs had a generally negative view of the trend toward increased disclosure. On one
hand, they understood limited partners’ (LPs’) need to evaluate fund performance, but were less comfortable
with the broader dissemination of this information to the public. Limited Partners Agreements (LPAs) typically
3 “Not-So-Private Equity,” Institutional Investor, July 31, 2002, https://www.institutionalinvestor.com/article/b15135qxcjg9c6/not-so-private-equity
(accessed Jun. 25, 2020).
4 San Jose Mercury News v. California Public Employees Retirement System, Superior Court of California, November 6, 2002; “Calpers Settles Lawsuit
over Performance Data,” Wall Street Journal, December 19, 2002.
5 An example of CalPERS’s disclosure for its AIM program can be found at “Private Equity Program Fund Performance Review,” CalPERS,
September 30, 2019, https://www.calpers.ca.gov/page/investments/asset-classes/private-equity/pep-fund-performance (accessed Nov. 21, 2019).
6 The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, H.R. 4173 (2010), was signed into federal law on July 21,
2010.
7 Whereas the earlier disclosure requirements applied to all PE funds, the Dodd-Frank reporting requirements exempted VC funds in the belief that
their low leverage did not raise concerns about systemic risk.
8
Andrew J. Bowden, “Spreading Sunshine in Private Equity,” US Securities and Exchange Commission, May 6, 2014,
https://www.sec.gov/news/speech/2014--spch05062014ab.html (accessed Nov. 21, 2019).
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prohibited LPs from disclosing the information GPs had provided without their permission. In response to
recent lawsuits over reporting practices, KKR and the Carlyle Group (Carlyle) contended that the disclosure of
such information would cause “substantial competitive harm.” They also noted that confidentiality allowed
GPs to more extensively share information on fund performance with LPs. Carlyle’s legal counsel pointedly
noted, “These are voluntarily negotiated agreements between sophisticated investors advised by skilled legal
counsel.”9
GPs also had concerns that PE performance could only be reliably measured at the end of a fund’s life and
that interim valuations could be misleading. The basic concern revolved around the J-curve phenomenon of
PE returns (Exhibit 2). In the initial years, investment returns were negative, owing to management fees—
which were frequently drawn on committed capital—and underperforming investments that were identified
early and written down. Over time, the value of the investments was expected to rise above their original cost,
resulting in unrealized gains. In the final years of the fund, the higher valuations of the investments would be
realized by the partial or complete sale of the companies. Therefore, in the initial years of the fund, performance
was expected to be negative, and it was only at the end of the fund’s life that an accurate judgment of
performance could be rendered. Reporting of interim returns could lead to short-term performance
expectations, which worked against the long-term perspective and patience necessary to cultivate these
investments.
Further, private and public market valuations would always remain somewhat of an “apples to oranges”
comparison. No amount of additional market data or benchmarking could translate a private valuation into a
public market valuation. PE firms already devoted considerable effort to valuing their assets as accurately as
possible. To accomplish this, they regularly employed third-party firms and auditors to verify their valuations.
By its very nature, PE was an asset class in which judgment about valuation played a significant role.
A final argument against greater disclosure was that, as the information flow became more efficient, the
returns to the asset class could be jeopardized. Disclosing certain data “could undermine a fund’s ability to
invest and generate high returns for its LPs,” said Steve Judge, an industry spokesman.10 Transparency taken to
its logical conclusion might lead to market returns and commoditize the asset class.
The View of LPs
LPs also shared the GPs’ concern that performance metrics might be less accurate before the end of a
fund’s life and that, inevitably, investors would compare the interim returns to public equities with potentially
misleading results. On the other hand, LPs believed that GPs sometimes too quickly dismissed their concerns
about poor returns, and about high and hidden fees. A chief complaint of LPs was the growth in fund size that
had increased the amount of GP compensation coming from fees—as fees grew larger, it diminished the
alignment of interests from carried interest. Greg Turk, director of investments at TRS, said, “We want GPs to
earn their money, which means from carried interest. That helps them and us. Fees don’t help us.”11 GPs also
frequently charged monitoring, consulting, and transactions fees, which were often less clearly defined as to
how they were determined and paid. TRS, like other large institutional investors, was increasingly scrutinizing
fees and other provisions of LPAs to create greater alignment of incentives, and was trimming the number of
its investment managers to focus on better-performing funds.
Gretchen Morgenson, “Behind Private Equity’s Curtain,” New York Times, October 19, 2014.
Mark Maremont and Mike Spector, “Buyout Firms Push to Keep Information Under Wraps,” Wall Street
https://www.wsj.com/articles/buyout-firms-push-pension-funds-to-keep-information-under-wraps-1415142588 (accessed Nov. 21, 2019).
11 Author interview with Greg Turk, March 1, 2013.
9
10
Journal,
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In the aftermath of the CalPERS decision, in 2003, Sequoia Capital had barred the University of Michigan
from its next fund, citing concerns about public disclosure. Fearing that the pressures for more disclosure might
result in a lack of access to PE, some states, including Illinois, had granted state pensions an exemption from
public open-record laws.12 Nonetheless, the sheer growth in PE assets had resulted in continued FOIA requests
and lawsuits over PE fund practices. LPs wanting to maintain access to GPs sometimes found themselves being
asked to violate open-record laws to prevent the further disclosure of information to the public. Many state
pension managers chose to comply with GP requests to keep information private, but there was an increasingly
uneasy truce between the public’s push for greater disclosure and public pension funds’ desire to maintain GP
relationships.
Performance Measurement
Industry reporting standards were shaped by a set of broad voluntary guidelines called the Global
Investment Performance Standards (GIPS). The guidelines were designed to promote transparency and
consistency in the reporting of information and metrics around the principles of fair market value.13 Because
investors’ asset choices spanned many regions and countries, investors desired a common basis of information
and metrics to compare investments.
The main PE performance metric required by the GIPS guidelines was the annualized since-inception
gross-of-fees and net-of-fees internal rates of returns (SI-IRRs).14 To account for differences in economic
conditions over time, returns were calculated by vintage year (VY)—typically the year of the fund’s first capital
call. Gross-of-fees returns were the GPs’ return on invested capital. Net-of-fees returns were the LPs’ return,
net-of-management fees, and carried interest.15 Because TRS was an LP in many PE funds, it focused on net
returns and in narrowing the spread between gross and net returns.
In addition to the SI-IRR, funds were required to report several other metrics, including the following:

PIC = Paid-in capital to date ÷ committed capital. PIC measured how much capital cumulatively had
been drawn down to date.

DPI (also referred to as the realization ratio) = cumulative distributions ÷ paid-in capital. DPI
measured how much of a fund’s return had been returned (distributed) to investors.

RVPI = NAV after distributions (residual value) ÷ paid-in capital. RVPI measured how much of a
fund’s return was unrealized.

TVPI (also referred to as the investment multiple) = total value ÷ paid-in capital. TVPI was the sum
of DPI plus RVPI.
The additional metrics were required to better understand of the components of PE performance. Because
DPI was based on actual distributions (cash), LPs tended to put more weight on it in assessing performance
compared to RVPI, which depended on the GPs’ assessment of the assets’ potential value. As more of the
fund’s assets were liquidated and RVPI approached zero, performance was more accurately measured.
As of 2008, 13 states, including Illinois, exempted their pension plans from disclosing financial performance.
The industry started discussions about voluntary disclosure guidelines in 2005 and codified them in 2010. In 2018, the first major revision of the
GIPS standards was undertaken to take effect January 1, 2020. As of 2018, the GIPS standards had been adopted by 1,711 asset managers in more than
40 countries.
14 For additional information on the GIPS guidelines and discussion of PE performance metrics, see Susan Chaplinsky, “Assessing Private Equity
Performance,” UVA-F-1895 (Charlottesville, VA: Darden Business Publishing, 2019).
15 Gross SI-IRR was the fund’s return based on invested capital (i.e., contributed capital minus management fees) and the total distributions prior to
consideration of carried interest. Net SI-IRR was based on contributed capital (which included fees) and the distributions to LPs after any carried interest
(or other significant expenses) paid to GPs.
12
13
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In addition to these, many funds and benchmarking services had begun to report a public-market equivalent
(PME). The PME basically converted the investment outlays of a PE fund into an equivalent investment in a
public-market index and tracked how that investment would have performed over a comparable time period
(Exhibit 3). PMEs greater than one indicated that the PE fund had been able to create more wealth for its
investors compared to an equivalent investment in public equities. Similar to other performance metrics, PME
was most accurate in its assessment of performance for fully liquidated funds and therefore was less valuable
in assessing interim fund performance. The GIPS guidelines did not require the use of PME, but if the firm
chose to report it, the benchmark index was required to be disclosed.
The Situation at TRS
Since the global financial crisis, public pensions had grappled with how to achieve their targeted investment
returns in a low-interest-rate environment. As the industry looked ahead, it was not clear what mix of assets
might best achieve the 7.0% to 8.0% investment returns that most public pensions targeted. The median 10year annualized return to public pensions was 6.7%, with wide variation, but that was notably below the targeted
returns.16
In a bid to close this performance gap, from 2008 to 2018, state pensions had reduced their exposure to
public equities by 9.3% and fixed income by 3.9%, and shifted 4.6% of those funds to PE and 7.0% to real
assets (Exhibit 4). As a result, public pension funds had become the largest single investor in PE, with some
$500 billion committed globally to the asset class. PE had taken on greater importance because many pensions
were cutting back on investments in hedge funds, another large category of alternative assets, due to their high
fees and generally poor recent performance.17 Two recent studies suggested that public pensions’ PE
investments had outperformed public equities by a margin of about 2% to 4% annually (Exhibit 5).
Before Cinda Klickna joined the board, TRS approved a tactical plan in 2012 to increase its PE allocations
from 10% to 12% of total assets, and since then had further increased it in 2018 to 15% over the next five years
(Exhibit 6).18 The 15% target was higher than the 10.2% average PE target allocation of other public pension
plans.19 According to Turk, 15% was TRS’s maximum allocation to PE. Although the fund conceivably could
go higher, at that point, the cumulative holdings of PE, private debt, and real assets would reach the limits of
illiquidity the fund could prudently manage.20 The biggest impediment to pushing PE allocations higher was
the lack of insight into what might happen if the industry “unraveled.” Turk explained, “The last recession in
2007–08 was a quick one, literally the economy was bailed out, but if it had lasted longer it would have had
severe consequences.” As of June 30, 2018, TRS had $6.8 billion out of $52 billion invested in PE, and the
15% target would require new commitments to PE of roughly $1 billion per year through 2022.
TRS employed a team of 15 investment professionals to manage its assets, some six of whom were
dedicated to the PE portfolio. Years earlier, TRS had outsourced all back-office aspects of managing the PE
portfolio to Torrey Cove, an investment adviser, which left the staff to search for the best funds and manage
the portfolio. Its underfunded status, however, sometimes made it harder for TRS to obtain allocations from
the best funds, which could be highly selective about their investors. It had fewer reserves compared to betterfunded plans and, in the event of an economic downturn, could face greater liquidity pressures.
“Public Pension Study, July 2019,” American Investment Council.
Dan Fitzpatrick, “Calpers Pulls Back from Hedge Funds,” Wall Street Journal, July 23, 2014, https://www.wsj.com/articles/calpers-pulls-back-fromhedge-funds-1406156915 (accessed Jun. 3, 2020).
18 Tom Carr, “TRS Approves a New 12 Month Tactical Investment Plan for its Private Equity Portfolio,” Preqin, June 28, 2011,
https://www.preqin.com/insights/research/blogs/trs-approves-a-new-12-month-tactical-investment-plan-for-its-private-equity-portfolio
(accessed
Jun. 3, 2020).
19 “2019 Wilshire Consulting Report on State Retirement Systems: Funding Levels and Asset Allocations,” Wilshire Associates, March 2019.
20 Author interview with Greg Turk, November 8, 2019.
16
17
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TRS’s PE portfolio consisted of 193 partnerships, including co-investments and privately held debt. It
allocated 80% of its PE investments to corporate finance (buyout and growth equity funds), 10% to VC, and
10% to special situation/distressed debt. The heavier weighting toward buyout funds reflected the fact that
given TRS’s size, many VC funds were too small for it to receive meaningful allocations. Further, it was easier
to evaluate the potential of buyout-fund investments because they were more tangible compared to the
“concepts” of venture funds. In the current investment climate, TRS was targeting top-tier middle-market
buyout funds between $500 million and $1.5 billion for maximum allocations and scaling back allocations to
mega-buyout funds. Turk had become concerned about the large size of mega-buyout funds and the high
multiples at which they were deploying capital.
TRS attempted to earn a 7.0% overall return on its portfolio, and this target had proven difficult to achieve
consistently (Exhibit 7). For fiscal year (FY) 2018, the overall return on its portfolio had been 8.5%, and 8.3%
and 6.2% over the past 5 and 10 years, respectively. At its current value of $52 billion, TRS was funded at 40.7%
of its projected liabilities, among the lowest of state pensions (Exhibit 8).
While noting that part of TRS’s underfunding stemmed from a chronic lack of state funding, the advisability
of investing more in alternative assets had begun to be openly questioned. An investigative report by Crain’s
Chicago Business found that TRS allocated roughly a third of its portfolio to PE and hedge funds. It cautioned
that these investments “dangle the potential for higher returns, but only because they carry greater risks and
fees...Gunning for bigger returns exposes the plan to the possibility of bigger losses, further jeopardizing the
pensions of 362,121 former and current teachers.”21 All told, TRS had paid $353 million in fees to external
investment managers in 2018. Increasingly, Turk found himself being asked why more assets weren’t being
allocated to public equities in light of their recent strong performance and lower fees. Others suggested that
pensions were ignoring the competition among PE firms attempting to put record amounts of funds to work,
driving valuations up and prospective returns down. Even David Rubenstein, legendary cofounder of Carlyle,
cautioned, “I would say that the economics of private equity will never be as great as it was 20 years ago.”22
Investment in First Light Capital Fund V
Under consideration at the next board meeting was a $75 million commitment to First Light Capital, LLC
Fund V, a $1.25 billion fund that specialized in midsize buyouts of US market companies. To date, First Light
had raised four funds: the two most recent, Fund III (2006 VY) was nearly fully realized, and Fund IV (2012
VY) was partially realized. Exhibit 9 provides performance data for Funds III and IV. TRS benchmarked its
performance relative to the Russell 3000 Index, a broad-based index of the largest 3,000 companies that
comprised 98% of the investable US equity market. To reflect TRS’s performance expectations that PE provide
superior performance to public equities, it chose to add a 3% premium to the public market benchmark, which
had a beta of one.23 From these data, the GIPS performance metrics could be computed for Fund IV to help
assess the proposed investment in Fund V.
21 Lynne Marek, “Pension Peril,” Crain’s Chicago Business, December 17, 2011, http://www.chicagobusiness.com/article/20111217/
ISSUE01/312179972/pension-peril-illinois-trs-goes-higher-risk-with-investments#ixzz2J1mF32tJ (accessed Jun. 3, 2020).
22 John Authers, “Pensions’ Shift into Private Equity Ignores Risks,” Financial Times, August 26, 2016.
23 Methodically, it was problematic to estimate beta for an illiquid asset class. Several studies that attempted it found the betas of buyout funds ranged
from 1.3 to 1.7, while the betas of VC investments ranged from 1.6 to 3.2.
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Decision
Although the performance of TRS’s PE portfolio had exhibited some variation, the board and Klickna had
been generally supportive of increased allocations to PE. The pensions of state teachers were paid from the
monies the state and teachers contributed to TRS and the investment returns on the pension assets. Klickna
would continue to push the state to improve its pension funding and, in the meantime, seek to ensure that TRS
met its performance goals. In her mind, this meant that TRS should generally look to invest in funds that had
upper-quartile returns and PMEs greater than one. The former high school English teacher from Rockford,
Illinois, believed there were—in the words of the poet Robert Frost—“promises to keep” in meeting teachers’
pension obligations.
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CalPERS Disclosed Performance for Selected Private Equity (PE) Funds
Illinois Teachers’ Retirement System, 2019: Private Equity Performance
Exhibit 1
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2015
2015
Onex Partners IV, L.P.
Patria Brazilian PE Fund V
Siris Partners III, L.P.
$75
$150
$300
$500
$400
$800
$500
$300
$100
$100
$200
$60
$520
$47
$127
$100
$72
$54
$293
$578
$479
$966
$527
$286
$93
$96
$197
$60
$945
$607
$866
$47
$127
$100
$129
$100
$41
$0
$36
$255
$489
$920
$406
$365
$151
$48
$266
$12
$1,207
$1,079
$1,218
$134
$219
$83
$227
$217
$87
$67
$313
$824
$793
$1,315
$837
$801
$226
$112
$332
$44
$1,413
$1,178
$1,228
$139
$219
$93
$228
$217
11.5% 1
14.9% 1
2.6%
13.80%
13.8%
11.1%
13.1%
25.4%
20.8%
3.30%
9.0%
−4.6%
10.7%
18.8%
8.3%
22.7%
26.6%
−1.2%
29.3%
24.7%
1.2× 1
1.2× 1
1.1×
1.4×
1.7×
1.4×
1.6×
2.8×
2.4×
1.2×
1.7×
0.7×
1.5×
1.9×
1.4×
3.0×
1.7×
0.9×
1.8×
2.2×
Trident VII, L.P.
2017
$270
$187
$2
$210
13.3% 1
1.1× 1
Data source: “Private Equity Program Fund Performance Review,” CalPERS, September 30, 2019, https://www.calpers.ca.gov/page/investments/asset-classes/private-equity/pep-fund-performance
(accessed Nov. 21, 2019).
2013
2014
KKR Asian Fund II L.P.
2012
2010
Advent Latin America Private Equity Fund V-H L.P.
Cerberus Institutional Partners V, L.P.
2009
Khosla Ventures III, L.P.
2012
2009
2011
2008
TPG Partners VI, L.P.
Khosla Ventures Seed, L.P.
Blackstone Capital Partners VI L.P.
2007
Silver Lake Partners III, L.P.
Blackstone Tactical Opportunities
2006
Apollo Investment Fund VI, L.P.
2011
2005
Insight Venture Partners V, L.P.
2011
2004
Permira Europe III
Hellman & Friedman Capital Partners VII
$825
2003
California Community Venture Fund
Francisco Partners III, L.P.
$480
2001
Bridgepoint Europe II ‘A’ LP
$138
2001
$75
Vintage Year (VY) Capital Committed Cash In Cash Out Cash Out and Remaining Value Net IRR Net Investment Multiple
KKR European Fund, L.P.
(in millions of US dollars)
FUND
As of June 30, 2019, CalPERS had $27 billion invested in PE out of $354 billion in 260 funds. The since-inception net internal rate of return (IRR) was 10.8%, and the
net multiple was 1.5× on its PE investments.
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Exhibit 2
Illinois Teachers’ Retirement System, 2019: Private Equity Performance
The J-Curve Phenomenon of PE Returns
Source: “The J-Curve PE,” posted to public domain under Creative Commons (CC BY-SA 3.0) by “Urbanrenewal,” December 12,
2001, https://en.wikipedia.org/wiki/File:The_J-Curve_PE.png (accessed Jun. 17, 2020).
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0
1
2 100
3 50
0
4
0
5
0
6
0
7
0
8
0
9
250
0 100
C
0
0
0
0
150
0
50
0
300
0
500
TVPI
D
0
(100)
(50)
150
0
50
0
300
120
(100)
Net CFs
120
120
2.5×
IRR 18.1%
NAV
Panel A: CFs of PE Fund
113%
113%
128%
166%
185%
183%
201%
240%
225%
100%
Index
12.78%
0.00%
13.41%
29.60%
11.39%
-0.73%
9.54%
19.42%
-6.24%
0
199
88
0
0
0
0
0
0
512
PME
225
Panel B: Kaplan-Schoar PME
Year-overYear
Returns
FV(C)¹
Calculation of Public Market Equivalent (PME)
Illinois Teachers’ Retirement System, 2019: Private Equity Performance
Exhibit 3
0
0
0
203
0
61
0
281
120
666
1.3×
0
FV(D)
Source: Author analysis.
¹ FV indicates future value of CF at year-end 2018.
Note: Cash Flows (CFs) of PE fund are made up of LP Contributions, that is, capital calls (C), net Distributions (D), and the remaining NAV taken as a liquidating dividend, net of fees and
carry. CFs for PME calculations are benchmarked relative to the S&P 500 Index.
2011
2012
2013
2014
2015
2016
2017
2018
Totals
2010
Dec. 31,
2009
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Exhibit 4
Illinois Teachers’ Retirement System, 2019: Private Equity Performance
Changes in State Pensions’ Asset Allocations
Changes
08–18
-8.8%
-0.5%
4.6%
Equity
US equity
Non-US equity
Private equity
Equity subtotal
2008
38.1%
18.8%
5.6%
62.5%
2013
28.2%
20.4%
9.2%
57.8%
2018
29.3%
18.3%
10.2%
57.8%
Total fixed income
27.6%
23.7%
23.7%
-3.9%
Total real assets
5.9%
7.2%
12.9%
7.0%
Other
4.0%
11.2%
5.6%
1.6%
Data source: “2019 Wilshire Consulting Report on State Retirement Systems: Funding Levels and Asset
Allocations,” Wilshire Associates, March 2019, 6.
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Exhibit 5
Illinois Teachers’ Retirement System, 2019: Private Equity Performance
Public Pensions’ PE Performance versus Public Equities
20-state composite
PE benchmark
Excess return
PE composite
PE benchmark
Excess return
Annualized Returns
Fiscal Years
Bull
Bear
2002–16
Markets*
Markets*
10.2%
17.3%
−7.6%
5.8%
14.2%
−14.1%
4.4%
3.1%
6.5%
9.7%
5.8%
3.9%
16.9%
14.2%
2.7%
−7.8%
−14.1%
6.3%
Standard
Deviation
14.3%
16.8%
13.7%
16.8%
The 20-state composite is a composite of 20 state pension systems managing PE portfolios over the entire 15 fiscal years, and
the PE composite is a composite of 46 state pension systems managing PE portfolios over all or part of the study.
* Bull markets are defined as occurring in fiscal years 2004–07 and 2010–16. Bear markets are defined as occurring in fiscal
years 2002–03 and 2008–09.
PE benchmark is weighted 70% to the Russell 3000 Index (6.1% annualized return) and 30% to the MSCI All Country World
Investable ex USA Index (5.0% annualized return).
Data source: “An Examination of Private Equity Performance among State Pensions: Evidence for a Systemic Asset Allocation
Underweight,” Cliffwater Research, August 10, 2017.
Median 10-Year Annual Returns for US Public Pensions
This study analyzed the portfolios of 165 US public pensions. Data
through June 30, 2018.
Data source: “Public Pensions Study—2019,” American Investment
Council, July 2019.
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Exhibit 6
Illinois Teachers’ Retirement System, 2019: Private Equity Performance
TRS’s Strategic Investment Allocation Targets versus Total Assets
Public equity
Private equity
Real estate (opportunistic)
Total Equity
Total
Fund
$18,511.6
$6,792.6
$1,445.5
$26,749.7
Actual
Percent
35.9%
13.2%
2.8%
51.9%
Interim
Target
36.0%
12.0%
3.0%
51.0%
Long-Term
Target
34.0%
15.0%
5.0%
54.0%
Real estate (core–value add)
Other real assets
Total Real Assets
$5,790.6
$1,253.7
$7,044.3
11.2%
2.5%
13.7%
11.0%
4.0%
15.0%
11.0%
4.0%
15.0%
Total Diversifying Strategies
$5,864.1
11.4%
13.0%
14.0%
Global fixed income
Short term
Total Income
$10,692.0
$1,181.1
$11,873.1
20.7%
2.3%
23.0%
20.0%
1.0%
21.0%
17.0%
0.0%
17.0%
$539.7
N/A
N/A
N/A
$52,070.9
100%
100%
100%
Pending settlement/expenses
Total TRS Fund
Data source: TRS, “Comprehensive Annual Financial Report, for the Fiscal Year Ended June 30, 2018,” 2018.
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Exhibit 7
19.0%
18.2%
13.3%
14.8%
8.5%
7.8%
Private Equity
Russell 3000 Index + 3.0%¹
Equity—US
Russell 3000 Index
Equity—International
MSCI All Country World ex USA Investable Index
22.0%
20.4%
20.0%
18.5%
17.4%
22.0%
2017
12.6%
11.4%
-9.5%
-9.6%
-1.5%
2.1%
1.0%
5.2%
¹ Index compounded monthly.
Data source: State Street Bank and Trust and TRS.
-4.7%
-5.0%
8.8%
7.3%
8.0%
10.5%
Year ended June 30,
2016
2015
0.0%
4.0%
2.4%
4.6%
Performance calculations provided by State Street Bank and Trust use net-of-fee time-weighted rates of return.
2018
8.5%
8.2%
21.6%
22.3%
25.5%
25.2%
23.7%
28.9%
2014
17.4%
16.4%
Performance of Selected TRS Investments
13.2%
13.9%
23.3%
21.5%
15.2%
25.1%
2013
12.8%
12.5%
UV8086
6.2%
5.5%
10.2%
11.6%
12.1%
14.9%
6.8%
6.4%
12.8%
13.3%
13.5%
16.7%
3.2%
2.9%
9.9%
10.2%
10.2%
13.5%
13.4%
9.7%
Annualized at June 30, 2018
3 Years 5 Years 10 Years 20 Years
6.9%
8.3%
6.2%
7.3%
8.5%
6.6%
Illinois Teachers’ Retirement System, 2019: Private Equity Performance
Asset Class/Index
TRS Total Fund
TRS weighted policy index
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Exhibit 8
Illinois Teachers’ Retirement System, 2019: Private Equity Performance
TRS’s Funded Ratio Based on Actuarial Value of Assets
The funded ratio in this chart is the ratio of actuarial assets to actuarial liabilities.
An increase in this ratio indicates an improvement in TRS’s ability to meet future benefit obligations.
Data source: TRS.
Distribution of Funded Ratios of All State Pensions
0.3
0.25
Funded Ratio (in percentages)
0.25
0.2
0.15
0.15
0.15
0.12
0.12
0.12
0.1
0.05
0.05
0
40%,
50%
50%,
60%
60%,
70%
70%,
80%
80%,
90%
90%, > 100%
100%
Data source: “2019 Wilshire Consulting Report on State Retirement Systems: Funding Levels and Asset
Allocations,” Wilshire Associates, March 2019, 7.
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Proposed Investment in First Light Capital
Illinois Teachers’ Retirement System, 2019: Private Equity Performance
Exhibit 9
UV8086
2012
2006
2006
$501–$1,500
$501–$1,500
$900
94.30%
104.00%
100.00%
Percent
Called
1.00
1.59
0.54
1.40
1.70
0.94
1.62
DPI
(×)
0.77
1.09
0.69
0.13
0.41
0.01
0.15
RVPI
(×)
1.96
2.51
1.39
1.61
1.92
1.30
1.77
Net TVPI (×)
(×)
19.90
33.00
13.90
10.30
13.80
6.60
14.50
Net IRR
(%)
¹ PE benchmark is made up of $500 million—$1.5 million midsize buyout funds, whose principal area of investment focus is North America. 17 funds and 18 funds are included
in the VY 2006 and VY 2012 benchmarks, respectively. Benchmark data are from Preqin through March 31, 2019, and were adapted by author.
Top quartile
Bottom quartile
PE benchmark¹ median
Top quartile
Bottom quartile
PE benchmark¹ median
First Light Fund III
Vintage
Size
Year (VY) (in millions of dollars)
First Light benchmarked its funds against buyout funds of the same vintage year that targeted similar investments.
First Light Capital, LLC was currently raising a $1.25 billion Fund V for leveraged buyout investments. First Light acquired middle-market companies
with strong, defensible positions and low cyclicality in the United States. It typically targeted businesses valued between $100 million and $500 million,
and applied a conservative approach to leverage that deployed between $50 million and $300 million of equity per transaction. It was particularly skilled
at supporting acquisitive businesses. On average, its portfolio companies executed six transformative acquisitions.
Founded in 1993, First Light Capital was a private equity investment firm based in Los Angeles, California. The firm preferred to invest in the technologyenabled services, industrial services, distribution, and engineered products sectors.
Description
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Proposed Investment in First Light Capital
Exhibit 9 (continued)
1.00
1.17
17.0%
1.57
33.9%
480
480
190
300
(15)
475
2013
1.78
13.5%
729
729
480
100
(15)
565
2014
1.80
1.5%
1,285
(320)
965
729
260
(15)
974
2015
2.05
13.4%
Data source: First Light cash flows developed by author.
-4.0%
2.43
2.53
1,063
(350)
713
(15)
770
785
2018
23.7%
1,185
(400)
785
(15)
859
(15)
950
1,274
(400)
874
874
2017
965
2016
¹ Year-over-year returns are computed from the December month-end values of the Russell 3000 Index with 3% premium added.
Cumulative index value
Russell 3000 Index + 3%¹
190
190
End of the year
NAV before distributions
Less: Distributions to LPs and GPs
NAV after distributions
2012
First Light Fund IV (in millions of dollars)
200
(15)
185
1,000
Beginning of the year
Assets
Capital calls
Less: Management fees
Invested capital
Committed capital
In 2012, First Light Capital raised $1.0 billion for Fund IV, and its cash flows and performance to date are shown below.
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