Q: You would like to move your private equity allocation up, but can’t. Why not?
A: We have a little over $10 billion of assets. We’re supposed to have over $21 billion if we were fully funded. We do not have the resources we should have to pursue the investment opportunities that might be available to us.
Because of the inconsistency in our funding, we have been having to liquidate up to $100 million a month in assets. As a result – like with many of the investment opportunities that are presented – we can’t tie up our money in alternatives.
Q: What is the impact of receiving the annual contribution in one lump sum payment?
A: We have to be market timers. Last year the entire annual contribution came in one lump sum from the employer. That’s a very difficult investment strategy to invest a single tranche of $500 million in a month.
Q: The system does have some private equity exposure. How does your program work?
A: We go through funds-of-funds. Our structure is not designed to really have us get into direct [fund] investing. We typically target U.S. funds and our managers are typically small emerging managers.
We also have an interest in developing minority- and women-owned businesses in Chicago and elsewhere. That’s part of our strategy. [The emerging manager program] sits across asset classes. [It’s a way to] try to separate yourself from the crowd, hopefully in a positive way … to look for the new idea that perhaps might be able to add a little more return than you might be able to get doing the same old thing.
Q: Are managers able to approach the system outside the funds-of-funds structure?
A: Managers can come in directly. We have quite a bit of freedom to turn over rocks and expose opportunities. Our investment staff is pretty impressive in their knowledge.
Q: Any other strategies the system is pursuing?
A: Some things are happening on Sub-Saharan Africa that are interesting. I can’t say anything that will have us putting money in something tomorrow or the next day, but there are some developments that need to be evaluated.
I remember back when we were all talking about the Asian tigers and the cultural environments that spawned that burst of growth of the Pacific Rim economies. Stories out of Sub-Saharan Africa kind of mimic those stories. [Things like] income distribution becoming more equitable, moving from an extraction-based economy to more consumer-driven middle class economy.
Q: Why is building more exposure to private equity important to the health of your program?
A: There’s probably two aspects that would be appealing under certain circumstances. [One], the expected return on private equity is greater than the broader market. In part [because] you expect to get higher returns on private equity, you’re giving up liquidity, you’re making a long play on the investments.
[Two], private equity provides a stabilizing influence. You’re able to take a long-term perspective. A fully funded pension plan would certainly want to take advantage of those [aspects].
Q: Private equity has some negative headline risk for public systems. How does that affect your thinking about the asset class?
A: It has not kept us from going into private equity. The question is, what do private equity firms do to unleash the value of their investments? I see them being done with the slash-and-burn kind of tactics.
It’s clearly our intent as we discuss private equity opportunities to make sure we know what our managers are doing. It’s not that we have a social activist screen on our investment activities, but it’s something we’re aware of.
On fees, everybody is interested in, what’s the bang for the buck? We have these conversations. We don’t have a target for fee reduction, but we do talk about fees and how the fees are aligned with our interests.
Action item: Contact Chicago Teachers’ Pension Fund at 312-641-4464 or http://www.ctpf.org/