Illinois/TRS Case

June 2019

Cinda Klickna needs to decide whether to approve TRS’ increase PE asset allocation to invest in First Light Capital. TRS, relative to other public pensions, has higher PE asset allocations (15% v 10%) which can draw concern given the lack of transparency from GPs and public nature of pensions.

A pension is underfunded when the FV of their assets do not meet the FV of liabilities (how much should be given to retirees in the future). This situation can lead to increased scrutiny from stakeholders and may impact the pension's ability to meet its obligations.

Teachers have a defined benefit pension, meaning the responsibility of retirement savings is on the employer. Historically, they were the most popular form of plan. Over time, they have eradicated to defined contribution pension plans, which place the onus of retirement savings on employees, leading to a shift in how retirement benefits are structured and funded. Defined contribution is not a guaranteed amount, instead, the gain or loss of an individuals retirement savings is subject to market performance, which means that the final benefit at retirement can vary significantly based on investment choices and market conditions.

This is due to mismatch between the promises made by the pension system and the actual funding levels, creating concerns about the sustainability of benefits for future retirees.

Should TRS Allocate up to 15% of its assets to PE?

  • reasons for yes:

    • diversification

    • illiquidity premium — PE investments typically offer an illiquidity premium, compensating investors for the risk associated with locking up capital for extended periods.

    • potential for higher returns — historically, private equity has outperformed public equity markets over the long term, providing opportunities for enhanced growth.

  • reasons for no:

    • not diversification - is 15% too high?

    • the avg allocation is 10%, meaning most have a rationale that it shouldn’t be too high.

if you had to allocate a large fraction to PE, how would you go about it?

  • not all funds do well, so accessing the top funds is critical.

  • there are big, cyclical patterns in the returns. For example, the funds raised during the dot com bubble did not do well. but funds that started in a recession did very well.

  • j curve — newer funds are not doing well because of a pattern most PE funds follow, wherein returns are not seen until then end of the funds’ lives

  • wide dispersion in PE Performance

    • looking at all funds and classifying them as VC and Buyout funds that have completely liquidated

    • the bottom quartile generate about 3% return while the top quartile generates about 19% return

    • PME is not required by GIPS, but many fund managers report it."

    • “Winners stay winners and losers stay losers”

      • You want to pick a “good” fund because it will have access to the best deals

required disclosures for PE firms

  • SI-IRR

  • DVTP

  • PIC

  • TVP

  • RVTP

Exhibit 1, CalPERS PE Performance

  • net IRR is 24.7%, we can’t necessarily confirm this without the timing of the cash flows

  • you can get DPI, RVPI, TVPI, with metrics provided

Should Cinda recommend investing in First Light Capital?

  • given “winners stay winners,” we need historical data to see how successful this fund is.

  • ex. 9 provides detail on FLC

    • look at vintage year, consider what quartile it is in

    • liquidating dividend —