Illinois Municipal trims alternatives target but remains friend of minority firms

Illinois Municipal Retirement Fund trimmed its target allocation to alternatives to 7 percent, even as it increased its minority-manager goal for private equity by 50 percent.

The previous target allocation of 8 percent was recently lowered from 9 percent.

At its March 1 meeting the board of the $41.3 billion pension decided on the rebalancing after an asset-allocation review.

According to policy, rebalancing recommendations are made if the target allocation and actual portfolio value differ by four percentage points or more. Illinois Municipal’s actual allocation to alternative assets was 3.6 percent on Jan. 31.

Alternatives in the Illinois municipal fund include PE, agriculture and timberland.

Boost to alternatives

It is unclear why Illinois Municipal’s actual allocation is so far below target, though the team has moved assets from its equity portfolio to boost allocations in alternatives, said a source familiar with the fund.

Meantime, Illinois Municipal has increased its minority-manager-allocation goal for private equity to 15 percent, a news release shows. The earlier goal was 10 percent. Such firms must be 51 percent or more owned by minorities, women, or people with a disability, according to the Illinois Pension Code.

The $739 million committed to 19 minority managers already accounts for more than 29 percent of Illinois Municipal’s total PE commitments of $2.5 billion as of Jan. 31, 2018, according to presentations.

“The fund has appetite for more minority managers,” said Dhvani Shah, chief investment officer of Illinois Municipal, in an email.

The average commitment for minority PE funds is $35 million and Illinois Municipal has been steadily making more commitments, Shah said.

Earlier in February 2018, Illinois Municipal re-upped $15 million to the Latino firm AUA and $20 million to Versant Voyageurs, managed by minority-led firm Vistria Group.

These followed re-ups to Vistria Fund II for $75 million, ICV Partners IV for $35 million, Valor IV for $75 million and New MainStream III for $25 million in 2017.

Apart from re-ups, Illinois Municipal uses a number of strategies to engage with minority managers, Shah said.

The pension fund held meetings with 98 minority-owned funds in 2017, a 46 percent increase over 2016. Its managers attend industry events such as Consortium East, NASP Annual Pensions and Financial Services Conference, NAA Wall Street Summit and Women’s Private Equity Summit.

In addition to direct investments, Illinois Municipal also invests through its fund-of-fund and separate-account partners Abbott Capital and Pantheon.

Abbott Capital had committed more than $50 million to eight minority-owned firms that manage a total of 11 funds as of Sept. 2017.

Pantheon also made commitments of more than $23 million to five minority-owned firms that manage 11 funds in the same period, according to presentations.

Exclusive RFPs

Illinois Municipal has launched exclusive RFPs for minority-owned private equity firms, Shah said. Such an RFP in 2013 led to engagements with AUA, Estancia, New MainStream, Valor and Vistria funds. Illinois Municipal subsequently re-upped to four of them, she said.

The 19 minority-owned PE managers hired by Illinois Municipal also include Khosla Ventures, Oak HC/FT, 1315 Capital, Canvas Ventures, Vivo Ventures, Storm Ventures, DBL Partners, Smith Whiley, Vista Equity Partners and Hispania Private Equity. Muller and Monroe is a minority fund-of-funds.

In addition to ratcheting back its target to alternative investments, Illinois Municipal has reduced target allocations to U.S. equity and fixed income. Target allocations have increased for international equity and real estate.

Action Item: Read more on Illinois Municipal’s diversity program here https://www.imrf.org/en/investments/about-investments/reports

Former U.S. President Barack Obama speaks during the North American Climate Summit in Chicago on Dec. 5, 2017. REUTERS/Kamil Krzaczynski