Searches and Hires

Illinois Teachers preps emerging markets debt search, allocates $1.3 billion

Pension funds also terminates 7 managers running $2.4 billion

The $49.4 billion Illinois Teachers' Retirement System, Springfield, authorized a search for an active emerging markets debt manager to run between $300 million and $600 million at a board meeting Friday.

The search, which is scheduled to be posted in about two weeks, is being conducted because the fund hasn't reviewed managers in the asset class for three years and several newer, non-U.S.-based managers have come to the attention of investment staff, said Scottie Bevill, senior investment officer for fixed income, during an investment committee meeting on Thursday.

Funding for the mandate will come from reducing existing emerging markets managers' portfolio. The successful manager, who may manage the account in local or hard currency, likely will be selected in the first quarter of 2018, Mr. Bevill said.

The current emerging market debt managers are Franklin Templeton (BEN) Investments (BEN) and TCW Group, which manage $584 million and $580 million, respectively.

Also, the pension fund allocated more than $1.3 billion to six managers. The largest allocation was hiring Arrowstreet Capital to manage $500 million in active quantitatively managed international equity. Funding will come from the termination of a $501 million active large-cap growth international equity portfolio managed by McKinley Capital Management for performance reasons, said Bill Thomas, investment officer for global equity.

McKinley Capital executives did not return a call for comment by press time.

The pension fund established an up to $250 million strategic partnership for venture capital with Greenspring Associates' existing commingled vehicles — a fund of funds, secondaries fund and co-investment fund.

Up to $600 million was earmarked as part of the strategic partnership for a fund of one to which the fund's existing venture capital funds, which total $674 million, will be moved as part of "laying the future for our venture capital program," Joshua M. Ross, investment officer for private equity, said at the investment committee meeting.

About $350 million of existing venture capital investments will ultimately be maintained, with the balance to be invested in new venture capital funds, co-investments and to acquire secondary stakes based on the advice of Greenspring Associates.

Mr. Ross said TRS needs to "become more creative" because of extreme capacity constraints in the venture capital industry.

"The hope is that we will be able to get into the best venture capital managers' funds with Greenspring's help. They are the best in the space. As a public pension fund, we need a partner like this," Mr. Ross aid.

Man Group was hired to manage up to $300 million in an alternative risk premium strategy. As part of the restructuring of the $3.1 billion hedge fund portfolio, which began after the fund's August meeting, trustees approved the termination of Bridgewater Associates' Pure Alpha directional hedge fund strategy, which totaled $336 million, and of Tourbillon Global Venture's global long/short equity strategy, which held $195 million.

Edward Shim, investment officer for hedge funds, said neither strategy was "a good fit" within the new portfolio structure and stressed that each manager could be replaced with hedge funds or alternative risk premium strategies with lower fees and greater transparency.

Bridgewater continues to manage $921 million in risk-parity strategies for TRS.

Solar Capital Partners received a $125 million commitment, of which $75 million will go into the firm's closed-end middle-market direct lending fund, and $50 million to a separate account of individual loans. It also committed up to $50 million to Basis Investment Group Fund I, a U.S. real estate debt securities fund. The commitment is from the system's $515 million emerging managers program.

Trustees also committed up to $100 million to Clearlake Capital Partners V, which invests in underperforming or financially stressed middle-market North American companies in the technology, consumer and industrials sectors. TRS invested in the three prior three Clearlake Capital Group funds.

Separately, as part of a portfolio construction change in the pension fund's $4.8 billion beta-plus fixed-income portfolio to a more defensive position with shorter bond duration, three managers were terminated: Manulife Asset Management for a $477 million core-plus bond strategy; New Century Advisors, $383 million global-inflation-linked bond fund; and PGIM Fixed Income, $308 million U.S. relative-value bond strategy. PGIM will continue to manage $811 million in other fixed-income strategies for TRS.

Redeemed assets will be redistributed among the nine remaining managers in the portfolio, Mr. Bevill said.

Garcia Hamilton & Associates also was terminated for management of a $182 million floating rate short-term asset reserve fund because staff determined only one manager was needed to manage the $1.3 billion account. Taplin, Canida & Habacht, the other manager, will absorb the additional assets, Mr. Bevill said.

TRS trustees ratified the termination by staff between meetings of Acadian Asset Management for management of a $563 million active U.S. large-cap core portfolio. Mr. Thomas said Acadian was terminated because it is more non-U.S.-focused than the portfolio requires. Staff may look at other similar managers, he added.

Acadian continues to manage $882 million in an active large-cap core international equity portfolio.