CHICAGO - A group of Chicago's black money managers and brokers has been visiting Illinois' state-sponsored pension systems to demand that 15% of their assets and brokerage transactions, among other investment-related business, be assigned to black-owned firms.
They want the implementation process to begin immediately.
Their effort has gotten support from Michael J. Madigan, speaker of the Illinois Assembly and a powerful Democrat in the state, who was spurred by several key black state legislative leaders.
Mr. Madigan has taken the unusual step of speaking to trustees of at least one and possibly more of the state retirement systems, endorsing the group's effort in a more general way to provide broader opportunities to minority firms.
Keith Bozarth, executive director of the $22 billion Teachers' Retirement System of Illinois, Springfield, said Mr. Madigan's appearance at the fund's recent trustees' meeting was unique as far as he can recall.
The group making the demands includes almost all of the black-owned money management, brokerage and alternative investment firms in Chicago. Leading members of the informal group and their firms include such money managers as John W. Rogers Jr., chairman, chief executive officer and co-chief investment officer, Ariel Capital Management Inc.; Louis A. Holland, managing partner and chief investment officer, Holland Capital Management; and Barbara Bowles, chairman and chief investment officer, Kenwood Group. Leaders from brokerage firms include James Reynolds Jr., chairman and CEO, Loop Capital Markets LLC; and Christopher Melvin, president, Melvin Securities Corp. Executives from alternative investment firms involved include Quintin Primo, co-chairman, Capri/Capital Advisors LLC, a real estate manager; Andre Rice, president of his own private equity firm; and Michael Y Granger and Xcylur R. Stoakley, both co-founders and general partners of Ark Capital Management, a venture capital firm.
Meeting with Teachers
The Illinois Teachers fund has been the initial primary focus of the group because of the fund's size and what the group considers an egregious lack of diversity in its investment-management-related activity. About a dozen members of the group met several weeks ago with the top two executives at the system, Mr. Bozarth, who plans to leave the system soon, and Mark A. Caplinger, who recently left as chief investment officer. The group listed such demands as:
* at least 15% of the system's assets be managed by black-owned firms;
* at least 15% of the system's brokerage business go to black-owned firms;
* some investment business be assigned to black consultants;
* the use of manager-of-managers programs be avoided, even if they feature minority firms; and
* the appointment of more black trustees.
The group is making its demands on behalf of black-owned firms only, as opposed to broader minority- and women-owned firms, and it also is emphasizing the hiring of Illinois-based black-owned firms.
Among other demands, the group wants the retirement systems to scrap the use of the term "emerging managers" because of an implication that firms placed under that label are new and less experienced, even though their principals might have been in the business for years. The group also wants to discontinue the term because it "keeps out legitimate, successful firms that have gotten larger than `emerging,"' said a person close to the group. "So when a pension fund gets enlightened, the emerging term is used as a ceiling to keep these firms out."
One reason the group wants to discourage the use of manager-of-managers programs is that popular ones such as those run by Progress Investment Management Co., San Francisco, and Northern Trust Co., Chicago, aren't minority-owned or might not be based in Illinois.
The Illinois Teachers fund adopted its first allocation to emerging managers, including minority-owned firms, last year. It hired Progress, assigning it 1%, or $240 million, of its assets, half to domestic equities and half to domestic fixed income. Mr. Bozarth said the trustees had wanted to wait a year to evaluate the program to decide if they wanted to expand it.
"The energy needs to be focused on good, home-grown talent," said the person close to the group. "Fund of funds are used as an excuse not to hire legitimate, experienced firms individually."
Members of the group have met with or plan to meet with officials of other state-sponsored funds, including the Illinois Municipal Retirement Fund, Oak Brook; the Illinois State Board of Investment, Chicago; and the State Universities Retirement System of Illinois, Champaign. Also, the group plans to target the University of Illinois endowment fund.
Despite the extent of the demands, "There has been a sense of good will" by both the members of the group and the officials of the state systems listening to their message, said the person close to the firms. "It is not antagonistic. Once people hear the story and see the numbers (of the slight involvement of black firms in investment work for the state retirement systems), they realize there needs to be more openness and opportunities."
Members of the group who were contacted declined to discuss its activity. But the group expressed to the officials of the state retirement systems profound concern about the continued limited involvement of black firms in the investment management of the state funds, despite years of pressing the issue. The person close to the group said only 1% of the assets of the state funds are managed by black-owned firms. In addition, he said, the consulting firms and people retained by the systems are almost universally white. Lamenting other examples of a lack of diversity, the person said, "as far as we can tell there is only one African-American trustee on the four big state plans."
"Consultants have a lot of influence with the funds, but they don't have relationships with minorities," the person close to the group said.
All around, "there hasn't been a feeling of welcomeness" for black-owned firms, the person added.
According to Mr. Bozarth, the retirement systems are required under state law only to report annually on the use of minority managers and brokers. It doesn't mandate any specific assignments.
In reaction to the group's appeal and Mr. Madigan's appearance, Mr. Bozarth and Kimberly Pollitt, acting chief investment officer, who also will become acting executive director after Mr. Bozarth's departure, along with the Illinois Teachers trustees formed a four-member subcommittee to consider the issues raised by the group. The subcommittee, which includes Sharon Leggett, the only black among the trustees, plans to report to the full board at a meeting this month.
"I think any fund has to balance its fiduciary duty with whatever course it takes," Mr. Bozarth said. "Anything that can be done to remedy that is a good thing."
Ms. Pollitt added, "We want to do what we can to make sure we are including all these firms and to make sure we do what is best for the system."
The group said much of the hiring done by the systems is largely subjective.
"Decisions are based on relationships," the person close to the group said. "You don't pick managers based on past performance, but on talent, creativity, and future performance. A lot of that is subjective."
The group isn't seeking a legislative remedy for their demands, hoping instead to achieve its aims by persuasion. A spokesman for Mr. Madigan denied he was involved in any way with any minority-type initiative with the retirement systems, despite his appearance on the agenda of at least one of the boards. The group has been meeting with the Rev. Jesse L. Jackson, who has sought to expand opportunities for minorities in the investment industry with his Wall Street and, in Chicago, LaSalle Street projects.