Chicago Teachers’ Pension Boosted Funded Status in Fiscal 2023, but Private Equity Underperforms
The Chicago Teachers Pension Fund earned 9.1 percent last year, but did not reach its benchmark, according to the website Chief Invesment Officer.
The CTPF Annual Comprehensive Financial also reported that its private equity investments had a negative return of 1.1 percent and its investments in real estate was down 4.1 percent.
While it is no secret that commercial real estate has tanked since the Covid pandemic hit in 2020 as more people work at home, the dismal showing for private equity is alarming.
We have been writing that CTPF should not invest in private equity because they plunder the companies they buy up by firing the workers, cutting their healthcare and slashing pension costs. Private equity companies engage in the very destructive behavior that the Chicago Teachers Union has been fighting against - buying up real estate to drive up housing costs and investing in fossil fuel companies that destroy our environment.
The private equity industry has long worked hard to keep its most abusive business practices secret from the public and investors, which include high and secret fees.
CORE boasted in earlier pension elections that its trustees voted to no longer do business with hedge funds. They should do likewise with private equity!
CTPF Chief Investment Officer (CIO) Fernando Vinzons told board trustees that his trip to Cape Town, South Africa last October was funded by the Government Employees Pension Fund. CTPF said the annual conference is a way for participants to connect with pension networks.
Development Partners International, LLP (DPI), is the first private equity firm with $3.1 billion in assets under management across Africa, March 31, 2023. Their fund performance was up 8.4 percent last year. Advance Finance Investment Group, LLC (AFIG Funds) claim that their $267 million investment strategy is to develop local entrepreneurs in Africa. Their fund performance was a whopping negative 17 percent.
However, when we asked CTPF Communications Director Michelle Holleman about this, she used Orwellian language to acknowledge that the CTPF $10 million investment in the AFIG Fund II had a “net IRR (that) was (17.4%), which is reflective of the low points in the investment cycle.”
The what? IRR?? But that’s exactly how Wall Street and the Chicago Teachers’ Pension Fund phrase it to make it look like the opposite. It’s not bombing - it’s air support!
CTPF’s spokesperson wrote that private equity investments need time to “mature” and generate good returns. So this poor performance is normal, the returns will typically improve, which they call a J curve. Holleman wrote that two AFIG investments are performing well, so no need to worry.
“Given the strong performance of their investments, and additional opportunities nearing completion, AFIG believes they have reached the bottom of the macro cycle (the J), and expects to exit the investments, generating returns at significantly improved valuations in 2025-2026,” Holleman wrote in an email.
I’m curious why the African Pension Fund needs to spend all this money to fly out people like the CTPF Chief Investment Officer Ferenando Vinzons and others to South Africa. The one thing everyone must understand in this world - there are no free lunches!
The CTPF assets under management increased to $12.1 billion at the end of the fiscal year, an increase from $11.8 billion at the end of fiscal 2022. The fund reported one-, five- and 10-year returns of 9.1%, 7.3% and 8.0%, respectively, ai-cio reported.
The fund reported the following returns: Domestic equity - 18.9%, International equity - 16.5%, Infrastructure - 10.6%, Fixed income - negative - 0.3%, Private equity - negative 1.1%, Real estate - negative 4.1%.
The fund allocated 30.5% of its portfolio to domestic equity and another 30.5% to international equity. Fixed income made up 18.7% of the fund, and real estate had an allocation of 11.4%. The rest of the fund was comprised of private equity (8.2%), infrastructure (2.0%), public REITs (0.9%) and cash equivalents (0.0%), according to Chief Investment Officer.
CTPF Executive Director Carlton Lenoir said in a letter that their staff must document and justify each expense. He claimed that their expenses for IT services decreased by 56 percent (they say there is an open IT position after someone left), specialized services decreased by 22 percent (more in house work?), and external counsel (legal) expenses were reduced by 75 percent (one source says former long-time Fund Attorney Joe Burns expenses were always one of the top 2 Fund expenses).
“CTPF believes that an actively managed portfolio allows us to accomplish our goals and is consistent with our stated investment beliefs including incorporating ESG (Environment Social Governance) issues into our investment analysis ..,” Lenoir wrote in the letter.
This statement completely contradicts investment gurus like John Vogle and Warren Buffet who said active managers never beat the average market returns and are a drain on investment performance because of their excessive fees. Washington High School Delegate and Chair of the CTU Tier 2 Committee Erika Meza told trustees at an earlier board meeting that the Pension Fund should invest in Index Funds which can save the Fund tens of millions of dollars in fees while it is proven to outperform any managers in the long term.
The CTPF Investment Consultant Callan receives a referral fee or “partnership fee” of $25k for each private equity company they refer, according to their contract.
Lenoir further wrote that as of March 16, 2023, the Investment team presented a review of private equity fees. “CTPF examined 91 private equity partnerships and determined that all but three were below the median for fees.” (That’s like saying almost every 2024 Rolls-Royce we looked at gave us a discount.)
“An 8.7% reduction in the budgeted amount for the Callan custodial fee.” (But what was budgeted? I remember Substance Founder George Schmidt said the Board of Ed would deliberately make a long list of possible schools to close to make it seem like many were saved and only a few were closed.
“Additionally, the Fund’s costs for custodial and investment consulting services are 43.8% and 64.3% lower respectively than the average paid by public pension plans for 2022.” (But are we comparing apples to apples, or grapes to grapefruits? CTPF has about $12 billion in assets, while CalPERS has assets of $468 billion and the New York State Teachers Retirment System has $137 billion in assets. So of course CTPF costs are much lower than these giants.)