Update 5/29/17:   Cost and Fair Market Value as reported in the Illinois State Board of Investments does not give enough information to know what the real returns are for any Private Equity investment.    The returns paid back to the pension fund are not known.  Also not known are how much money was paid in fees to private equity firms like GTCR.

Who is the biggest loser? It could be the State of Illinois. Serious questions remain about whether Rauner’s firm, GTCR,  has lost big money for  General Assembly, Illinois Judges and Illinois State Employees Pension Funds as reported in FY 2015-2016.

There are serious questions about whether two private equity funds that GTCR is running for Illinois Pension funds are losing big dollars.

The “R” in GTCR is Rauner.  As in Gov. Bruce Rauner.  Rauner and his partners at GTCR have made money for decades by being the investment manager for a slice of this public government pension money (not just for Illinois).

GTCR has raised a significant portion of its money, perhaps the largest percentage, from public pension funds. They supplied half to two-thirds of the firm’s funds, by Gov. Rauner’s own estimate. Rauner is still making money as an investor off of the GTCR funds he owns.

The Illinois State Board of Investments manages the $15.6 billion dollars on behalf of the Illinois General Assembly,  Illinois Judges and the Illinois State Employees pension fund.  As Governor, Rauner appoints board members to oversee the Illinois State Board of Investments. Is that a conflict of interest? Many people think it is.

Last year, Rauner made $188 million as reported on his personal taxes from his investments including those in GTCR. He even brags that he accepted no pay as governor. At the same time, he is dodging $32 million in taxes using the carried interest loophole that Pres. Trump plans to eliminate.

But the State of Illinois MAY BE doing POORLY with their investments managed by Rauner’s firm, GTCR. The current state of Illinois’ investments in GTCR is not knowable given the report. Pension industry experts say that these reports are NOT transparent and that is BAD for the people of Illinois.

Real GOP Illinois’ team took a deeper look at GTCR’s fund performance and here’s what we found:

Has Golder Thoma Cressey Rauner (GTCR) lost their edge?

GTCR is managing $30,112,538 for the Illinois State Board of Investment.

The Illinois State Board of Investment are fiduciaries managing money for the beneficiaries of the pension system i.e.  the General Assembly, Illinois judges and the Illinois state employees.  The Illinois State Board of Investment is supposed to be pick the best investments for pension fund participants. The Board also hires portfolio consultants and others to help them manage this mountain of money.

In the case of the two Golder Thoma Cressey Rauner (GTCR) funds listed below, the total COST to buy into these funds was $30,112,538.   These are private placement private equity deals – not just anyone can buy into them.

The fair market value is now worth an abysmal $3,774,696.  BUT here’s what we don’t know. We don’t know what, if any, money was paid back to Illinois over the years.  We also don’t know what fees were paid by Illinois to be in the funds for over a period of years.

This could mean that for every $10 put into the deal, it’s now worth around $1. If this is the case, Illinois is losing, not winning. The amount of money, if any that was paid back to Illinois over the years must be disclosed in order to determine the amount of the loss (or gain).      The amount of money paid by Illinois over the years to GTCR in fees must be disclosed as well to determine the amount of loss (or gain).

This could also mean that GTCR lost significant money for the Illinois General Assembly, Illinois Judges and Illinois State Employees pension funds.  These are pension funds that are already underfunded.   Why can’t we see from the Annual Report how each private equity firm is doing and not lump all the returns together in one line?

If there is a loss, it’s not just money lost at face value. If Illinois paid a price for investing with these funds – the State is missing gain they could have had from investing in something else.  (This is true for all investments losses).

Check out the 2016 Annual Report from the Illinois State Board of Investments- Page 122.  The fair value of the combined investments in two GTCR funds are down over 87%.  Is it a loss for Illinois? The Illinois Board of Investment must disclose the amount of the cash returned in order to determine whether there was a loss or gain.    They also have to disclose the fees paid to GTCR over the life of these funds.     Also, why is one of the funds over 20 years old and still open?   Aren’t private equity deals supposed to only last for 5 years or so?

Fund Name                                                                 Cost                Fair Value

GOLDER THOMA CRESSEY RAUNER FUND IX     $  5,770,466       $3,039,804
GOLDER THOMA CRESSEY RAUNER FUND VI     $24,342,072       $   734,892

Fees, Fees, Fees!

The Illinois State Board of Investment made a big deal about how they’re reducing fees for pension fund participants by cutting the amount of money invested in hedge funds.

Private equity fees are as high as hedge fund fees.

How can there be a savings in fees if the Board turns around and almost doubles the amount of pension fund money being invested with private equity funds? That’s what the new policy shows in the 2016 Annual Report from the Illinois State Board of Investments.

Remember, Gov. Rauner controls the Illinois State Board of Investments with his appointments.

Illinois reports the fees for hedge funds as a line item expense, so yes these ‘expenses’ will go down.

BUT- the private equity fees are hidden in the income line.  Illinois shows as a ‘net’ amount received after fees have been taken out.    The amount of fees paid to private equity is not broken out separately and is not shown in the annual report.

A quick calculation shows that with almost $583 million currently invested in private equity the management fees for firms like GTCR is about $11.6 million.  Those fees will rise to $29 million per year under the new policy.

In addition, if private equity gains 17.8%  (the same as the trailing 3 year average return) those performance fees could rise from close to $20 million under the current policy to over $50 million under the policy target.

Deeply Concerned

Back in 2013, recently retired GTCR LLC Chairman Bruce Rauner, said he was “deeply concerned” about the private equity industry in light of shrinking returns.

Mr. Rauner said the industry has matured so much that it’s difficult to buy companies, especially large ones, at prices that allow for a significant increase in values.

The efficiencies in the marketplace have driven the returns down,” he told students and professionals attending the Beecken Petty O’Keefe & Co. Private Equity Conference.

“As I look at our industry, I have to say, I’m deeply concerned,” he said. As private-equity firms find it harder to extract returns, they’re turning away from their areas of expertise and are becoming too short-sighted in order to seek better returns, he said.

There are a number of private-equity firms that are dying, and “you can’t kill a private equity firm with a stick,” he said. When private-equity firms begin winding down their business, it often takes years for them to sell off their assets.

Questions remain

Under Gov. Rauner, the State of Illinois’ backlog of unpaid bills has ballooned from $4 billion to $21 billion (including the $6.6 billion state agencies are sitting on). Illinois taxpayers are on the hook for this and more.

On top of this mess, Rauner’s firm, GTCR, may be losing millions of dollars through poor investment performance for the State of Illinois but, due to lack of transparency, it isn’t possible for the public to know the amount of the losses.  This hasn’t hurt Gov. Rauner who earned $188 million last year, based in part on the management fees on these investments and the carried interest loophole.

This begs the question: Is Rauner working for the State of Illinois or is he working for himself? Voters will decide the answer to that question in the 2018 elections.

The above financial statements have not been verified by a certified public accountant. Real GOP Illinois welcomes questions and comments on this story.

Director contributed to this story.



4 thoughts on “UPDATE: Is Rauner’s firm GTCR losing millions of dollars for Illinois?”

  1. I share you concern about the connections between GTCR and the Illinois State pension. However, your analysis of the performance of the funds is deeply flawed. There is not enough information to know the performance of any of the investments. The CAFR does not show the cashflows for any of its holdings, so the FMV doesn’t tell us how much made was made, only what value is left after cash was returned to the pension. Washington State has an investment in Fund IX and it has returned 13.6%. See, http://www.sib.wa.gov/financial/pdfs/quarterly/ir123116.pdf.

    I am the former CIO for the State of North Carolina and a critic of private equity in public pension plans. See, http://meditationonmoneymanagement.blogspot.com/

  2. Ask the governor and the State of Illinois to provide all of the data to the public. Why isn’t this public?!

  3. Yes, not all of the information you mention is publicly available. It should be public. It should be transparent and that is why we are asking questions. Why no one is questioning this in the media or in state government – now that is a good question.

  4. I’m confused. He made more than double as governor as he made as a private citizen. How much of this is that carried interest loophole? Stinks to high heaven.

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