The Arkansas Teacher Retirement System trustees Wednesday authorized an up to $30 million investment in a San Francisco-based firm's buyout fund that will invest in small and lower-middle market software and service companies.
The investment will be in the Alpine Investors' VIII fund.
The teacher retirement system is state government's largest retirement system with about $21 billion in investments, and more than 120,000 working and retired members.
Alpine Investors, founded in 2001, is seeking total capital commitments of $1.7 billion for its VIII fund with a cap of $2 billion, said Michael Bacine of the system's Pennsylvania-based private equity consultant Franklin Park.
The fund will target companies in need of new management either because they are poorly run, the founder is retiring or they are being carved out from a larger company, he told the system's investment committee, which recommended the investment.
"The difference here is that they build a group of experienced professionals to be CEOs of the companies that they ultimately invest in so they do that upfront and really have those identified before they even find a company and then they ... ultimately run their playbook to improve the operations of the existing companies," Bacine said.
Alpine Investors' seven funds have had a gross internal rate of return of 22.2%, according to Franklin Park's written report to the trustees.
Trustee Susannah Marshall, who is the state's bank commissioner, asked Bacine about whether Alpine Investors had previously identified cybersecurity issues.
Bacine said the firm has not had any such issues.
"As far as the underlying companies, ... why we like sector-focused groups like Alpine and many others that you have heard from us is they are experienced in the space and aware of those potential issues and look for them in their companies," he said. "I am not aware of any issue they've had in their portfolio."
In other business, the trustees voted to give the system's staff the option of issuing a request for qualifications or a request for proposals to evaluate and identify investment consultants for the system's direct investments.
The scope of the requests will include recommendations for new direct investments and ongoing monitoring and managing of existing and new direct investments.
"We may need to use the [request for proposals] process because that uses the pricing in the evaluation ... as opposed to the [request for qualifications] process that doesn't take price into consideration at all," system executive director Clint Rhoden told the trustees.
"We'd just like to have a little more flexibility to go forward in this process."
On June 7, the trustees voted to authorize the system to issue a request for qualifications from investment consultants to review and make recommendations about the system's direct investments and ongoing monitoring and managing of these investments.
At that meeting, the trustees also voted to change the system's investment policy to bar the system from approving "any material changes" in any direct investment without first receiving written advice or recommendations from a third-party investment consultant and, if needed, outside legal counsel, as well as receiving written approval from the trustees' investment committee and full board of trustees.
System officials said they had previously required an investment consultant's recommendation and full board approval for an initial direct investment and the system's management had informed the board's chairman of any plans to restructure the initial direct investment. The full board was informed later.
The policy change in June came after the Arkansas Legislative Audit said the system did not obtain a review and recommendation from an investment consultant or board approval for the system reinvesting $58 million in conjunction with multiple parties to execute a promissory note to Big River Steel, totaling $290 million in May 2019, and for the conversion of $48 million in loans to Highland Pellets to equity in June 2020. The Joint Legislative Auditing Committee's committee on state agencies has voted to defer action on that audit of the system two times.