The Arkansas Teacher Retirement System's trustees on Monday voted to authorize the system to wind down its investment in the Bermuda-based Aeolus Keystone fund, which specializes in property catastrophe insurance coverage.
As of June 30, the system had about $185 million invested in the Aeolus Keystone fund, said P.J. Kelly of Aon Hewitt Investment Consulting, which is the system's general investment consultant.
Kelly said Aon Hewitt recommends that the system decline renewal of the January and midyear Aeolus Keystone investment funds and allow the system's investment exposure in the funds to wind down, which he expects to happen in summer 2022.
"Aon's opinion is that Aeolus is taking on unnecessary risk to achieve their desired returns, which was exemplified most recently by their outsized losses from Hurricane Ida," Kelly wrote in a Sept. 14 memo to three system officials. "Additional concerns surround the weak performance and below market terms, particularly related to higher than market fees and lack of a high-water mark."
But Kelly said Aon Hewitt continues to believe that exposure to the insurance-linked securities market is an attractive investment for the system's portfolio and that it will continue to monitor the landscape for potential investments that complement the recently approved Pillar Juniperus Opportunity Fund.
Last month, the trustees authorized an investment of up to $95 million in that fund, which invests in insurance-linked securities. Bermuda-based PillarCapital Management Limited is the fund manager.
The Teacher Retirement System is state government's largest such agency, with more than 100,000 working and retired members. Its investments are valued at roughly $21.2 billion, said system Executive Director Clint Rhoden.
TEMPORARY CONSULTANT
In other business, the trustees authorized the system to hire Global Principle Partners as a temporary consultant for its direct investments. The system had no applicants when it issued a request for proposals for a direct investment consultant.
The system will contract with Global Principle Partners for $55,000 a month for about six months until a long-term consultant is hired after the issuance of another request for proposals, said system Deputy Director Rod Graves. He said he hopes the long-term consultant that is hired will cost less each month than Global Principle Partners.
He said the system may not have received any responses to its request for proposals in part because the request was advertised only on the Office of State Procurement's website and in part because of the skills that the system is seeking.
The system plans to try to advertise nationally in some industry publications, he said.
Global Principle Partners previously partnered with the Teacher Retirement System when the system was invested in Big River Steel, Graves said.
The consultant is a U.S.-based, world-class project finance group founded in 2003, and it has raised more than $8 billion in financing for projects and provided advisory services for more than $4 billion in mergers, acquisitions and consolidations of investments, the system's staff said in a written report to trustees.
The system obtained approval from the Office of State Procurement to contract with the firm on a temporary basis.
On June 7, the trustees authorized the system to issue a request for proposals for investment consultants to review and make recommendations about proposed direct investments and their monitoring and management.
At that time, they 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 recommendation from a third-party investment consultant and, if needed, outside legal counsel, as well as receiving written approval from the trustees' investment committee and the full board of trustees.
The June 7 vote came after 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, along 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.
CHANGES MADE
The trustees voted to change more than $300 million of investments authorized at their Sept. 27 meeting from a standard procurement requiring prior legislative review before closing to an imminent-need procurement requiring legislative review after closing.
The Legislative Council meeting for this month has been canceled, and the next meeting is now scheduled for Nov. 19.
These investments include:
• The transfer of the system's interests in about $90.5 million in the France-based Capital Fund Management Institutional Systematic Diversified Fund L.P. Series 1.5 to the Capital Fund Management Systematic Global Macro L.P. Series 1.
• Up to $70 million in the Morgan Stanley Prime Property Fund, a New York-based diversified real estate fund focused on income-producing properties in primary markets, and up to $70 million in Tthe RREEF Core Plus Industrial Fund, a New York-based real state fund specializing in industrial assets.
• Up to $50 million in Chatham Asset Private Debt and Strategic Capital Fund III, a Chatham, N.J.-based fund that invests in high-yield bonds, leverage loans and equity on a long and short basis.
• Up to $40 million in Almanac Realty Securities IX, a New York-based fund that invests in both public and private real estate operating companies.
• Up to $30 million in Clearlake Capital Partners VII, a Santa Monica, Calif.-based private equity fund that makes opportunistic debt and equity investments in middle-market companies that are undergoing change and/or are in underserved industries or markets in North America.