Private Equity Is Good for Illinois’ Companies & Pension Funds – Here’s How

By Maura O’Hara

For some time, the Illinois Venture Capital Association (IVCA) and its members have asserted the significant benefits that private equity investments deliver to Illinois and to its pension funds.  At times, these contentions have raised eyebrows from naysayers who point to New York, Texas and California as centers of private equity. 

Two recent studies of investment industry data reveal that Illinois has reasons to boast about its appeal for private investments. Together, they underscore the difference the last decade has made in attracting investors and entrepreneurs to our state, despite its financial uncertainties. Consider:

  • For the first time, Illinois ranked first in the country in 2015 for money invested in portfolio companies by PE firms, a report by the American Investment Council shows. They invested $94 billion in 193 companies. Overall, the group estimated that private equity firms invested more than $625 billion in 3,700-plus U.S.-based companies last year. Noteworthy, of the 25 largest dealers referenced in the report, six included Illinois Venture Capital Association member firms, either as investor or seller.
  • A study by IVCA of the 10-year performance of four Illinois public pension funds’ private equity investments vs. their overall portfolio performance found that the annualized returns realized from their PE investments exceeded their total portfolio by an average of 400 basis points. During that period, the pension funds secured annualized returns of 11.6 percent from their private equity portfolio vs. 6.9 percent from their overall portfolio return.    

The studies confirm the attractiveness of Illinois’ entrepreneurial spirit and also its well-educated base of human talent and inventiveness; this despite a very challenging political climate and uncertain outlook for the state. Another key ingredient is simply the presence of committed long-term investing partners based here.

Illinois’ entrepreneurs require partners willing to provide capital, financial resources and managerial expertise for the long haul – partners who help develop strategic business plans, sit on their boards and work to strengthen their portfolio companies over many years. These partnerships promote sustainability, drive growth and strengthen operations.

Typically, private equity firms in Illinois invest in more mature companies that benefit from a capital inflow, new management tools and strategies to accelerate growth. Exemplifying these companies are Giordano’s, Chicago’s iconic pizza brand, that flourishes under Victory Park Capital; and Fieldglass, a software provider for managing contingent-worker services, that got venture capital funding from Prism Opportunity Fund and then private equity funding from Madison Dearborn Partners – both firms IVCA members.

Take a look at 6 of the 25 largest private equity deals in 2015 in which IVCA member firms participated, as cited in the American Investment Council report.  No surprise that they concentrate in healthcare, business and consumer services, sectors for which Chicago and Illinois are well-known.

ILLINOIS COMPANY

INDUSTRY

IVCA MEMBER (ROLE)

Gold Standard Baking

Consumer Products and Services

Arbor Investments (Seller)

Infogix

Information Technology

Thoma Bravo (Investor)

Kaufman Hall

Business Products and Services

Madison Dearborn Partners (Investor)

LBP Manufacturing

Business Products and Services

Pritzker Group Private Capital (Investor)

Option Care

Healthcare

Madison Dearborn Partners (Investor)

Patterson Medical Holdings

Healthcare

Madison Dearborn Partners (Investor)

 

Illinois’ strong performance in 2015 should come as no surprise; the state is no newcomer to private investing and is home to 672 private equity-backed companies. It also possesses the ecosystem necessary to attract entrepreneurs and private equity firms – as well as venture capital firms and angel investors. That ecosystem includes universities, human and investment capital, pillar companies, and mentoring from serial entrepreneurs and seasoned investors. And what these companies deliver often is lower jobless rates, rising wages and housing values and higher tax revenues.

Chicago and the state benefit, in particular, from exceptional research universities and tech hubs, such as Chicago’s 1871, which increasingly produce current and future entrepreneurs with inventive products and services that attract investors.

Private investing also helps the beneficiaries of four of Illinois’ largest public pension funds. An internal study found that while all four funds’ private equity investments generated 10-year annualized returns significantly higher than their overall performance, three of them also had superior five-year performance as well, beating the overall portfolio return by a range of 110 to 720 basis points. The pension funds’ assets ranged from $15.8 billion to $46.2 billion and averaged nearly $29 billion.

A third recent study has found that Illinois’ picture in early stage, that is, venture capital investing is equally bright. Pitchbook spotlighted Chicago’s preeminence among U.S. municipalities in generating the best investment returns from companies that had gone public or experienced a liquidity event – such as a sale, merger or purchase. Over 10 years, 81 percent of Chicago- based VC investments returned at least three times the capital invested, and 45 percent of them returned more than 10 times the capital invested, the new data showed – leading the nation in both instances.

The same Pitchbook study suggests that Chicago offered better value than Silicon Valley and other top venture capital hubs during those 10 years. In part, this reflects the great success of our city’s consumer and business services companies, epitomized by GrubHub, Braintree Payments and Cleversafe (which were all backed by IVCA members) and their appeal to investors and acquirers.

Over the past 15 years, Illinois and Chicago have benefited from a unified private equity and venture capital firm community created by the Illinois Venture Capital Association. Collectively, IVCA members invest over $100 billion on behalf of limited partners that include pension funds, endowments and foundations into those hundreds of portfolio companies. They represent a pool of dedicated investors that was not nearly as well-organized during the first internet boom nearly 20 years ago.

So, let’s celebrate the special recipe that makes Illinois and Chicago such strong investment centers and demand that our elected officials govern our state with a fiduciary’s prudence so that our future will be as bright as the past..

Maura O’Hara is executive director of the Illinois Venture Capital Association, a post she has held since 2003.