Aside from the risks inherent in private equity and real estate investments, some pension experts have raised concerns about the lack of transparency surrounding these bets.
Under a 2005 rewrite of Illinois' Freedom of Information Act, public pension funds are not required to provide basic information about what assets are being purchased, the fine print of contracts or, most importantly, how assets are valued.
The Tribune was able to identify some assets underlying these investments only by reviewing thousands of pages of pension fund documents and scouring industry newsletters and Web sites.
"Private equity and real estate are the dark side," said Jeremy Gold, a national pension expert formerly of the Wharton School's Pension Research Council. "I say dark side because nobody really knows what real estate is worth until someone wants to buy it. Good luck figuring out what private equity is really worth."
These issues come into play when analyzing the results achieved by Chicago-based Hopewell Ventures, a private equity investment firm that, according to the Tribune's review of pension fund documents, is among the firms losing the most value in terms of percentage for city pension funds.
Hopewell's co-founder is David Wilhelm, a native Chicagoan who has managed campaigns for Mayor Richard Daley and brought the 1996 Democratic National Convention to Chicago as national party chairman. He was also a campaign adviser for former Gov. Rod Blagojevich and an informal adviser to President Barack Obama's presidential campaign.
In 2004, the municipal and laborers pension funds each invested about $5 million in Hopewell, whose holdings include a Minnesota printing company that filed for bankruptcy three years after the firm invested $2 million as well as an Illinois company that produces pasteurized eggs.
According to the Tribune's analysis of pension fund documents, the funds' investment of $10.2 million is now worth nearly $6 million less — for an annualized return of negative 9 percent. The funds also paid the firm $1.7 million in fees.
Craig Overmyer, one of Hopewell's principal partners, said the values reported by the pension funds and in the Tribune's review do not properly reflect the firm's performance. Hopewell has actually seen a 4 percent annualized return from pension fund investments, according to Overmyer.
The reason for the difference, he said, is that the firm received an investment from the U.S. Small Business Administration, which uses stricter accounting rules than those used by other private equity managers. The federal agency does not allow firms to increase the assessed value of its investments until it has seen eight quarters of positive returns, which Overmyer said has forced Hopewell to report values lower than what other firms report.
As this example suggests, private equity and real estate firms calculate for themselves how much their assets are worth, and the firms do not publicly disclose their methods, which are considered closely guarded trade secrets. Although the firms hire auditors to verify their numbers, none of the public pension funds conducts its own audit.
Overmyer said the firm successfully pushed the Small Business Administration to allow Hopewell to change the way it reports values to pension funds, so next year's valuations should be higher. Yet because the firm isn't required to open its books, there's no way to evaluate whether its figures are accurate.
Beyond that, no one really knows how much pension funds will make from these types of investments until someone buys the underlying assets.
Overmyer said Hopewell is happy with its performance and is confident it will eventually yield double-digit returns.
"I am not the least bit bashful about our record," he said. "I can't predict the future, but I can say that our returns have been positive and that we have some phenomenal companies in our portfolio."Copyright © 2015, Los Angeles Times