Spotlight: Q&A with Illinois State Treasurer Michael W. Frerichs
Michael W. Frerichs
Illinois State Treasurer
Michael W. Frerichs was first elected Illinois State Treasurer in 2014 and serves as the state’s Chief Investment and Banking Officer. The State Treasurer’s Office actively manages approximately $35 billion, investing money on behalf of the state and local units of government.
1. When most people think of state government, venture capital is not something that usually comes up. How does the State of Illinois work with the local VC ecosystem?
Like other fiduciaries, my job is to prudently invest public funds. I also have a responsibility to the long-term fiscal health of our state and local government institutions, which rely on a vibrant economy. When folks think about the role of the State Treasurer and traditional government investors, many are surprised when I tell them about the work we do and how we approach investment decisions.
When I entered into office, I saw an opportunity to modernize the original Technology Development Account program, which had gone unused since 2011, to provide much needed capital to our tech-enabled businesses here in Illinois. We made an explicit goal of investing in ways to attract, assist and retain quality tech-enabled businesses.
We began making investments in 2016 out of our new and revamped Illinois Growth and Innovation Fund (“ILGIF”) and, in 2018, we worked with the legislature to increase the amount of investment capital that was available. The result was a $1B evergreen impact investment fund with three primary investment objectives:
Drive strong investment returns,
Drive economic development throughout the local economy, and
Foster a more diverse and inclusive manager and entrepreneurial community across the State.
Our core philosophy is that each of these goals are related. For ILGIF, we invest with an explicit intention to generate positive measurable social and environmental impact, alongside a financial return. Supporting high-potential startups and the broader entrepreneurial ecosystem in Illinois, particularly in our underserved communities, is key to achieving these objectives.
2. Beyond driving strong investment performance for Illinois, ILGIF has two other goals built-in that are rather unique -- Support equity, diversity and inclusion to enable worthy fund managers and grow promising technology-enabled companies, and Integrate sustainability/ESG factors to increase expected financial returns and minimize projected risk. Why was it important to infuse these into your mission?
When we talk about VC and the buyout space, we talk about true long-term investing, as most funds have life cycles longer than 10 years. That is why we cannot imagine a true long-term investment strategy that does not incorporate non-financial factors. We consider it a serious risk if funds do not take ESG factors into consideration during their investment processes or do not cultivate a team of diverse managers to vet deals.
ILGIF has intentionally pursued manager diversity, specifically firms led by people from underrepresented backgrounds. Integrating diversity factors into our investment decisions is not only a way to support our communities, but it’s smart business. Diverse firms are often better-positioned for greater innovation, stronger investment returns, and better investment decision-making. We now have over $230 million invested with diverse fund managers, approximately 43% of the total committed capital.
3. The State of Illinois has also been thinking a lot about diversity on boards of directors. Why is this a focus for the Illinois State Treasurer's Office and what are the implications, practically speaking, for public and private companies?
Diversity is a critical dimension of effective board composition and performance. Companies with diverse boards – inclusive of gender, race, ethnicity, skill sets, professional backgrounds, and LGBTQ+ status – are better positioned to execute good governance, effective risk management, and optimal decision-making.
For long-term investors like the Illinois Treasurer, board diversity is critically important because it can have a notable impact on investment performance. A 2020 McKinsey study of over 1,000 large companies found that corporate leadership groups with the highest levels of racial and ethnic diversity outperformed by 36% in terms of profitability. Further, there was a profitability differential of 48% between companies with the highest gender diversity at the executive level and companies with the least.
Given the correlation between board diversity and long-term outperformance, asset owners like us have a direct interest in ensuring that the companies in which they invest are diverse and inclusive at the highest levels. Our role as investors is to prioritize corporate focus on this issue.
Of more than 30 million businesses in the United States, fewer than 1 percent are listed on the stock exchange (New York Times). If we focused on board diversity for public companies, we would only be addressing a small fraction of the issue at large. We also emphasize the importance of board diversity in the private market because the private companies of today become the public companies of tomorrow. The earlier a company can incorporate an inclusive environment into its culture, the better positioned it will be for success. This is why we track diverse perspectives at all levels across the tech ecosystem here, and why we partnered with Chicago:Blend to create the Data Collection Standards for Portfolio Companies.
My office is leading a few other initiatives to advance this important issue. I currently lead the Midwest Investors Diversity Initiative (MIDI), a 16-member coalition comprised of regional institutional investors with over $820 billion in assets under management that works collaboratively to understand company policies and practices and make targeted recommendations to institutionalize best practices and improve board diversity.
I am also actively involved on the Board of Directors of the Thirty Percent Coalition, which is comprised of over 90 members with over $7 trillion in assets under management (AUM). This coalition is committed to the goal of advancing women, including women of color, on boards of public companies. Alongside our fellow investors, we have successfully engaged nearly 400 companies that have now appointed women to their boards.
Finally, my office launched a campaign in October 2020, asking all companies in the Russell 3000 to disclose the racial, ethnic and gender composition of their Board of Directors in their proxy statements. We believe the business case for board diversity warrants the request for full disclosure. Our office, joined by fellow institutional investors, is asking leading American companies to self-correct this omission if they do not do so already. Supporters of this effort will be examining policies to vote against nominating committees with no reported racial/ethnic diversity in their proxy statements and expanding more direct shareholder engagement.
4. As you look at the investment landscape in Illinois over the next 5-10 years, what's still needed to create a more robust and inclusive funding community for Illinois startups? What can the VC and startup community be doing better?
Illinois has already been doing a phenomenal job in encouraging companies and managers to track diversity metrics internally, expand their hiring and investing pipeline network, and improve diversity at the board level. Our startups and VC community has also taken positive steps. We need to see continued efforts in all of these areas moving forward.
In terms of investment allocations, we need to see more capital in pre-seed and expansion stage venture, led by diverse founders, and in companies based outside of Chicago. Right now there is a dearth of capital in growth-stage capital in Illinois. As a community, we’ve done an excellent job of supporting our Seed to Series B companies, but companies at the expansion stage are still outsourcing capital to coastal firms. Another critical investment area is the pre-seed stage for companies led by diverse founders; we consistently hear about underrepresented founders who struggle to get through the historic “friends and family” round because they do not have the same access to wealth that their non-diverse counterparts have.
Lastly, we need to see more dollars allocated outside of Chicago. There are many incredible companies in Central, Southern, Western, and Northern Illinois with talent that is hungry to innovate. University of Illinois Urbana-Champaign is home to one of the best engineering schools in the country. Some of ILGIF’s best portfolio companies are based in cities like Peoria and Batavia, and our strategic partners are accelerating exciting technology companies all over Illinois. There simply is no reason for us to limit deal flow to Chicago.
For our part at the Treasurer’s Office, we will be encouraging our GPs to look into these opportunities not only in the Chicago metro area, but outside the city where applicable and we will continue to diversify the manager pool here in Illinois by investing in new managers who are identifying opportunities in these regions.