Memorandum

To: Investment Committee State Universities Retirement System of Illinois (SURS)

From: Ryan Ball, CFA and Lauren Etcheverry, CFA

Date: May 31, 2012

Subject: U.S. Equity Small Cap Growth Search Recommendation

Search Overview

In August 2011, Callan completed a Manager Structure Review. The intent of the review was to identify and recommend changes for any unintended biases or missing components in the current portfolio. The review identified a slightly higher market capitalization and modest value bias within the small cap equity allocation. This search was undertaken to find a U.S. equity small cap growth manager that will complement the existing portfolio and help offset the above tilts.

Search Process

The search process began with the drafting of a Request for Proposal (RFP) by SURS and Callan which was subsequently posted on the SURS website, as well as Callan’s website. There were 72 respondents to the RFP including 10 MFDB firms. This initial respondent list was narrowed based on the following qualifications:

� Style: Seven year average Z-scores below 0.53 were removed to include only managers with true growth characteristics. 0.53 is the score of the replaced manager, ensuring remaining candidates would have more prominent growth characteristics. (Z-score is a measure of a manager’s growth or value investment style. Higher values represent a more aggressive growth style.)

� Capitalization: Seven year average weighted median market capitalizations above Callan’s median small cap growth manager of $1.23 billion were removed to include only managers with true small capitalization exposure.

� Performance: Managers with less than a 43% from Callan’s performance score1 were removed.This minimum performance score was chosen as it represents the value of this metric for the manager previously terminated from the investment style.

The above screens resulted in 15 remaining candidates (including 1 Illinois and 2 MFDB firms) (See Appendix A):

The remaining candidates were presented to Callan’s Manager Search Committee comprised of 15 senior consultants for review. These managers were evaluated based on the following:

1 Historical performance criteria are scored based on the following: Cumulative 4, 5 and 7 year data relative to the Russell 2000 Growth Index and the Callan Small Cap Growth Style Group; Rolling three-year periods based on quarterly data compared to the Index and Style Group. Performance is evaluated relative to each criterion thus there is a maximum of 40 points possible (17 rolling three-year periods and 3 other cumulative periods for one market measure and one comparative group). Candidates receive one point for each standard passed.

Exhibit 5

2

� Characteristics to move SURS equity portfolio characteristics closer to those of the overall equity universe.

� Organizational strength and stability of firm.� Qualifications and stability of portfolio management team.� Performance track record.

Callan’s Manager Search Committee recommended seven semi-finalist candidates to be interviewed by Callan and SURS staff. SURS staff and Callan elected to include Fortaleza Asset Management, an Illinois based minority-owned firm, as an eighth candidate despite the firm’s failure to meet some of the qualifications and criteria previously listed.

Callan and SURS staff conducted meetings with the eight semi-finalists to interview key personnel and better understand the investment process and philosophy of each firm. As a result of the interview process, two finalist candidates, Nicholas Investment Partners and CastleArk Management, LLC, were identified to be presented to the Board of Trustees. Reasons for exclusion for the six firms eliminatedduring the interview process can be found in Appendix B.

Search Conclusion

Upon review by the Board of Trustees, Callan recommends the selection of one of the previously mentioned finalist investment managers to complement the existing small cap structure.

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Appendix B

Emerald Advisers Inc.� The strategy has lower risk/reward characteristics and less competitive performance on a long

term annualized and rolling returns basis� Team dynamic in the interview process was a concern – some dominating professionals� Historical product asset decline presents some unease

Fortaleza Asset Management, Inc.� Lowest risk/reward and long term performance of the semi-finalist candidates on an annualized

and rolling returns basis� Consistent characteristics - however larger in market capitalization than what was accepted in the

initial screening process

J.P. Morgan Asset Management� Portfolio Manager was not present at the interview – SURS’s contact would be a portfolio

specialist � There is concern that minority brokerage requirements may not be met

Nichols Asset Management LLC� Newer team to the firm (joined in 2005 and 2007)� Smaller product and firm asset base than other candidates and assets are with manager of

manager programs only� Woman owned by the chief executive officer whose background is fixed income – not equity

investment related

Ranger Investment Management, L.P.� Performance contrasts with the investment process during some periods historically� There is concern that minority brokerage requirements may not be met

Summit Creek Advisors, LLC� Newer firm (2005) and very recent (and rapid) asset growth� There is concern that minority brokerage requirements may not be met

Exhibit 5

CastleArk Management, LLCOne North Wacker DriveSuite 3950Chicago, IL 60606

HistoryCastleArk Management LLC was founded in January 1999 by a group of investment professionals from Loomis Sayles’Chicago office where they managed both equity and fixed income products. The group began managing their first equityaccount at CastleArk in March 1999.

StructureFounded: 1999Ownership: Employee OwnedErrors and omissions insurance: YesIn compliance with SEC and DOL: YesGIPS Compliant: Yes

Contact: Steve ManusOne North Wacker DriveSuite 3950Chicago, IL 60606Phone: (312) 456-9682Fax: (312) 456-9690Email: smanus@castleark.com

Key Professionals Joined InvestmentFirm Experience1999 1979Jerry Castellini - President1999 1980Edward Clark - CEO

Employee Structure

Administrative 3Client Services/Marketing 3Dedicated Fundamental Analyst 4Dedicated Quantitative Analyst 1Operations 2Portfolio Manager 7Trader 3Total 23

Total Asset Growth

0

500

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1500

2000

2500

3000

3500

4000

2007

2634

2008

1700

2009

2428

2010

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2011

2825

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Total Asset Structure

Asset Type $(mm)U.S. Tax-Exempt 2,651 94%U.S. Taxable 101 4%Non-U.S. 73 3%

Total 2,825 100%

U.S. Tax-Exempt Separate/Commingled Assets as of December 31, 2011

Asset Class $(mm)Domestic Broad Equity 2,422 91%Domestic Broad Fixed-Income 229 9%

Total 2,651 100%

Client Type $(mm)Corporate 376 14%Endowment/Foundation 53 2%Public 2,114 80%Sub-Advised 61 2%Other 47 2%

Total 2,651 100%

Note(s): Asset decrease in 2008 was attributed to market depreciation. Asset decline in 2011 was attributed to timing of cash flows and client rebalancing."Other" assets represent religious accounts.

1

Exhibit 5

CastleArk Management, LLCSmall Company GrowthAs of December 31, 2011

Key Professionals Joined InvestmentFirm Experience

James Stark - PM 2007 1987Gregory Baxter - PM 2007 2002Austin Campbell - Dedicated FA 2010 2010

Investment Professionals5 Years

Function # Gained LostDedicated Fundamental Analyst 1 1 0Portfolio Manager 2 2 0

Portfolio Decision: Team Management

Total Asset Structure

Asset Type $(mm)U.S. Tax-Exempt Sep Acct 297 100%

Total 297 100%

Total Asset Growth

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50

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150

200

250

300

350

400

2007

69

2008

78

2009

145

2010

236

2011

297

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U.S. Tax-Exempt Assets

Largest # of $(mm) 5 YearsVehicle Acct Accts Assets Net FlowsSeparate 132 9 297 182

Fee Schedule:

Min Acct Size ($mm): 10

Account FeeSize ($mm) (%)Balance 1.00Client Allocation$70 1.00

Product Highlights:

Investment Style: Small Cap Growth

Benchmark: Russell 2000 Growth

Invest. Strategy: Fundamental Research (100% Bottom Up)

Investment Process:20% Industry/Sector Allocation80% Security Selection

YearPortfolio Characteristics End

% Mid Cap ($wgt) $1.5 - $10 B 44% Small Cap ($wgt) < $1.5 B 56Number of Holdings 92Annual Percent Turnover 196

Performance Composite:

Assets in composite ($mm): 297Number of Accts in Composite: 9

2011 Annual Dispersion Range:Composite Return: (0.11%)Highest Return: (0.04%)Lowest Return: (0.22%)

Note(s): The product incepted in May of 2007. Prior to joining CastleArk, the team worked at M & I Investment Managementand managed the firm’s Small Cap Growth product. Asset increase in 2008 was attributed to the gain of one account for $16million and subsequent inflows despite market depreciation. Asset increase in 2009 was attributed primarily to marketappreciation. Asset growth in 2010 was attributed to the gain of two accounts for $15 million and considerable inflows.

2

Exhibit 5

CastleArk Management, LLCSmall Company Growth

Investment Philosophy:CastleArk believes that excess returns can be achieved by investing in companies with improving business fundamentals,superior earnings and revenue growth rates where the direction of growth is more important than the absolute level ofgrowth.

Research Process:CastleArk’s research process is based on the internal analysis of the small cap team. The philosophy focuses on knownfacts and fundamentals, as well as avoidance of stocks whose raising value is due to opinions and speculation of others. Themajority of the research is internally generated through meetings with managements, discussions with industry consultantsand public filings. Outside research and Wall Street analysis is used to supplement the team’s internal research and tomeasure market expectations.

Security Selection:The security selection process begins with a universe of all companies with market capitalizations of between $150 millionand $3.5 billion, roughly the equivalent of the Russell 2000 Growth market cap range. Investment candidates are identifiedby the use of proprietary quantitative screens, company management meetings, and industry conferences. Once identified,candidates are researched to determine the drivers of their fundamental business improvement and to assess the magnitudeand sustainability of these drivers. Typical drivers include new products or services, new management, restructuring, changein pricing power, change in the secular growth rate of the industry, etc. The final step in the process is to determine whetherthe improvement is already fully reflected in the stock price.

Portfolio Construction:Portfolios typically hold between 85 to 100 securities and have an average annual portfolio turnover in the 200-250% range.Initial positions generally start in the 50-60 basis point range and will be increased in weight if the fundamental story andstock price are playing out as expected.

Sell Discipline:A security may be sold if one of the follow factors occur: 1) driver to fundamental improvement is no longer sustainable; 2)dramatic change in fundamentals; and/or 3) valuation suggests stock is fully valued.

3

Exhibit 5

Nicholas Investment PartnersP.O. Box 2828Del Mar, CA 92014

HistoryNicholas Investment Partners is a limited partnership with seven partners in investments, compliance/operations, clientservice and marketing and business administration. The firm is 100% employee owned, with the majority held by women.

StructureFounded: 2006Ownership: Employee OwnedErrors and omissions insurance: YesIn compliance with SEC and DOL: YesGIPS Compliant: Yes

Contact: Laura DeMarcoP.O. Box 2828Del Mar, CA 92014Phone: (858) 381-8181Fax: (858) 756-6542Email: ldemarco@nicpartners.com

Key Professionals Joined InvestmentFirm Experience2006 1984Catherine Nicholas - CIO, Dir of Dom Equity

Res, Managing Partner2011 1991Chris Siriani - COO2006 1993Arthur Gleeson - Director of Operations

Employee Structure

Administrative 3Client Services/Marketing 3Executive Management 1Operations 1Portfolio Manager 2Trader 2Total 12

Total Asset Growth

0

100

200

300

400

500

600

700

2007

246

2008

160

2009

272

2010

477

2011

491

$(M

illio

ns)

Total Asset Structure

Asset Type $(mm)U.S. Tax-Exempt 178 36%U.S. Taxable 313 64%

Total 491 100%

U.S. Tax-Exempt Separate/Commingled Assets as of December 31, 2011

Asset Class $(mm)Domestic Broad Equity 162 91%Domestic Broad Fixed-Income 16 9%

Total 178 100%

Client Type $(mm)Public 178 100%High Net Worth 1 0%

Total 178 100%

Note(s): Asset increase in 2010 was attributed to the gain of six accounts for $86 million. Chris Siriani joined the firm in 2011 to replace Greg Gleeson wholeft the firm at that time.

1

Exhibit 5

Nicholas Investment PartnersSmall CapAs of December 31, 2011

Key Professionals Joined InvestmentFirm Experience

Catherine Nicholas - PM 2006 1984John Wylie - PM 2007 1981Alexander Reison - Trader 2006 2006Cathy Newcomb-Burdick - Dedicated FA 2011 1989

Investment Professionals5 Years

Function # Gained LostDedicated Fundamental Analyst 1 3 2Portfolio Manager 2 1 0

Portfolio Decision: Individual With Backup

Total Asset Structure

Asset Type $(mm)U.S. Tax-Exempt Sep Acct 76 56%U.S. Taxable 59 44%

Total 135 100%

Total Asset Growth

0

50

100

150

200

2007

10

2008

18

2009

51

2010

121

2011

135

$(M

illio

ns)

U.S. Tax-Exempt Assets

Largest # of $(mm) 5 YearsVehicle Acct Accts Assets Net FlowsSeparate 38 10 76 20

Fee Schedule:

Min Acct Size ($mm): 5

Account FeeSize ($mm) (%)Balance 1.00Client Allocation$70 1.00

Product Highlights:

Investment Style: Small Cap Growth

Benchmark: Russell 2000 Growth

Invest. Strategy: Fundamental Research (100% Bottom Up)

Investment Process:5% Industry/Sector Allocation5% Risk Control

90% Security Selection

YearPortfolio Characteristics End

% Mid Cap ($wgt) $1.5 - $10 B 52% Small Cap ($wgt) < $1.5 B 48Number of Holdings 92Annual Percent Turnover 121

Performance Composite:

Assets in composite ($mm): 135Number of Accts in Composite: 11

2011 Annual Dispersion Range:Composite Return: (7.85%)Highest Return: (7.38%)Lowest Return: (8.18%)

Note(s): Product incepted July 2007. Asset increase in 2008 was attributed to the gain of four accounts for $18 milliondespite market depreciation. Asset growth in 2009 was attributed to the gain of four accounts for $7 million and subsequentinflows as well as market appreciation. Asset increase in 2010 was attributed to the gain of five accounts for $50 million.Analysts Jeff Smith and Ryan Beckham left the firm in 2008 and in 2011, respectively.

2

Exhibit 5

Nicholas Investment PartnersSmall Cap

Investment Philosophy:Nicholas Investment Partners believes that investing in successful, growing companies - ones that manage positive changeadvantageously and are poised to exceed expectations - has the potential to result in outstanding capital appreciation.

Research Process:Approximately 80% of investment ideas are internally generated. Each member of the investment team is actively engagedin the traditional fundamental research and confirmation process of highly ranked stocks generated by external and internalresearch sources including a multifactor quantitative model. The internal research model systematically and objectivelysources new ideas and monitors the strength of existing holdings. Idea generation and research is dynamic and combinestraditional fundamental analysis with the power of quantitative modeling. This quantitative effort is driven by experiencedinvestment professionals applying tools to identify and validate their investment ideas as well as manage the portfolio.Nicholas’ quantitative model is based upon their philosophy of positive change, supported by quality and timelinessmeasures.

Security Selection:Nicholas Investment Partners applies its buy criteria to a universe of 5,500+ companies within the market capitalization of theRussell 2000 Growth Index. The investment team closely follows 100-150 top-ranked stocks which typically include currentholdings plus eligible buy candidates. The firm’s buy discipline is to invest in companies demonstrating a combination of thefollowing: 1) Positive Change: Sources of positive change may include a new product, competitive advantage, industrydynamics, regulatory change or management change. 2) Sustainability: This positive change must also be sustainable andsupported by the company’s long-term earnings potential, financial strength and quality of management. 3) Timeliness: Thetimeliness of investment is confirmed by evaluating the stocks relative price strength, liquidity, institutional sponsorship,market sentiment and economic factors impacting the company. Companies meeting their investment criteria typicallyexhibit revenue and earnings acceleration, upward earnings revisions, improving credit profiles, gaining market share andstrong management teams.

Portfolio Construction:When constructing portfolios, the portfolio manager will typically adhere to the following general guidelines: positions areinitiated at 1 to 2% of the portfolios total market value and do not exceed 5%; there is an average of 75 - 100 holdings;market capitalization of a stock at the time of purchase is within the market capitalization range of the Index, but will typicallynot exceed 2x the upper limit of the Index as the stock appreciates; sector weights are typically no greater than 2x thebenchmark weight or 35% of the total portfolio market value; and cash levels are typically less than 2% and generally will notexceed 5% of the portfolio.

Sell Discipline:Stocks are sold out of the portfolio for any of the following reasons: 1) Better total return candidate. This is the mostcommon reason a stock is sold. 2) Reason for purchase is no longer valid. 3) Stock appreciates beyond the portfolioconcentration and capitalization limits: If a stock appreciates beyond 2x the capitalization range of the benchmark, theportfolio manager will sell the entire position and redeploy the profits to other US Small Cap positions meeting the buycriteria.

3

Exhibit 5

State Universities Retirement System of IllinoisPerformance vs CAI Small Cap Growth StylePeriods Ended March 31, 2012

Return RankingThe chart below illustrates fund rankings over various periods versus the CAI Small Cap Growth Style. The bars representthe range of returns from the 10th percentile to the 90th percentile for each period for all funds in the CAI Small Cap GrowthStyle. The numbers to the right of the bar represent the percentile rankings of the funds being analyzed. The table below thechart details the rates of return plotted in the graph above.

(20%)

(10%)

0%

10%

20%

30%

40%

50%

Last Quarter Last Year Last 3 Years Last 5 Years Last 7 Years

B(10)

A(97)

(72)

A(66)B(67)

(59)

B(4)

A(63)(62)

(56)

(60)

10th Percentile 17.59 10.08 34.01 10.07 11.7825th Percentile 16.04 5.88 32.82 7.13 9.31

Median 14.52 2.48 29.01 4.69 7.7675th Percentile 13.00 (1.97) 27.22 2.44 5.7890th Percentile 12.12 (6.61) 23.81 (0.17) 4.11

CastleArk A 10.78 (0.26) 28.34 - -Nicholas B 17.64 (0.47) 37.85 - -

Russell 2000Growth Index 13.28 0.68 28.36 4.15 6.86

Note(s): Performance is shown gross-of-fees.

State Universities Retirement System of Illinois

Exhibit 5

State Universities Retirement System of IllinoisPerformance vs CAI Small Cap Growth StyleRecent Periods

Return RankingThe chart below illustrates fund rankings over various periods versus the CAI Small Cap Growth Style. The bars representthe range of returns from the 10th percentile to the 90th percentile for each period for all funds in the CAI Small Cap GrowthStyle. The numbers to the right of the bar represent the percentile rankings of the funds being analyzed. The table below thechart details the rates of return plotted in the graph above.

(80%)

(60%)

(40%)

(20%)

0%

20%

40%

60%

80%

12/2011- 3/2012 2011 2010 2009 2008

B(10)

A(97)(72)

A(36)

B(83)

(59)

B(1)

A(52)(44)

B(9)

A(37)

(68)

A(12)

B(84)

(15)

10th Percentile 17.59 5.32 37.44 49.85 (35.78)25th Percentile 16.04 2.52 32.43 46.78 (39.77)

Median 14.52 (1.69) 28.81 38.09 (42.68)75th Percentile 13.00 (6.27) 26.94 28.49 (46.51)90th Percentile 12.12 (10.23) 21.64 19.99 (49.49)

CastleArk A 10.78 (0.11) 28.62 43.41 (37.78)Nicholas B 17.64 (7.85) 43.24 50.20 (48.52)

Russell 2000Growth Index 13.28 (2.91) 29.09 34.47 (38.54)

State Universities Retirement System of Illinois

Exhibit 5

State Universities Retirement System of IllinoisRisk/Reward vs CAI Small Cap Growth StyleFour and Three-Quarter Years Ended March 31, 2012

20% 22% 24% 26% 28% 30% 32% 34% 36% 38% 40% 42%(10%)

(5%)

0%

5%

10%

15%

CastleArk

Nicholas

Russell 2000 Growth Index

Standard Deviation

Re

turn

s

State Universities Retirement System of Illinois

Exhibit 5

Comparative Manager Matrix

This page allows for detailed comparisons of multiple managers against each other, as well as versus market indices andpeer groups. This comparative analysis can involve various types of performance statistics and holdings-based portfolioanalysis over multiple time periods. The number in the middle of each box is the relevant value for a given portfolio, and thesmaller number in the lower right corner is the relevant peer group ranking of that value.

Return Based Risk Statistics for 4-3/4 Years Ended March 31, 2012vs the Russell 2000 Growth Index and the CAI Sm Cap Growth Style PEER GROUP

(19) CastleArk 27.50%

(64)

8.92

(33)

4.70%

(56)

0.91

(82)

0.22

(14)

0.45

(23)

0.95%

(78)

(19) Nicholas 32.84%

(11)

7.54

(48)

4.70%

(56)

0.97

(21)

0.09

(37)

0.13

(37)

0.98%

(23)

(19)

Russell

2000 Growth

Index

27.62%

(63)

0.00

(100)

0.00%

(100)

1.00

(1)

0.07

(48)

0.00

(50)

1.00%

(1)

Correlation

Excess

Return

Ratio

Sharpe

RatioR-Squared

Downside

Risk

Tracking

Error

Standard

Deviation

State Universities Retirement System of Illinois

Exhibit 5