CalPERS Reconfigures Huge Industrial Portfolio

Jon PetersonIn December, the California Public Employees’ Retirement System replaced longtime partners LaSalle Investment Management as the overseer of nearly $2 billion in industrial real estate.

All but $60 million of the properties, owned and managed by LaSalle through the CalEast Global Logistics portfolio, were transferred to Menlo Park’s GI Partners.

Now, $1.9 billion in CalEast properties—all in North America and all managed by GI—are being reclassified, largely away from being considered “core,” or low-risk investments, to value-add real estate, a category that signifies greater risk but more investment upside.

The thinking behind the change is not entirely clear. CalPERS staff is withholding comment, at least until after a May 16 investment committee meeting, where the matter is expected to be discussed in closed session. The pension fund board is expected to learn behind closed doors the rationale for separating the CalEast holdings into three separate portfolios with 72 percent re-classified as value-added property. Investment staff at the huge public pension fund declined comment on the activities at least until after that briefing, CalPERS information officer Clark McKinley wrote in an e-mail.

The largest of the three new portfolios is called CalEast Solstice, valued at $1.37 billion. CalEast Canada is valued at $105.9 million; CalEast Industrial Investors at $423.5 million.

CalPERS and other public entities are normally required to do business in an open forum. They discuss items confidentially based on an assertion that a public airing would undermine investment competitiveness or contracts. They are required to vote in a public forum, however.

The CalEast re-organization may be part of a strategic real estate restructuring that has been underway for a number of months at CalPERS. In that case, GI Partners may not have initiated the property remix on its own but rather worked out the plan with staff as a strategic measure, McKinley said.

GI Partners also did not respond to requests for comment.

The private-equity and real estate investment company has worked with CalPERS for at least a decade. In 2001, CalPERS put $500 million in equity into a GI Partners fund aimed at investment in distressed, but highly improved Internet-related real estate, including data centers. The strategy proved a good one following the dot-com bust. GI and CalPERS sold the fund assets in an initial public offering in November 2004: Digital Realty Investment Trust is now based in San Francisco.

DLR stock has risen close to 400 percent since 2004, closing at not quite $60 on May 13, according to Yahoo! Finance.

At the time of the CalEast portfolio transfer, CalPERS already had more than $700 million invested in three GI Partners funds.

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