Real estate investment managers new to the world of institutional capital will get a crack at landing funds from the largest U.S. public pension fund under a proposed program expected to go before its board on Aug. 16.
The California Public Employees’ Retirement System will consider an initial allocation of $200 million to the effort, which will be aimed at urban infill properties, according to staff and consultant reports. It is a real estate class in which the pension fund has experimented in the past with mixed results. Allowable leverage would be limited to 50 percent at the asset and fund levels.
Eligible managers are expected to have less than $1 billion in assets under management. They should be raising their first, second or third fund or forming their first, second or third separate-account strategy.
The primary investment focus is to be on traditional property assets: offices, industrial buildings, retail centers and apartments.
Selected managers are proposed to have five-year contracts with the pension fund and to make a modest, unspecified co-investment, according to pension-fund staff reports.
A CalPERS spokesman did not directly address a question about why the pension is pursuing the strategy now. However, in general the goal appears to be diversification. Other pension funds and institutional investors that have pursued like strategies have cited the likelihood that smaller managers would target smaller properties and opportunities than large established managers, allowing the pension fund to invest across a wider property spectrum from the relatively small to the large.
The investment staff at CalPERS is expected to select existing real estate investment managers with proven track records. Those firms in turn would identify, oversee and mentor the emerging managers. The plan would be to start small and ramp up, Clark McKinley, information officer for the CalPERS office of public affairs, said in an email.
CalPERS wants the emerging manager program to focus on urban California markets, particularly the larger population centers in the San Francisco Bay area and Southern California. These markets have ample room for emerging managers to compete with larger firms in locating opportunity, according to a board report from Los Angeles-based Crosswater Realty Advisors. CalPERS retained Crosswater to help formulate the emerging-manager program. Crosswater declined comment for this report.
The timeline to implement the proposal is unsettled, but it is likely the emerging managers would be selected sometime in 2012, McKinley said.
CalPERS has embraced an emerging manager approach in the past and is no stranger to urban investing. Its CalSmart program focused on both emerging managers and urban real estate. Through 2010—the most recent data available—CalSmart had assets valued at $570 million.
RREEF LLC, the real estate asset manager for Deutsche Bank AG, which has offices in San Francisco, was responsible for allocating capital to emerging managers. The pension fund replaced RREEF earlier this year with Los Angeles-based Canyon Capital Realty Advisors LLC.
According to the staff report, CalPERS has 10 emerging manager investment strategies that are active today with more than $888.5 million in CalPERS allocations. This includes those working inside CalSmart as well as other initiatives.
CalPERS’ previous urban real estate investments have had a spotty track record with an inconsistent pattern of success, according to the staff memo.
CalPERS has more than 1.6 million members, and last year the pension fund paid out more than $13 billion in benefits.