By Jon Peterson
San Francisco-based Stockbridge Capital Group has been allocated $200 million by the Los Angeles County Employees Retirement Association for a new separate account to invest in real estate nationwide including the Bay Area.
Stockbridge plans an investment strategy mixing low-, medium- and high-risk properties. About half of the portfolio is to consist of low-risk or “core” properties, which are typically at least 80 percent occupied and 10 years old or less. The core portfolio could include some additional risk factors including leasing risk such as near-term lease expiration or building capital requirements.
The other half of the portfolio would be evenly divided among acquisitions and new development opportunities. The managers hope to buy buildings at below replacement cost in markets evidencing strong recovery prospects to drive value appreciation and rental growth. The high-return segment of the portfolio would be primarily for the development of industrial and retail properties expected to achieve core status upon completion.
The pension fund anticipates an unleveraged internal rate of return, excluding fees for the fund manager, of 7 percent to 8.5 percent for the lowest-risk portion of the portfolio with returns ranging from 8.5 percent to 12.5 percent for the other half, according to public records.
LACERA has given Stockbridge full investment discretion, John McClelland, principal investment officer for real estate for the pension fund, said in an email. That means the real estate manager can make final investment decisions without input from the pension fund.
Stockbridge declined comment for this report.
LACERA hired Stockbridge in part to work again with Jay Jehle, a managing director and partner with the firm who served from 1993 to 2007 as the portfolio manager of a core, value-add and high-return separate-account portfolio on behalf of the pension fund while he worked for RREEF, now named Deutsche Asset and Wealth Management. During this time, the portfolio grew to $1.3 billion. Jehle is the lead portfolio manager for Stockbridge on the new account.
LACERA likes that Stockbridge is still in the process of building its client base and has capacity to add new separate-account relationships. The pension fund investment staff also derives comfort that the firm policy is not to seek additional business if it will result in inferior investment management services for existing clients, according to board documents.
The San Francisco Bay Area is one of 20 markets targeted for the account for all of the four main property types—office, industrial, retail and apartments, according to a LACERA document. Stockbridge anticipates that it will invest $12.5 million to $50 million in equity for each transaction on behalf of the pension fund.
Stockbridge had total firm assets of $5.7 billion as of March 31. The real estate manager has six separate-account clients with total assets valued at $2 billion, according LACERA.
LACERA hired New York City-based Clarion Partners LLC and Chicago-based Heitman LLC for separate-account relationships at the same May meeting where it retained Stockbridge. Each manager received a $200 million allocation.