Tag: real estate

San Francisco Pension Postpones Hedge Fund Vote

Golden Gate Bridge

The San Francisco Employees’ Retirement System is delaying a vote on a new proposal to begin investing in hedge funds.

The scaled-down proposal calls for investing a maximum of 5 percent of assets in hedge funds. Originally, the pension fund was considering a 15 percent allocation.

The vote will be held in February.

More from SF Gate:

The board of the San Francisco Employees’ Retirement System voted Wednesday to postpone a decision on investing in hedge funds until February to give staff time to research an alternative proposal that was submitted Tuesday night.

The alternative calls for investing just 5 percent of the fund’s $20 billion in assets in hedge funds and — in a new twist — putting 3 percent in Bay Area real estate.

The system’s investment staff had recommended sinking $3 billion — or 15 percent of the fund’s $20 billion in assets — in hedge funds as part of an asset-allocation overhaul. The system, which manages pension money for about 50,000 active and retired city workers, has never invested in hedge funds. The goals of the plan included reducing volatility, improving performance in down markets and enhancing diversification.

Staff also would have supported investing 10 or 12 percent in hedge funds, but didn’t want to go below that. “Without 10 percent it wouldn’t be a meaningful hedge against a down market. We felt that was an absolute minimum,” Jay Huish, the system’s executive director, said in an interview last month.

But some members of the board were reluctant to make that big a commitment to hedge funds, especially after the giant California Employees Retirement System announced Sept. 15 that it will exit all hedge funds over the next year “as part of an ongoing effort to reduce complexity and costs in its investment program.” At that time, CalPERS had $4 billion or 1.4 percent of its assets in hedge funds. San Francisco’s system would have been one of the first public pension funds to make a major decision on hedge funds since then.

At Tuesday’s meeting, about 30 active and retired city employees begged the board not to invest 15 percent in hedge funds. Among their arguments: that hedge funds are too risky, illiquid, not transparent, charge excessive fees and may amplify systemic risks in the financial system.

Only one spoke in favor of it: Mike Hebel, who represents the San Francisco Police Officers Association. He said the system needs an asset allocation makeover to prevent another hit like it took in the 2008-09 market crash and hedge funds should be part of that. The value of its investments fell by about $6.3 billion or 36 percent during that period.

The San Francisco Employees’ Retirement System manages $20 billion in assets.

 

Photo by ilirjan rrumbullaku via Flickr CC License

New York Common Fund Commits $200 Million to Urban Real Estate

Manhattan

The New York Common Retirement Fund has committed $200 million to a fund that invests in real estate in New York City, Los Angeles and other urban areas.

More from IPE Real Estate:

The fund has backed CIM Group’s Fund VIII, which is targeting established US urban areas.

The fund invests in New York City, San Francisco and Los Angeles, focusing on equity, preferred equity and mezzanine transactions between $10m and $250m.

Direct investments, mortgage debt, workouts, public/private partnerships and operating real estate businesses are being targeted.

CIM Group, which was given a $225m commitment for its Fund III by New York Common in 2007, is targeting $2bn for Fund VIII.

New York Common said it made the investment on the back of high returns with prior funds with the manager.

The investor has pegged the current investment at $311m.

CIM has previously distributed $40.1m back to the pension fund.

[…]

CIM is co-investing 5% of total commitments to the fund, with a cap of $20m.

The manager will make around 30 to 40 deals.

Limited partners in the fund are projected to achieve a gross 20% IRR, with a 2x equity multiple.

Leverage will not exceed 75%.

The New York Common Retirement Fund manages about $177 billion in assets.

 

Photo by Tim (Timothy) Pearce via Flickr CC License

Biggs: Public Pensions Take On Too Much Risk

roulette

Andrew Biggs, former deputy commissioner of the Social Security Administration and current Resident Scholar at the American Enterprise Institute, penned a column for the Wall Street Journal this week in which he posed the thesis that public pension funds invest in too many risky assets.

To start, he compares the asset allocations of an individual versus that of CalPERS. From the column:

Many individuals follow a rough “100 minus your age” rule to determine how much risk to take with their retirement savings. A 25-year-old might put 75% of his savings in stocks or other risky assets, the remaining 25% in bonds and other safer investments. A 45-year-old would hold 55% in stocks, and a 65-year-old 35%. Individuals take this risk knowing that the end balance of their IRA or 401(k) account will vary with market returns.

Now consider the California Public Employees’ Retirement System (Calpers), the largest U.S. public plan and a trendsetter for others. The typical participant is around age 62, so a “100 minus age” rule would recommend that Calpers hold about 38% risky assets. In reality, Calpers holds about 75% of its portfolio in stocks and other risky assets, such as real estate, private equity and, until recently, hedge funds, despite offering benefits that, unlike IRAs or 401(k)s, it guarantees against market risk. Most other states are little different: Illinois holds 75% in risky assets; the Texas teachers’ plan holds 81%; the New York state and local plan 72%; Pennsylvania 82%; New Mexico 85%.

The column goes on:

Managers of government pension plans counter that they have longer investment horizons and can take greater risks. But most financial economists believe that the risks of stock investments grow, not shrink, with time. Moreover, while governments may exist forever, pensions cannot take forever to pay off their losses: New accounting rules promulgated by the Governmental Accounting Standards Board (GASB) and taking effect this year will push plans to amortize unfunded liabilities over roughly 15 years. Even without these rules, volatile pension investments translate into volatile contribution requirements that can and have destabilized government budgets.

Yet public-plan managers may see little option other than to double down on risk. In 2013 nearly half of state and local plan sponsors failed to make their full pension contribution. Moving from the 7.5% return currently assumed by Calpers to the roughly 5% yield on a 38%-62% stock-bond portfolio would increase annual contributions by around 50%—an additional $4 billion—making funding even more challenging.

But the fundamental misunderstanding afflicting practically the entire public-pension community is that taking more investment risk does not make a plan less expensive. It merely makes it less expensive today, by reducing contributions on the assumption that high investment returns will make up the difference. Risky investments shift the costs onto future generations who must make up for shortfalls if investments don’t pay off as assumed.

Read the entire column here.

 

Photo by  dktrpepr via Flickr CC License

CalSTRS Commits $290 Million to European Real Estate Funds

The CalSTRS Building
The CalSTRS Building

CalSTRS has committed $293 million to two funds that invest in European real estate. The moves are part of the pension fund’s planned third quarter real estate commitment of $900 million.

Details on the investments from IPE Real Estate:

Commitments of $200m and €75m were made to TCI Fund Management’s Real Estate Partners Fund I and Meyer Bergman European Retail Partners, respectively.

The investment in TCI Fund I, which invests in first mortgages backed by trophy assets in Western Europe and the US, has been placed into CalSTRS’s core portfolio.

CalSTRS said the assets backing the mortgages were the key appeal, alongside the income-producing potential of the strategy.

Net IRR for CalSTRS’s core assets is between 6% and 8%.

The commitment from CalSTRS represents 25% of TCI’s targeted $800m capital raise.

CalSTRS’s view that there is a strong market opportunity for European value-add retail was behind its decision to back Meyer Bergman.

The pension fund also cited a lack of available new development in Western Europe.

The fund will target Germany, France, the Nordics and the UK.

The two commitments, part of $900m approved for real estate during the third quarter, come alongside a $100m allocation to Pramerica Real Estate Investors’ PRISA II open-ended fund.

The $6.5bn fund has an income-generating core component and a non-core, build-to-core and lease-up component.

CalSTRS, with assets of $187 billion, is the second-largest public pension fund in the United States.

 

Photo by Stephen Curtin

Arizona Public-Safety Pension Cleared of Wrongdoing in Federal Criminal Investigation

The Arizona Public Safety Personnel Retirement System has been cleared of any wrongdoing as federal officials close an investigation into the fund’s real estate valuations.

The U.S. Attorney’s Office and the FBI were investigating whether fund staff inflated real estate values to trigger bonuses.

More from the Arizona Republic:

“Based upon our joint investigation with the FBI, at this time we do not believe that PSPRS committed any criminal misconduct,” U.S. Attorney Elizabeth Strange wrote in a letter to the pension system. “This office takes no position on civil or administrative liability, however, as our review focused exclusively on whether PSPRS engaged in criminal conduct in violation of federal law.”

Trust officials, including PSPRS Chairman Brian Tobin, said during a news conference Monday at the organization’s headquarters in central Phoenix that they were vindicated.

“We knew we were innocent of any wrongdoing,” said Tobin, flanked by junior-member PSPRS staff. “We kept our heads down and focused on the work and … the outcome we believed would come did. … We, this agency, our board, this staff have done nothing wrong.”

The leader of a police organization who called for the inquiry noted, however, that it was unclear whether individuals at PSPRS had been exonerated.

The investigation began after four high-ranking employees quit in protest last year over how PSPRS was reporting the values of trust real-estate assets managed by Scottsdale-based Desert Troon. The 13,000-member Arizona Police Association responded last fall by calling for a criminal investigation.

Kansas Pension Plans To Commit $350 Million To At Least Six Real Estate Funds

businessman holding small model house in his hands

The Kansas Public Employees Retirement System (PERS) is planning to ramp up its real estate commitments in 2015. The fund will invest up to $350 million in at least a half-dozen real estate funds. More from IPE Real Estate:

The pension fund will split the capital, with $200m for core strategies and as much as $150m for non-core investments.

An increased allocation and separate-account asset sales have given the pension fund substantial core capital to deploy.

Kansas PERS will invest the core capital with its existing core managers: JP Morgan Strategic Property Fund, Morgan Stanley Prime Property Fund, LaSalle Property Fund, Heitman America Real Estate Trust, UBS Trumbull Property Fund and Jamestown Premiere Property Fund.

It could also place capital in a new, core, open-ended fund as it evaluates the merits of adding a seventh core fund.

Non-core capital would be invested in funds targeting assets in the US, as well as Europe or Asia.

Kansas PERS, which typically makes $40m commitments, would consider approving three or four commitments next year.

The pension fund said it believed non-core strategies offered the potential for attractive risk-adjusted returns.

On an unleveraged basis, value-add investments are being underwritten to premiums of 200 basis points or more above core returns, it said.

Kansas PERS said it would continue to target skilled managers focused to their core competencies, rather than those accepting additional risk and new strategies to reach for outsized returns.

The System’s real estate portfolio returned 15 percent last fiscal year.

Virginia Pension To Put $100 Million in Blackstone Real Estate Fund

businessman holding small model house in his hands

The Virginia Retirement System (VRS) has committed $100 million to a Blackstone real estate fund that will invest in large office, retail, and apartment properties.

From IPE Real Estate:

The Virginia Retirement System (VRS) has allocated $100m (€80.1m) to the core-plus Blackstone Property Partners fund.

The open-ended fund, which invests in a combination of core, value-added and opportunistic strategies, is targeting returns of between 9% and 11%.

[…]

The pension fund is the third to commit to the Blackstone vehicle, following $100m in overall commitments from the Arizona State Retirement System and the Texas Permanent School Fund – the latter being one of the first to invest in the fund.

Blackstone is co-investing $75m in the fund, which will be 50% leveraged.

The manager will buy larger properties and portfolios across the office, industrial, retail and apartment sectors.

Blackstone, traditionally an opportunistic fund manager, can buy either directly or invest in real estate operating companies.

VRS, which has no targeted allocation to real estate, had a total $6.84bn in its real assets category as of September.

VRS manages $66.1 billion in assets.

New Jersey Pension Shifts $100 Million From U.S. to Asian Real Estate

businessman holding small model house in his hands

The New Jersey Division of Investment, the arm of the state government that manages and invests pension assets, is pulling $100 million out of U.S. real estate and shifting the money to a fund that invests in Asian real estate.

The fund will invest in real estate in China, Japan, Singapore and Australia. More details from IPE Real Estate:

The New Jersey Division of Investment is pulling capital out of two core US real estate funds and redeploying it into an Asia-Pacific property fund.

New Jersey is redeeming all of its $91m (€73.2m) interest in the AEW Core Property Trust as well as a partial redemption from its $400m interest in the CT High Grade Partners II fund.

The pension fund has approved a $100m commitment to SC Investment Management’s Real Estate Capital Asia Partners I, which will be funded by the two redemptions.

Following a recent recovery in US real estate prices, New Jersey decided to rotate capital from existing managers to new opportunities. Over the past several months, the pension fund has been evaluating core investments it made between 2006 to 2008.

New Jersey is seeking to capitalise on sustained occupier and investor demand in Asia Pacific, driven by long-term demographic and urbanisation trends in the region.

[…]

SC Invesmtent is targeting a 9% return by investing in undervalued, under-managed and distressed properties where value creation opportunities exist.

According to New Jersey, SC Investment has been a consistent top-quartile performer. In the manager’s previous investment funds, deals generated a 35% gross IRR and 2.1x return, with proceeds of $600m.

The Division of Investment manages $81.22 billion in pension assets.

Texas Teachers Pension Invests $200 Million in Automotive Real Estate

The Owner Said This Gets a Lot of Attention

The Teacher Retirement System of Texas (TRS Texas) has committed $200 million to a fund that invests in car dealership properties.

From IPE Real Estate:

The pension fund is investing in the $651m BSREP CARS Co-Invest Pooling, a vehicle set up by Brookfield to invest in Capital Automotive, which provides real estate financing for car dealerships.

The commitment by Texas Teachers was one of several from institutional investors and will amount to 30.5% of invested capital in the vehicle.

Brookfield Strategic Real Estate Partners Fund provided most of the capital for the joint venture. Brookfield declined to comment on how much capital it has invested. Additional capital came from BSREP CARS.

Capital Automotive, which has invested $4.3bn in 440 US facilities and has a 16.3m sqft portfolio in 35 US states, typically provides real estate financing for automotive dealers to either acquire new locations or upgrade existing operations. The firm was previously owned by DRA Advisors.

Texas Teachers made the investment for its ‘special situations’ portfolio, a new category it created within its real assets portfolio for investments outside traditional core, value-added and opportunistic classifications.

TRS Texas manages $124 billion in assets and is the sixth-largest public pension fund in the United States.

 

Photo by Billy Wilson 2010 via Flickr CC License

Viewpoint: Arizona’s Pension Whistle-Blowers Deserve State Protection

Entering Arizona

This week, Arizona’s Department of Administration agreed to pay the legal tab of four ex-employees of the Public Safety Personnel Retirement System (PSPRS).

The ex-employees are being sued by a real estate investment firm, Troon, for “defaming” the firm by raising questions about how it values assets.

The employees quit PSPRS last year in protest of the allegedly inflated real estate valuations.

The fact that the government is footing the ex-employees’ private legal bills has divided observers into two camps: the camp that believes the public shouldn’t be obligated to cover private legal bills, and the camp that thinks the state is doing a service to whistle-blowers who tried to expose misconduct within the pension system.

Here’s an editorial from the Arizona Republic editorial board, which falls into the latter camp:

It is hard to fathom that four highly educated, highly paid employees of the state’s pension system for first responders would quit their jobs in protest if they didn’t see something that raised serious concerns.

And so it is right that the state that employed them should protect them now that they are under heavy legal fire.

Last year, three investment managers and the in-house counsel for the Public Safety Personnel Retirement System made a powerful statement: They could no longer work for a system they believed had gone rogue.

The four unwittingly made themselves targets for legal action by asking serious and difficult questions about the valuation of the trust’s real-estate investments managed by Desert Troon.

They wanted to know whether the PSPRS used inflated real-estate values for Troon-managed investments to trigger bonuses.

Troon manages large swaths of trust real estate in Arizona, Colorado, Texas and Utah. In return, the trust has paid Troon at least $12 million per year. And Troon enjoys a minority-ownership stake.

As reported by The Republic’s Craig Harris, Troon-managed properties are among the poorest-performing real-estate investments for the system in recent years.

Lost value from the Troon-managed real estate is adding to the larger problem of a pension system for police and firefighters that is short more than half the money it needs to fund current and future retirement payments for those enrolled.

The trust also manages pension systems for public officials and correctional officers. Those funds, along with the others, creak under an unfunded liability of $7.78 billion.

After PSPRS investment managers Anton Orlich, Mark Selfridge and Paul Corens and in-house counsel Andrew Carriker quit their jobs, they found themselves defendants in a Troon lawsuit accusing them of engaging in a conspiracy to defame senior management at the company and the pension system.

The legitimacy of the four men’s concerns will play out over time, but those concerns can’t be called frivolous. They’ve led to a federal criminal investigation into the PSPRS. And a federal grand jury has gone after 100 trust documents, many involving Troon-related real-estate investments.

The former employees have paid dearly for sounding the siren on the state’s pension system. Legal bills have stacked up, and until recently, they did not know how much financial and emotional strain they would have to bear, given they were sued after they left the PSPRS.

Fortunately, the state has affirmed it will cover their legal defense, and there are no financial limits to that coverage. In fact, the state is required to provide legal defense for current or former employees when sued for “acts within the course and scope of employment.”

Without that protection, Arizona would be compelling silence in its employees who perceive wrongdoing in the workplace. It would also make whistle-blowers susceptible to punitive lawsuits meant to shut them up.

Unless we’re looking at the unfathomable, and these four former employees were motivated by malice when they quit their jobs, they did something courageous and decent that requires the state of Arizona to have their backs.


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