AMERICAS NEWS: Investing in diversity

More limited partners are pursuing efforts to give women and minorities a greater priority in the private equity real estate industry. One recent example is Allstate Investments, the investment management arm of the US insurance company, which has committed an initial pool of $100 million to establish an emerging manager programme that will provide capital to real estate and private equity fund managers with strong women and minority participation.

“It’s a call to action,” said Edgar Alvarado, Allstate’s head of real estate equity. Even after 25 years in real estate, he noted the lack of diversity in the private equity and real estate industries, suggesting that it is a problem. “This is what we’re doing to address it,” he added. The programme, which is part of an overall companywide diversity initiative, is slated for a late 2012 launch.

To broaden the pool of potential candidates, Allstate’s programme will include not only firms that are women- and minority-owned, but also those that count women and minorities among the investment professionals that participate in the firm’s carry. Additionally, the programme will consider real estate firms that invest in underserved or urban markets with women- or minority-owned development and operating partners and private equity firms that invest in women- and minority-owned businesses.

Meanwhile, the California Public Employees’ Retirement System (CalPERS) is close to selecting a mentoring manager to help identify and nurture firms for its $200 million real estate emerging manager programme, which was approved last August. The $237.6 billion pension already has been investing in real estate emerging managers – including many that are women- and minority-owned – for several years, but it previously lacked a formal programme. California law prohibits the use of race, gender or ethnicity in defining emerging managers.

Additionally, the California State Teachers’ Retirement System plans to present a paper this summer analysing the diversity of the fund managers in its real estate portfolio.
In a report issued last summer, Crosswater Realty Advisors, which is consulting with CalPERS on the development of its programme, wrote: “Since minority- or women-owned business enterprises are more likely to be emerging managers, implementation of an emerging manager programme can support CalPERS’ diversity goals and tap into markets that may fall ‘under the radar’ of more established firms.”

Currently, there are about 130 emerging real estate managers, which is defined as a firm with $3 billion or less in assets under management and a minimum of 45 percent employee ownership or a firm that is majority-owned by ethnic minorities, women or disabled veterans, according to the Altura Emerging Manager Information platform, an emerging manager database cited in the Crosswater report. Of that number, 32 are minority- or women-owned.

In a white paper published in February, Nori Gerardo Lietz, founder of California-based investment advisory firm Areté Capital, pointed to investors as one of the parties responsible for perpetuating the lack of diversity in private real estate, private equity and venture capital. She noted that the amount of capital allocated to emerging managers is “miniscule” compared to the amounts allocated to their more established counterparts. Because of this, emerging manager programmes alone are not sufficient; investors also need to hold managers more accountable for poor diversity practices, she said.

Still, the number of private equity real estate investors with diversity targets remains limited. The Crosswater report listed 10 US pension funds with real estate emerging manager programmes, about half of which have a focus on minority- and women-owned businesses. However, only one programme –
established by a consortium that includes the Illinois Municipal Retirement Fund, the State Universities Retirement System of Illinois and the Public School Teachers’ Pension Fund of Chicago – is mandated by state law to fund such businesses.

While some studies have shown that small real estate managers can produce better returns for investors, Crosswater’s findings were less conclusive. Indeed, while the Teacher Retirement System of Texas has seen good returns for its programme, others such as the Los Angeles County Employees Retirement Association have experienced mixed results.

Moreover, in a presentation last August, Ted Eliopoulos, senior investment officer of real estate at CalPERS, said that, overall, its real estate emerging managers had not met investment expectations and underperformed relevant benchmarks. However, he noted that the pension’s interest in a formal programme was to reduce risk and take advantage of the opportunities available through an emerging manager.