A fund of one

How one US pension plan is revising the definition of a ‘commingled’ fund to speed up investment

Finding ways of investing faster appears to be rife among US pension plans at the minute. Note last month’s procedural shift by the Nebraska Investment Council, which removed the need for board approval for certain repeat commitments. The reasoning for the expedited process was to better enable the pension system to invest in vehicles prior to the first close, when better fees and terms are sometimes offered. If you ever wanted an indicator of how hot the US real estate market has become, measures likes these are surely one.

In addition, since the Nebraska case came to light, another one has cropped up. As PERE reported this week, the Los Angeles County Employees Retirement Association (LACERA) has made a $100 million commitment to CityView Bay Area II.

This might seem like a run-of-the-mill commitment to a commingled fund. Indeed, that is what LACERA calls it. However, upon closer inspection, it much more closely resembles a separate account. There is only one limited partner, LACERA, and the pension plan has complete control over areas such as general partner termination, fund extensions and cessation of investment period. It also has retained the right to own the projects outright upon completion as long-term core assets and already has drawn up a true separate account management agreement with CityView to be used if and when it acquires full interests.

So, why hasn’t LACERA just committed to a separate account rather than what it technically defines as commingled fund? The answer is the need for speed.

If LACERA had made this commitment as a separate account, it would first have had to go through a time-consuming request for proposal (RFP) process that typically requires six to nine months to complete. However, it doesn’t want to miss out on opportunities now.

Still, there is no ‘legal’ definition for what constitutes a commingled fund. In addition, unlike some investors, LACERA does not have a limit on the percentage of a commingled fund that its investment can represent.

It’s also important to note that not all state pension plans are subject to RFP processes for separate account managers or other real estate hires  One large public pension that PERE spoke with has made its multiple separate account manager hires without putting mandates out for public bid. For LACERA, the need to engage in an RFP process becomes an additional hurdle and potentially puts it at a competitive disadvantage. This unique fund structure is one way for the pension plan to level the playing field without breaking the rules.

Of course, not all pension funds in the US will be following suit in finding ways to expedite the investment process. However, with the US market appearing so hot right now and investors not wishing to be too late to opportunities, one can expect more pension plans to find ways to be more nimble.