CalPERS eyes $3 billion in industrial deals

America’s largest pension plan has embarked on a new partnership with Bentall Kennedy that could significantly increase its industrial portfolio over the next five years. The first deal on behalf of the separate account closed last week.

The California Public Employees Retirement System (CalPERS) is poised to become an aggressive industrial buyer over the next five years. The $254.89 billion pension system has formed Institutional Logistics Partners, a separate account with commercial real estate advisor Bentall Kennedy, and approved an initial commitment of $250 million to the venture, according to documents from its investment committee meeting yesterday.

Institutional Logistics Partners will focus on buying stabilized, core industrial properties in primary markets in the US, principally coastal markets. CalPERS will invest 99.5 percent of the capital in the partnership, while Bentall Kennedy will make a 0.5 percent co-investment through its partners’ personal capital. 

The partnership is targeting the acquisition of up to $3 billion in industrial assets over the next four to five years. The $250 million capital outlay represents CalPERS’ commitment for the last six months of its fiscal year 2013, which ends on June 30.  While the pension plan is anticipated to make new allocations to Institutional Logistics Partners every fiscal year, it will monitor the separate account and approve each new allocation based on the partnership’s performance. 

Mike McKee, chief executive of Bentall Kennedy’s US operations, estimates that his firm will invest an average of $500 million of equity in industrial assets each year on behalf of the CalPERS separate account during the five-year period. The partnership, which may use modest leverage of up to 25 percent, closed on its first investment one week ago with the purchase of Northgate, a one million-square-foot industrial warehouse facility in Riverside, California, from KTR Capital Partners for $69 million. McKee noted that Bentall Kennedy also is actively looking at investment opportunities in the New York/New Jersey industrial market.

The partnership is intended to help increase CalPERS’ ‘base’ or core portfolio of quality real estate assets that can be held over the long term. “We’re not market timers,” said McKee. “We want to make investments, and we want to do it in properties that will be around a long time and will give [CalPERS] income.” 

The firm is targeting net returns of 7 percent to 9 percent for the partnership’s investments over the four- to five-year horizon. McKee noted that the pension system did not have a particular focus on industrial real estate, but it wanted a balanced commercial real estate portfolio across various property types. 

The mandate, which is intended for a 16-year period, will be the largest to date for Bentall Kennedy. The Toronto-based firm has managed a number of real estate portfolios, including those in office and hotel real estate, for CalPERS over the past 15 years and is listed as one of 18 non-core real estate managers on the pension plan’s website. Also, CalPERS acquired a one-third stake in the firm for $100 million last year.

The pension system now plans to expand its pool of non-core real estate managers as it carries out a five-year strategic real estate plan, adopted in February 2011, to invest at least 75 percent of its real estate portfolio in core US properties. “When they were looking to fill out the first wave of their line-up of core managers, they went to managers that they already had relationships with,” said McKee. Under the plan, the pension system also is seeking to reduce the number of external managers, with most new commitments going to five to 10 long-term partners via separate accounts. 

As of January 31, CalPERS held $21.37 billion, or 8.4 percent of its total portfolio, in real estate, according to its website.