CalPERS’ Mouchakkaa: Deployment ‘is a balancing act’

The $351bn pension system approved a $600m increase to its real estate commitments for the current fiscal year, but its head of real assets explained why not all that capital may be invested.

The California Public Employees’ Retirement System approved $600 million more in real estate commitments year-on-year, despite seeing a slow pace of capital commitment, according to materials posted ahead of Monday’s investment committee meeting.

CalPERS has earmarked $4.8 billion for new real estate investments in the 2018-19 fiscal year, which began July 1, according to a memorandum from CalPERS’ real estate consultant, Pension Consulting Alliance. In addition, the pension plan has set aside $1.4 billion for maintenance and improvements for existing assets.

As of April 30, only 25 percent of the $4.2 billion allocated for the last fiscal year was deployed, up from 5 percent as of September 30, as PERE previously reported.

CalPERS’ separate account mandates are allocated yearly to partners with discretionary control over the capital. The total amounts – including new investments, reinvestments in existing properties and debt paydowns – to be allocated to CalPERS’ managers for the new fiscal year will be disclosed next month.

Overall, capital deployment has been slow because of a competitive market, particularly for long-term, cash-flowing assets, Paul Mouchakkaa, the pension system’s head of real assets, told PERE.

“We’re not the only ones chasing those investments and properties, and pricing has continued to spiral upwards,” he said. “That market backdrop makes it more difficult as each year has passed to win the deals. Are we in the mix for most of those deals? Yes, but we are disciplined and so are our partners.”

He added that CalPERS’ increased real estate allocation year-on-year is also driven by the market, because the pension system wants to have extra capital on hand if new opportunities emerge.

“What if the market turns in our favor?” Mouchakkaa said. “We think that allows us to be more active in the market. It is a balancing act and we don’t want [our partners] to deploy at any cost. It is a discussion between our partners and us what we want to deploy during the year. If they can put all money to work, then great. If they put zero money in the year, we want to understand why.”

CalPERS’ $31.8 billion real estate portfolio returned 6.8 percent, 26 basis points under its benchmark, the US core fund index MSCI Investment Property Databank, in the year ending June 30, PERE previously reported.

The $351 billion pension fund’s overall portfolio returned 8.6 percent for the 2017-18 fiscal year, 6 basis points below its benchmark.

– With additional reporting by Evelyn Lee