CalPERS plans $2bn RE outlay in 2011, private equity real estate funds to miss out

The California Public Employees’ Retirement System (CalPERS) is reportedly planning to commit up to $2 billion to real estate this year but private equity real estate firms are expected to lose out.

The Wall Street Journal reported that despite incurring a negative five percent return from the asset class in 2010, the largest US pension fund remained keen to have a sizeable real estate exposure. Going forward, however it is expected to make fewer outlays and those it does make are likely to be made as investments made via separate accounts. The pension fund currently has approximately $16.5 billion of real estate assets under ownership.

CalPERS has recently reduced the number of managers it is committing capital to. Managers to have been removed from parts of its portfolio include BlackRock, Hines and LaSalle Investment Management. It has replaced them with smaller brand names including CommonWealth Partners, GI Partners and GID Investment Advisors. See the December/January issue of PERE for an in depth profile of GID.

The WSJ reported that CalPERS is planning to commit the equity to managers investing in more core markets than it had before, subsequently shunning private equity real estate funds. It said CalPERS wanted to invest in strategies which require less leverage and target good quality buildings leased to high calibre tenants on strong leases.

Chief investment officer Joe Dear said the pension fund would regard real estate as a source of steady income rather than an asset class which would provide it with increasing values. This would negate the need for private equity real estate funds, which he said “tend to be more in the asset-gathering, fee-generating businesses than they are in the capital appreciation, income-generating business.”

“We decided to reduce the risk in the real-estate portfolio and increase its income orientation as a risk mitigator,” Dear said. CalPERS’ new strategy is expected to be discussed in a board meeting which could take place next month.

The pension fund is among an increasing number of large institutional investors to have altered their investment strategy in the wake of the global economic crisis. A common theme is for such investors to seek more control positions such as separate accounts, where the investor is the sole capital source for a strategy managed by a third-party, although investment clubs between like-minded investors has also proved popular. As a consequence, private equity real estate fund managers have decreased their fundraising targets on vehicles launched after the crisis as they seek commitments from smaller-ticket investors.