CalPERS reduces external RE fee payments

The country’s biggest pension fund has been pruning relationships with external managers and shifting its real estate allocation into safer investment strategies.

The California Public Employees’ Retirement System (CalPERS) has reduced its external management fees within the real estate asset class, according to a Monday presentation.

The country’s biggest pension system said in its annual real estate review that it reduced its external management fees, including profit sharing, from $811 million in the 2013-2014 fiscal year to $609 million in the 2014-2015 fiscal year. Those payments dropped even as its total real estate assets under management went up $1.5 billion to $27.5 billion over the same time period. CalPERS’ internal management fees stayed the same year over year at $7 million.

The pension giant released these figures after breaking out profit-sharing revenue for private equity last month, a first for the industry. This increased transparency comes as CalPERS continues a longer-term shift into safer investments in real estate with fewer external managers. The pension system is culling the number of external investment managers in its overall portfolio from approximately 200 currently to some 100 by 2020. Within real estate, the system currently has 50 external managers, and intends to reduce that number to 15 in five years. The pension plan would invest in the remaining managers through larger and more strategic relationships.

CalPERS kicked off this plan in June by announcing the largest-ever secondaries sale, putting up to $3 billion of its real estate holdings on the secondary market. The pension system plans to shift the majority of its real estate holdings into core assets, targeting at least 75 percent core investments after July 1, 2017. Currently, CalPERS classifies about half its investments as core, according to the Monday report.

About 81 percent of the portfolio is in strategic holdings and the rest are legacy investments, which the pension system continues to liquidate. CalPERS expects to continue reducing its external management fees as it pares down its legacy portfolio.

CalPERS has pushed for more transparency in its entire portfolio, creating a proprietary system called Private Equity Accounting and Reporting Solution (PEARS) to track net gains and payments to external private equity investment partners, among other data points. Overall, the pension system said that active funds in its private equity portfolio have generated $24.2 billion in realized net gains for the pension plan from 1990 to June 30, 2015, and these external investment partners have realized $3.4 billion from profit sharing agreements with CalPERS.

Last month, the pension system released numbers for two private equity real estate funds managed by The Carlyle Group, based in Washington, DC. Carlyle realized $12.8 million in profit sharing from CalPERS’ stake in its 2000-vintage North America opportunistic fund Carlyle Realty Partners III. Carlyle also realized $3.3 million in carry attributable to CalPERS’ investment in Carlyle Europe Real Estate Partners, a 2002-vintage opportunistic fund focused on European industrial real estate. CalPERS committed $32.3 million to this €426.6 million vehicle, according to PERE Research & Analytics.

Real estate overall has returned 13.5 percent over the 2014-15 fiscal year that ended June 30, and 7.2 percent over the past 20 years, according to Monday’s presentation materials. Real estate makes up the majority of CalPERS’ $31.8 billion real assets portfolio, and infrastructure and forestland each comprise $2.2 billion. In the 2014-15 fiscal year, forestland returned -0.3 percent and infrastructure returned 13.2 percent.