The California Public Employees Retirement System will dramatically scale back its exposure to international real estate as it looks to transform its $15 billion real estate portfolio.
The $228.3 billion public pension expects private core real estate investments, made primarily through separate accounts and targeting the US, to make up three-quarters of its property portfolio in the future – with non-core assets representing no more than 25 percent.
CalPERS HQ
As a result, CalPERS investments in international real estate will be dramatically culled from the current target of 50 percent to just 10 percent of a bucket of new investments, with the focus on emerging markets such as Brazil, India and China as well as “limited exposure” to Western Europe and Japan. 
CalPERS traditionally has been a cornerstone LP in many global and international opportunistic funds, but the pension is overhauling its strategy after suffering losses in its opportunistic deals of -35.4 percent net in the three years to the end of June.
In an investment committee report, expected to be approved next week, the pension said it would split its portfolio between legacy and new investments, with the new portfolio comprised of at least 75 percent core US assets, likely through five to 10 separate account managers and with a hold time of between 10 and 20 years.
CalPERS also will target a 15 percent allocation to US tactical deals, including core, value-added and opportunistic strategies, again with five to 10 managers and possibly including an emerging manager programme. The pension said it would then carve out a target 10 percent allocation to international value-added and opportunistic investing with between five to 10 managers.
In a blow to the private equity real estate industry, though, the US’ largest public pension warned that separate accounts would now be its vehicle of choice. “With a balance of moderate fees, alignment and control, [they] should be the primary structure used,” the report said, adding that operating company investments, open-ended funds and club funds could be added when opportunities emerged. However, commingled funds would only be “utilised when other structures are not available”.
Leverage also will play a major role going forward, with CalPERS introducing new minimum debt-service-coverage ratios (DSCR) and maximum loan-to-value ratios for its deals. According to the report, LTVs for all strategies should be around 50% with core investments having a DSCR of 2.0 and US and international tactical deals having a DSCR of around 1.5.
CalPERS’ existing 7 percent allocation to REITs is being reviewed by investment staff. CalPERS’ legacy portfolio, valued at $6.8 billion, will continue to be managed by the pension and fully liquidated by 2019.
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