The California Public Employees’ Retirement System (CalPERS) has approved a $1 billion increase to its annual dollar hard cap for new real estate investments, marking the first change to the threshold since 2011. The increase ups the $283.3 billion pension plan’s annual new investment limit for the overall real estate portfolio to $8 billion from $7 billion and that of its base core real estate portfolio to $7 billion from $6 billion.
In documents from CalPERS’ meeting yesterday, acting chief investment officer Ted Eliopoulos stated that an increase was necessary as “the current dollar cap for new investments for the real estate program could impede staff’s ability to act on new investment opportunities and thus restrict the growth of the asset class.”
The Real Assets Delegation Resolution, originally effective in July 2011, limits CalPERS’ annual investments in real assets based on percentages of the individual policy targets, which cannot exceed set dollar hard caps. Since 2011, however, the total value of the pension plan’s assets has grown significantly and has resulted in the percentage-based limits surpassing the original dollar limits.
For real estate, CalPERS restricts new investments from surpassing 30 percent of the policy target for the total real estate portfolio and 25 percent of the policy target for the base core portfolio. At this time, 30 percent of the total target would be about $8.45 billion, but Eliopoulos noted that the $8 billion cap will remain to mitigate potential vintage-year exposure.
A staff memo from Pension Consulting Alliance (PCA), CalPERS’ consultant, supported the decision, stating that the change allowed “increased flexibility and congruence with overall portfolio size.” PCA noted that CalPERS’ current emphasis on direct investments and core properties has increased the likelihood of large-scale investments and that a $1 billion single-asset investment “would not be unusual in prevailing market conditions nor inconsistent with CalPERS’ real estate strategic plan.” Thus, the former $7 billion hard cap could have impaired CalPERS’ ability to commit to future investments. PCA suggested that the increase could be particularly helpful should the opportunity for a large acquisition present itself later in the year.
Meanwhile, for CalPERS’ allocations to existing investments in the total real estate portfolio, the current Real Assets Delegation Resolution limit is 20 percent, not to exceed $5 billion. For “retiring early, disposing of, renewing or extending” existing debt financing investments in the real estate portfolio, the current limit is 30 percent, not to exceed $7 billion.