CalSTRS’ latest multifamily JV is its collaborative case in point

The $240bn pension’s new partnership represents the blueprint for how it wants to deploy capital.

California Street in San Francisco.

One of the US’s biggest pensions, the California State Teachers’ Retirement System, committed $300 million this week to a joint venture with Strada Investment Group, a San Francisco-based developer, to build apartments in the western US. The $240 billion pension fund will lean on BlackRock Real Estate, the real estate platform of the titanic asset manager, as an advisor for the partnership.

Targeting a number of markets, but with a particular focus on the San Francisco Bay Area, the joint venture will employ a ‘build-to-core’ approach to take advantage of Strada’s ground-up development expertise.

The partnership also encapsulates CalSTRS’ new investment thesis, known as the collaborative model. Touching all parts of its portfolio, the strategy calls for the pension to take a more active approach in its investments – limiting its interactions with commingled funds to those executing opportunistic strategies.

The Sacramento-based investor believes it can craft a well-balanced, risk-adjusted portfolio, with a discounted fee-load, through heavier exposures to separately managed accounts, co-investments, club deals, operating company acquisitions and programmatic joint ventures, such as the one formed with Strada.

This is not a novel approach. Sovereign wealth funds and insurance companies have leaned on direct investment structures for years. Elsewhere in North America, Canada’s public retirement systems have free-standing investment companies to source their own deals. Even CalSTRS first dabbled in non-fund structures more than three decades ago.

However, the collaborative model is also not business as usual. That CalSTRS has designated the strategy by name indicates the strength of its appetite for such investments. Growing its in-house investment staff from 180 to 300 over the next five years, as it plans to do in pursuit of this plan, speaks volumes.

During an interview conducted this summer and soon to be published, Scott Chan, CalSTRS’ deputy chief investment officer tasked with implementing the collaborative model, told PERE that the goal of the program is to turn the pension into the “partner of choice” within the institutional investment world. Unlike years past, that label is no longer limited. The pension aims to invest alongside other investors, as well as developers such as Strada. It also plans to maintain its relationships with managers, albeit in different ways.

As mentioned earlier, CalSTRS will leverage a longstanding relationship with BlackRock for its new joint venture. Yet, instead of investing capital on a discretionary basis, the New York-based firm will merely serve as a second set of eyes before the pension gives its blessing to deals. As such, and in keeping with the collaborative model, the fee for this service is a fraction of what is paid to a commingled fund manager, a CalSTRS official tells PERE.

Such arrangements will become more common as the model takes further root and other top US investors, such as the California Public Employees’ Retirement System and the Teachers’ Retirement System of Texas, continue to pursue similar strategies.

In 2017, CalSTRS managed 44 percent of its portfolio internally at a cost of $30 million. Meanwhile, the other 56 percent, which was managed externally, cost it $1.8 billion. The institution has no set target for internal management. But, even if it tilts the scale to 50-50, it could save hundreds of millions of dollars. Its gains are losses for fund managers.

Nevertheless, BlackRock and other firms have already started adapting to this change. Other managers hoping to access CalSTRS’ capital would be wise to do the same and look beyond offering it their latest commingled funds.

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For the full interview with CalSTRS’ deputy CIO Scott Chan and director of real estate Mike DiRé, and more on the collaborative model, see PERE’s October issue and check next week.

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