The California State Teachers’ Retirement System is considering how to expand its internal and third-party partnerships across asset classes, including real estate.
During the 2018-19 fiscal year, the $225 billion pension’s investment committee is focusing on further developing a collaborative model, according to documents from its Friday meeting. Through this plan, CalSTRS seeks to form long-term business relationships with other investors and managers to form investment vehicles that “produce attractive sources of return by effectively using the strengths of each investor,” a board document said.
CalSTRS has adopted some form of the collaborative business model for 20 years, and in real estate, the investor currently has over 50 collaborative relationships in various structures, according to a board document. Benefits include better dealflow, allocation control and performance through higher risk-adjusted returns, as well as lower fees.
“We chose the term ‘collaborative’ because it’s all-encompassing,” head of real estate Mike DiRé said at Friday’s meeting. “Real estate has had an advantage in the marketplace to putting together direct or collaborative business models because it’s been around longer.”
Within CalSTRS, the real estate team is working with the global equity group to research an internally-managed real estate investment trust portfolio.
Externally, CalSTRS plans to tap into various networks for real estate investing. In addition to using its existing relationships, the investor will utilize third-party service providers – such as brokers, lawyers, lenders and special servicers – to source deals; seek out opportunities with partners in the private equity and inflation sensitive asset classes; develop a list of “like-minded” investors to pursue large transactions and seek relationships to better use technology.
CalSTRS will consider increasing its operating company investments “to further align interest, increase deal flow and profits/cost savings,” a board document said. The investor could also structure “innovative alignments” with commingled funds.
Challenges to the collaborative model include greater competition in the market and more specialized opportunities – such as senior housing and lab space – that arise from the impact of demographics and technology on real estate. Internally, CalSTRS has been challenged by operational costs and the increased time and staff specialization needed for collaborative work.
“Attracting and retaining personnel becomes even more important as continuity of staffing is the key to maintaining relationships,” CalSTRS said in its board document. “New recruiting and training methods need to be explored to safeguard the system for normal succession especially for expansion of the program.
Added DiRé at Friday’s meeting: “We spend a lot of legal money, we spend a lot of consultant money. Instead of holding 20 assets in a fund, we might hold these assets individually. That adds a lot of work to legal, audit, etc.”
However, he said that to date, cost savings from not paying fees to outside managers have more than offset increased internal costs.
Despite these challenges, DiRé highlighted the success of CalSTRS’ real estate partnerships thus far. Core real estate, which comprises the majority of the pension’s internally-controlled real estate investments, has exceeded its ODCE benchmark over one-, three- and five-year periods. He also said his team learns more and performs better over time as they execute more collaborative deals.
DiRé added that he will introduce more details about an expanded collaborative model at CalSTRS’ September meeting. That presentation will include specific recommendations from chief investment officer Chris Ailman about what the real estate team needs from the pension’s board of directors.
CalSTRS managed $28 billion in real estate as of March 31. Its staff oversees $18.1 billion in control positions – which includes joint ventures, separate accounts and open-end funds – and $6.8 billion in non-control positions, which includes closed-end funds and co-investments.
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