Contra Costa mulls witholding planned MSREF commitment

Contra Costa County Employees’ Retirement Association is reportedly considering withdrawing a proposed $75m commitment to Morgan Stanley's latest global property fund, amid concerns over leverage and personnel changes. Contra is the second US pension to pull back on provisional commitments to MSREF VII this year.

Californian pension fund, the Contra Costa County Employees’ Retirement Association, is planning to withhold a proposed $75 million commitment to Morgan Stanley’s latest global real estate vehicle, Morgan Stanley Real Estate Fund VII Global.

Contra first announced the commitment to the fund last summer, however according to multiple reports on the issue, the pension is now considering reversing that initial decision because of concerns about investing in opportunity funds which employ high leverage for their investments.

The US pension had not finalised the commitment as it was still in the due diligence process. Contra Costa was unavailable for comment at press time.

Contra is the second pension this year to withhold a planned commitment from the Morgan Stanley vehicle. In January, the New Jersey Division of Investment said it was planning not close on its investment owing to declining real estate prices and increasing opportunities in the property debt market, according to documents from the pension fund’s board meeting.

The pension, which saw the value of its total assets under management fall almost $17 billion in 2008 to $63.9 billion, said it had changed its mind because “current appraised values for real estate” were lagging actual market prices at a time when more “attractive real estate debt-related opportunities” were expected to emerge in 2009.

Contra Costa is also reportedly concerned about the change in key personnel at the fund manager. John Carrafiell relinquished his position in January as co-global head of the business, while Sonny Kalsi, the co-global head based in New York, was placed on administrative leave in February.
The decision came as Morgan Stanley confirmed it was investigating a former China-based real estate executive for “actions” that “appear to have violated the Foreign Corrupt Practices Act”.

According to New Jersey fund documents, Morgan Stanley is targeting between $10 billion and $12 billion for the global fund, which would focus on “large, wholly or majority owned positions”.

The vehicle would also look at distressed opportunities and investments in emerging markets, with expected IRRs of more than 20 percent. Geographically, investments would be split equally between the US, Asia (with a focus on Japan), Western Europe (with a focus on Germany) and the emerging markets (with a focus on China).