Iowa seeks real estate debt fund managers

The $23.1 billion pension system is eyeing an expansion into real estate debt and plans to hire one or more managers to oversee a $200 million mandate.

The Iowa Public Employees’ Retirement System (IPERS) has launched a search for real estate debt fund managers that would be responsible for investing $200 million in capital that the pension system plans to commit to the strategy.

IPERS has issued a request for proposals (RFP) seeking managers involved with private commercial real estate debt originations, acquisitions, financings and dispositions. These investments primarily will consist of mezzanine debt, B-notes and first mortgages, but they also may include some preferred equity.

The selected firm or firms would have discretion in investing and managing the capital that IPERS allocates to a real estate debt strategy, according to the RFP. Proposals will be evaluated based on fund terms, the manager’s experience and track record, legal and operational issues and fees.

IPERS will consider any manager that currently is raising a fund or plans to raise a fund within the next six to nine months. Firms are required to have a minimum track record of five years and to have invested at least $500 million on behalf of one or more predecessor funds and/or invested at least $750 million on behalf of one or more separate accounts as of 30 June.

Proposals are due on 7 September, with the final selection expected to be announced on 6 December.

At its 21 June board meeting, IPERS' board approved a staff recommendation to allocate 10 percent within the real estate programme for private debt investments. “IPERS believes a significant capital 'gap' currently exists in the refinancing market for existing U.S. commercial real estate debt,” said Karl Koch, the pension's chief investment officer, in an email to PERE.  “Lenders willing to supply mezzanine or B-note capital to fill the gap could be rewarded with high risk-adjusted returns. This opportunity will not last more than one to two years, so this is a short-term opportunity, not a long-term strategic move for IPERS’ real estate investment programme.”

IPERS’ real estate portfolio currently comprises equity investments in properties, as well as the stocks of companies that manage properties, in the office, industrial, retail and apartment sectors. The pension system has an 8 percent allocation target to real estate.

Iowa’s pursuit of a real estate debt strategy follows Nebraska Investment Council’s consideration to diversify its real estate portfolio with more debt investments at its board meeting last month. In recent years, US pension funds such as the Los Angeles County Employees Retirement Association and the Florida State Board of Administration have begun investing in real estate debt through structures such as separate accounts or funds.