While more focused on core strategies, some private equity real estate investors still view higher-risk plays as a necessary component of their overall investment strategy in the asset class, particularly in certain markets and property types.
“We’ve had a very dramatic shift in strategy,” said Edgar Alvarado, group head of real estate equity at Allstate Investments, speaking at the PERE Global Investor Forum 2012 in Los Angeles. While the Northbrook, Illinois-based investment management arm of US insurer Allstate Corporation has been deploying capital to opportunistic real estate strategies since 1991, the firm has been “focused on income, not total return” coming out of the downturn, he said.
With income as the driver of its investment decisions, Allstate, which had had accumulated $4.1 billion in limited partnership interests including real estate as at June 2011 according to PEREConnect, has allocated more capital to income-focused investments, including core strategies, joint ventures and separate accounts.
Despite the evident preference for core, delegates heard how investors are not ruling out opportunistic strategies entirely. “There is a place for opportunistic, but I don’t think you can go all in,” said John McClelland, principal investment officer of real estate investments at the Los Angeles County Employees Retirement Association (LACERA). Opportunistic strategies can allow an investor to diversify into markets where it otherwise may not be possible to invest, he said. “There’s still some appetite for growth markets,” particularly in Asia, where there still aren’t too many core opportunities available.
The $39.2 billion pension plan – which has a 10 percent target allocation for real estate, within which 15 to 20 percent could go to opportunistic investments – also has made some high-return investments domestically, typically in development. “Sometimes it has done well, sometimes it hasn’t,” he said. For example, LACERA has invested in housing for 15 years and found the sector perform well during that time period although later, the pension plan noted, it “crashed and burned.” It also has “made some good buys” in the hotel sector.
Part of what made investors more cautious about opportunistic strategies was the high amount of leverage, and, as a result, the associated risk. “There was too much leverage in opportunistic strategies during the boom,” said Alvarado. More leverage, he added, raised the odds of volatility, given the execution, platform, individual asset and market risks associated with opportunistic strategies.
The question for an investor to ask was what it hoped to achieve with that leverage, he said. “There is no easy answer,” said Alvarado. “We can still probably justify higher leverage [in an opportunistic strategy], but not as much as we did before.”