The Los Angeles County Employees’ Retirement Association (LACERA) has authorized staff to reallocate about one-fifth of the nearly $1 billion in new capital that has been earmarked for the real estate asset class during its new fiscal year, which began on July 1. Potential reallocations would include up to $150 million of new capital for real estate equity investments that may be moved between core, value-added and high-return risk strategies, as well as up to $50 million of capital for debt opportunities that may be shifted between separate account managers.
The new capital allocations are part of $900 million that LACERA has set aside for real estate investments for the 2012-2013 fiscal year, under a new real estate investment plan that was approved last month. That plan calls for an allocation to real estate equity of $600 million, including $350 million to core, $150 million to value-added and $100 million to high-return investments. The pension plan also earmarked $300 million in additional capital for its real estate debt separate account managers, including $200 million to Cornerstone Real Estate Advisers and $100 million to Quadrant.
Real estate equity and debt investments can vary significantly in size and, in the case of LACERA, have ranged from $4 million to $150 million during the last three years, according to pension fund documents. Moreover, the pace of deal flow can be unpredictable, where no investment activity may occur for months followed by multiple transactions in one month.
“Since investment size is so unpredictable, the pension plan occasionally finds itself in a mismatch situation, where the amount of capital remaining in a risk category is less than the amount required by a specific new investment,” noted John McClelland, LACERA’s principal investment officer in real estate, in a recommendation to the pension plan’s board of investments. “Staff suggests that, when such a mismatch occurs, unused capital from other risk categories could be reallocated to accommodate the opportunities rather than restrict the managers to pursuing only those investments that happen to be less than or equal to the capital remaining within LACERA’s risk category allocation.”
Allowing available allocations to be moved among managers or risk categories will increase the likelihood that LACERA will be able to take advantage of attractive investments, McClelland explained. Moreover, delegating authority to staff to make such reallocations allows decisions to be made faster than if board action was required. “The pension plan’s managers need timely responses to registration requests since they are usually actively competing for investments,” he added.
LACERA’s real estate investment portfolio currently has a net value of $3.8 billion, or 9.8 percent of the pension’s total assets – slightly below its allocation target of 10 percent for the asset class.