The Los Angeles County Retirement Association (LACERA) yesterday approved retaining Heitman, Clarion Partners and Stockbridge Capital Group to manage real estate equity separate accounts on behalf of the pension plan. Each firm will receive an allocation of $200 million.
The three firms were selected as part of a real estate equity manager search that was approved on January 9. The purpose of the search was to identify real estate separate account managers that are capable of investing in core, value-added and high return strategies, as well as in multiple US regions, on a discretionary basis.
All 18 respondents to the RFP satisfied the minimum qualifications of the search, such as being a registered investment advisor and having at least five years of institutional real estate investment experience. The first phase of the evaluation process involved a qualitative assessment based on an evaluation of nine weighted categories, including company background, assets under management and investment philosophy and portfolio construction. Managers with scores of 84 or higher advanced to phase two of the selection process, which involved in-house and on-site manager interviews. After the on-site interviews, LACERA selected the three firms for recommendation to the board.
Among the attributes for Heitman were its 27-year average tenure for partners, its strong research team and a proposed strategy that would invest 70 percent to 80 percent of its allocation in core investments and 20 percent to 30 percent in value-added assets, noted John McClelland, LACERA’s principal investment officer of real estate, and real estate investment officers Amit Aggarwal and Trina Sanders, in a recommendation to the board.
Clarion, meanwhile, has a 30-year history of managing separate accounts and proposed a strategy that would call for a portfolio of around 65 percent to 75 percent core and 25 percent to 35 percent value-added. Lastly, Stockbridge has managed separate accounts for more than 25 years, and both the suggested portfolio manager and associate portfolio manager for the LACERA mandate previously worked on another separate account for the pension plan while working at RREEF.
The other three finalists were LaSalle Investment Management, AEW Capital Management and JPMorgan Asset Management. Despite being “a credible organization,” LaSalle was eliminated following the in-house interviews because “they proposed a relatively inexperienced team” and did not propose a clearly articulated investment strategy, the investment officers said. AEW “was impressive and presented a team of seasoned professionals,” but it had numerous funds and mandates that would compete with the LACERA account. JPMorgan, meanwhile, had a strong team and research capabilities, but “staff was concerned that the firm has a strong bias towards commingled funds rather than separate accounts” and its proposed strategy focused more on non-core than core.
LACERA currently has six equity separate account managers in its real estate program, including RREEF, TA Associates Realty, Invesco Real Estate, Capri Capital, Cornerstone Real Estate Advisers and Emmes Asset Management. Of the six, RREEF, TA Associates and Invesco each already manage nearly $1 billion of LACERA’s assets, which is close to the allocation limit for a single manager.
Of the remaining three managers, only one – Capri – is considering new investment opportunities and is restricted to multifamily investments, while the other two are restricted from making new investments because of performance-related issues. “Therefore, adding managers with investment capacity will help meet LACERA’s expected continued appetite for additional real estate,” the investment officers wrote in their recommendation. The pension currently has allocated 9.5 percent of its total portfolio to real estate, below its 10 percent target but within its policy range of 7 percent to 15 percent.