The Los Angeles County Employees Retirement Association is set to make its foray into private real estate debt with plans to invest up to $400 million in the sector – through two separate accounts.
Issuing a request for proposal today, the $34 billion public pension scheme said it was looking to hire up to two managers to target the subordinated debt origination space, particularly with loan-to-value ratios of between 50 percent and 75 percent.
John McClelland, LACERA’s principal real estate investment officer, said in an interview the debt could take the form of A-B structures, B-notes, mezzanine pieces or preferred equity, but that controlling the pension’s risk profile was crucial with separate accounts the “preferred method of investing”.
Part of the catalyst for adopting separate accounts was the ability of the pension to control its investments, he said, adding that many of the real estate debt fund offerings currently in the market were “broad in scope” and also included higher risk profiles.
Many separate account mandates are larger, often around $500 million and above, in order to ensure a diverse base of assets. McClelland said the RFP was part of LACERA’s attempt to see if the strategy of separate account subordinated debt investing was feasible.
McClelland added that LACERA was eyeing private real estate debt for the first time because of the general instability of the real estate equity markets. With little job growth, excess capital chasing core deals and few prospects for a market recovery anytime soon, he said LACERA was “not at all optimistic for the short-term future of the equity side of the business. I think it’s entirely possible we could flounder around at the current level for several years,” he continued.
The Los Angeles pension hopes to select finalists for the RFP by the first quarter of 2011, with a deadline for responses of 12 October. “This is our highest priority [in the real estate portfolio],” McClelland said.
In targeting separate accounts, the pension is following in the footsteps of many large institutional investors in getting greater control over its risk profile. “We are interesting in controlling risk to the maximum extent possible and want to be on the low side of the risk profile,” McClelland said.
In terms of the subordinated debt origination investments, the pension didn’t have a specific strategy, but said the originations could take a number of structures. “The returns that appear to be available to the holders of debt in the 50 percent to 75 percent loan-to-value ratio are attractive to us.”
LACERA’s real estate portfolio was valued at $2.9 billion, as of the end of August, with an actual allocation to real estate of 8.6 percent against a long-term target of 10 percent.