Mike DiRe wants you to ‘challenge the way you invest’

It has been a pivotal year for Mike DiRe. In January, he marked his first year in the newly created role of senior investment director of private markets at the California State Teachers’ Retirement System. In stepping up into the new post, he wrapped up 23 years as the pension plan’s head of real estate, a position that made him a boldface name in the industry.

He switched jobs amid a significant market dislocation spurred by aggressive interest rate hikes and shrinking liquidity. “It is quite different,” says DiRe, speaking via conference call from CalSTRS’ West Sacramento headquarters in late January. “The position had not been here before. So there was some defining-as-we-go going on with what the role is. And actually, the market played a significant part in what we spent our time on in the first year.”

Private markets – a bucket that comprises real estate, private equity and inflation-sensitive assets – has become a significant part of CalSTRS’ investment portfolio, making up approximately 37 percent of the investor’s overall holdings as of January 31. However, “the cashflows, that are not as predictable and not in our control with respect to when they are going to be drawn, needed some additional focus,” he says.

While DiRe continues to advise the real estate team as needed, he has handed off the decision-making responsibilities to his successor, Julie Donegan. In his new role, he has spent a lot of time on portfolio analysis and highlighted key differences between the asset class he knows best and private equity and inflation-sensitive, particularly in terms of how liquidity issues are addressed. “The real estate team was a lot more used to using lines of credit and leverage with respect to managing cashflows, [whereas] the private equity and inflation-sensitive hadn’t been in the position to have to do that,” he explains.

“Challenge the process and challenge the way you invest and the opportunities that are brought to you, try to think outside the box”

Mike DiRe,
CalSTRS

“Each team now will be putting in place lines of credit that they can use if they choose to. Essentially, if they are going beyond their pacing plans, because they have compelling transactions, or a desire to put out capital to diversify their portfolio, we can use the lines of credit to move in that direction if cash isn’t available at the fund level. So, we are currently putting those programs in place. And I think it will be utilized starting in 2024.”

What will be a new liquidity measure for private equity and inflation-sensitive, however, was adopted by CalSTRS’ real estate team more than 15 years ago. And DiRe was the driving force behind it.

Highlights and lowlights

For DiRe, his biggest career highlight has been the transformation of CalSTRS’ real estate business over the past 20-plus years

“I think just the steady progress of turning the portfolio around, the returns working, those individual changes kind of grouping together, whether it was the lines of credit or doing the development, or doing the joint venture structures, just those things kind of melding and working together, it was exciting to see it all come together over time,” he says.

Key to that transformation has been the real estate team – which has expanded from four investment professionals in 2000 to more than 30 today – with each portfolio manager setting up and taking ownership over a set of manager relationships. “Building the team, and having that success and sharing that as a team, that was really the highlight and why I liked the job for so long. It was really rewarding,” DiRe says.

For Teacher Retirement System of Texas’s Lang, one of DiRe’s biggest contributions to the private real estate industry was building a strong team. “You want something to last a lot longer than we do,” he says. “And the only way to do that is to build a great team and culture. And those team members disperse around the whole industry, because they don’t stay with you forever. But they still carry on that DNA.”

In terms of more specific highlights, DiRe points to Cambridge Crossing, a master-planned life sciences development in Cambridge, Massachusetts, in partnership with Texas Teachers and DivcoWest. He considers the investment, which marked the pension plan’s entry into the life sciences market in 2015, to be “a hallmark of a deal.” The partners first bought the raw land and subsequently built approximately three million square feet of life science buildings.

As for lowlights, CalSTRS’ international investments disappointed. “We weren’t able to really recreate what we did in the US overseas and had some missteps there,” he says. “We just didn’t have the personnel or the time to really move overseas and our portfolio always hovered around 5-15 percent internationally… It is just something that we never really fully accomplished. We had good people trying and working on it, but overseas investments have always been a challenge.”

DiRe also takes responsibility for some poorly-timed investments in the hotel sector. “I found out the hard way those are operating businesses, not necessarily just real estate,” he says. “And some of our timing in hotels right before the financial crisis, we took some pretty hard hits with our hotel investments.”

In the hotel sector, CalSTRS learned the hard way that it did not always have full alignment of interest with the operator, including making decisions such as when to put capital into the property, and consequently failed to anticipate a lot of market risks. “Hotels would be some decision-making that I made that I look back and still cringe,” he says.

Catching up

Pushing for change during his long tenure at CalSTRS – one of the world’s largest real estate investors, placing sixth in PERE’s Global Investor 100 ranking – is one of the reasons why this year’s Lifetime Achievement Award winner has become one of the most recognizable investor names in private real estate.

“He has been a force in the real estate industry for decades,” says Blackstone president and chief operating officer Jon Gray. “He is a highly talented investor who has always operated with refreshing candor and fairness. His unwavering dedication to the teachers of California has been extraordinary.”

Adam Gallistel, head of Americas real estate at Singaporean sovereign wealth fund GIC, concurs. “Mike’s courage is greater than most,” he says. “Mike is not so interested in what is market [practice], he is interested in what is fair. And he will fight for what is fair even if it is not what the prevailing market practice is at the time. I would say his willingness to fight for that and go to the mat for that, it is distinguishing relative to a lot of other executives in similar positions.”

Get to know DiRe better – here are three essential things to know about the CalSTRS’ private market head

Gallistel, whose organization has been in the same investor pool as CalSTRS in multiple real estate investments, points to DiRe’s outspokenness in that pool: “Sometimes, the collective voice of the LP community is only as strong as its weakest link. Mike will never be that weakest link.”

Although the director of real estate position was career-defining for DiRe, he did not jump at the chance to apply when the job became available in 2000. DiRe – who was then a portfolio manager at neighboring pension plan California Public Employees’ Retirement System – had to be encouraged to try out for the role by CalSTRS’ then-head of real estate, Mitch Pleis, who was leaving for the private sector, as well as the headhunter running the search process, a former Deloitte and Touche colleague named Sally Carlson.

“We had just started our family and we had two young boys at the time. And so, I was like, I don’t know if now is the right time for a change,” DiRe recalls.

Meanwhile, CalSTRS itself was in the midst of a significant change. “They did not have a CIO at the time,” he recounts. “And the CEO had announced his retirement as well. So, it was really an unknown what the leadership was going to be like there, because I didn’t know who I would be working for.” In fact, with no CIO and a retiring CEO who did not want to make investment personnel decisions, DiRe interviewed in front of CalSTRS’ board of directors.

The pension plan also was far from the industry leader it is today. At the time, CalSTRS only had a small number of real estate manager relationships. It avoided any investments that involved environmental risk or leasing risk, which significantly limited the types of opportunities the pension plan could pursue. “There was a lot of angst and risk aversion with doing anything new and different within real estate,” he recalls.

When the board asked why he was the right person for the job, DiRe answered: “I said, if you hire me, I will help make you nimble in the marketplace, and it will bring on more opportunities, and you will see better returns, and you will have more flexibility in the way that you invest.”

Helping in this mission to revamp CalSTRS’ real estate business was CalSTRS’ new CIO, Chris Ailman, who joined three months after DiRe. “Chris is more conservative than I am, but he was also very open to hearing ideas and definitely did want to have a higher risk-return than what we were getting from the portfolio at the time,” he says.

One of the first items on DiRe’s agenda as head of real estate was to work with the legal department to revise CalSTRS’ internal guidelines to enable the investor to take on more environmental, construction and leasing risk.

“It really opened up a lot more opportunities for CalSTRS to see transactions, and we became a better partner for those groups who were currently doing business with us,” DiRe remarks. “There was nothing revolutionary here. We were just trying to catch up.”

DiRe’s pre-CalSTRS résumé 

• 1985: Graduates from California State University in Sacramento with a degree in Finance/Real Estate
• 1985: Joins Liquidity Fund Financial Group in Emeryville, California as a senior analyst
• 1990: Joins Paterson Financial Services in Lafayette, California as a vice president in real estate security acquisitions
• 1991: Joins Deloitte and Touche’s real estate consulting group in San Francisco as a senior real estate consultant
• 1994: Joins the California State Public Employees’ Retirement System as a portfolio manager

Becoming an early mover

CalSTRS’ shift from an industry laggard to a leader did not occur until DiRe was three or four years on the job, when the investor began forming joint ventures with operating partners. “To me, the math wasn’t really difficult to see that there were too many layers of managers in between the real estate returns and CalSTRS as the eventual owner,” he notes.

Because of the multiple fees paid to an opportunistic fund manager and its development partner, CalSTRS was only earning a slightly better return than doing core-like investments. So DiRe decided to go directly to the developer.

“By doing that, we were able to really add hundreds of basis points in returns, and really not add that much risk, because we would actually do lower leverage amounts because we also needed to get more capital out,” he says. Whereas the fee load with an opportunity fund was around 400bps, the fee load was closer to 150bps in a direct relationship with the developer.

20 years of milestones at CalSTRS

• 2000: Hires DiRe as director of real estate, followed by Chris Ailman as CIO three months later
• 2000: Changes internal guidelines to allow real estate team to take on environmental, construction and leasing risk
• 2005: Makes first investment in a real estate operating company, Fairfield Residential; opens first lines of credit
• 2007: Makes first investment in a fund manager, acquiring a stake in PCCP
• 2015: Enters the life sciences market with acquisition of Cambridge Crossing with DivcoWest and Texas Teachers
• 2023: Promotes DiRe to senior investment director of private markets
• 2024: Announces Ailman’s retirement

“Once we formed a couple of those relationships, then other developers that might have wanted to have a direct relationship with the capital would come and knock on the door,” DiRe says.

The second major change for the real estate team was setting up lines of credit to manage its development pipeline. The credit lines were guaranteed and managed by CalSTRS, which ended up saving 200-300bps on the cost of private one-off construction debt. “The availability of that capital and the fact that developers who used our line did not have to put up personal guarantees helped make CalSTRS a partner of choice in our ‘build to core’ strategy,” DiRe says.

Bill Lindsay, co-founder and senior managing partner at Los Angeles-based manager PCCP, notes that CalSTRS has been “at the edge of innovating” when it comes to financing its real estate portfolio.

“CalSTRS has moved from financing asset by asset to thinking about long-term maturities and flexibility, and has executed some very innovative financing strategies on its larger portfolio, moving the financing decision from the investment manager to the retirement system and creating long-term stability,” Lindsay says. “We haven’t seen other pension funds do that yet.”

Lindsay adds that CalSTRS has been very thoughtful in asking managers for more input on how their real estate assets are financed, whether it be long-term financing, a line of credit or a private placement with an insurance company. “I think they have really innovated that and thought more about that CFO function of the real estate itself,” he says.

Financing aside, CalSTRS was also an early mover in other respects. This included making entity-level investments in real estate firms, buying a minority, non-controlling interest in PCCP in 2007, for example.  “At the time, it seemed very pioneering and we had a lot of explaining to do with other LPs,” Lindsay recalls. “Today, it seems like a routine occurrence.”

The pension plan was ahead of the pack in other ways, too. “I think they have been pretty innovative with their use of real estate operating companies,” says Eric Lang, senior managing director of external private markets at the Teacher Retirement System of Texas. “We do similar things, but I think they were a little bit ahead of us on that on real estate operating companies because their governance allowed them to do it differently than we have.”

For Gallistel, DiRe was most forward-thinking when it came to asset allocation and portfolio construction, going into sectors that would not have been on the list of a consultant’s offerings. “I think Mike was leading in taking CalSTRS to places where he saw the world going versus where it is today.” This included the pension plan’s move into life sciences “much earlier than the lion’s share of the domestic pension industry had,” as well as a foray into digital infrastructure years before many of their peers. The result was a high-quality portfolio “which would be the envy of almost any institutional investor,” Gallistel remarks.

Indeed, with his early-adopter approach, DiRe beat him out for opportunities on multiple occasions, Gallistel adds. “He has got a lot of street smarts. I have just always been impressed,” he says. “We will approach things very academically in certain sectors and we will have gone through a whole [list] of pros and cons of everybody we want to do business with.” But when reaching out to that shortlist, “I can’t tell you how many times that shortlist has been like, ‘Oh yeah, we already get all our money from CalSTRS.’”

He continues: “Mike has just got a very good nose for where things are going and what things will work and who to do business with.”

Why he stayed

To remain in the same real estate role for as long as DiRe did is a rarity in the industry 

“There were a lot of personal reasons I stayed at CalSTRS,” he says. “The primary one is I have a son with autism. Just the challenges and the needs he has, the environment at CalSTRS and the environment that Chris Ailman put together is that you really can put family first. And when you have a special needs child, there are a lot of random events in your life. Having a job like that, you don’t have to jump on a plane at a moment’s notice.” 

He is quick to credit his wife, however, for handling the lion’s share of their son’s care. Without her, “I couldn’t have done what I did in any position.” 

What also helped was that managers were willing to come to Sacramento. “It really is rewarding to be on this side of the business, because you don’t have any of these pressures,” he remarks. “You are not trying to sell anything. But also, it is just nice that you can control your time and control your travel. Just being in a position with an autistic son, that was very helpful for me to just stay here and bloom where I am planted.”

‘Challenge the process’

When asked what advice he would give to the next generation of real estate leaders, DiRe draws from his own experience in not accepting investing can only be done a certain way.  “Challenge the process and challenge the way you invest and the opportunities that are brought to you, try to think outside the box,” he remarks. “And encourage those around you to do the same thing. I have found that the people that do the best, just constantly ask, ‘Why? Why are we doing it that way?’”

DiRe adds that being inquisitive and challenging others is a crucial part of the due diligence involved with writing very large checks to managers. “It is a strange job to have to sign your name to an investment or a strategy that has more dollars behind it than you will ever see in your personal life,” he says. “And I have always found that just asking more questions helps me build comfort… In the end, isn’t that a fiduciary’s role, to think outside the box and just make sure that all the alternatives have at least been discussed?”

Alexandra Hill, Blackstone’s head of institutional business development, Americas, says DiRe has always been “a fierce advocate” for the teachers of California. “He is not afraid to challenge others if it will benefit his constituents,” she notes. “He challenges us in a fair and collaborative way to find a true win-win solution.”

“He has been a force in the real estate industry for decades” 

Jon Gray,
Blackstone

When asked how people react to being challenged, he responds: “I have really not had a problem with people being challenged, as long as you are doing it from the standpoint of trying to learn and trying to do the right thing.” He pauses. “Well, I actually can recall people saying, ‘Don’t ask me, I know how to do this better than you.’ You end up not having that relationship very much longer if people aren’t willing to discuss it.”

But “it is a two-way street,” he points out. “If you are asking or critiquing the way that someone is doing business, you should be open to being critiqued yourself.”

PCCP, for example, has challenged CalSTRS on policies and procedures that can be obstacles to moving quickly on time-limited opportunities. “It is a testament to the transparency and openness of the CalSTRS team that we have been able to say sometimes, is there a different way of solving this problem so that we can pursue a fast-moving investment theme?” Lindsay says. “The answer isn’t always yes, but Mike and his team have been open and when the timing is right, have been able to move quickly to take advantage of the market.”

The next chapter

Having now settled into his new role, DiRe is bracing for more changes. A week before his interview with PERE, DiRe learned that Ailman – with whom he had worked his entire career at CalSTRS – was retiring. Although the pension plan intends to select a new CIO by June 30, Ailman plans to stay on through the end of the year.

“Mike’s courage is greater than most”

Adam Gallistel,
GIC

“It allows us time to transition,” he explains. “And so it is not overly discomforting in any way other than there is going to be some change, and whoever gets selected, I am sure they will have changes we will have to adjust to and some ideas that probably need to be put into place. But I think conceptually, we are very fortunate at CalSTRS that the various investment disciplines have been in place for a long time, and they are used to working together.”

He adds that his new role has given him a different perspective on investing at CalSTRS. “When I was just director of real estate, I really cared about what the real estate was,” he says.

“I didn’t really think honestly a lot of time about the organization. But having been in this position for a year, it is definitely needed to have more conversations about how the organization is moving forward. As the markets continuously move faster, and the demands for capital are higher in the liquidity situation for us and others in the industry, we do have to coordinate better and work together as a team more.”

As for his own retirement, DiRe, who turns 62 this year, expects he will likely wrap up his career with CalSTRS and in the position he is in now. But he declines to put a specific date on it: “As long as I feel I am adding value, and it is challenging, I am happy to work here.”