Montana puts Beacon fund on troubled investments list

The $12.78 billion pension plan now counts its commitment to Boston-based real estate manager’s 2007 vintage fund among its official tally of poorly performing real estate investments.

The Montana Board of Investments (BOI) has added Beacon Capital Partners’ fifth commingled real estate fund, Beacon Capital Strategic Partners V, to its “watch list” of troubled investments. “While the manager has done a good job of trying to preserve value, suffering from the impact the recession has had on office properties, the fund is not expected to recover our cost,” the pension system noted in documents from its board meeting late last week.

In documents from its August board meeting, Montana BOI had disclosed that the Beacon fund was “on track to permanent impairment” and likely to be added to its Partnership Focus List for real estate. Impairment refers to a situation where the pension system is not expected to get all of its capital back on an investment.

Montana BOI declined to comment further, but PERE understands that Strategic Partners V was put on the watch list largely because of an unresolved debt issue related to a specific property in the fund. The inclusion of a real estate fund on a watch list, however, typically does not lead to any immediate action by the pension system’s board.

Montana BOI had committed $25 million to Strategic Partners V, which raised more than $4 billion and targeted a gross internal rate of return between 18 percent and 20 percent on the acquisition, development and redevelopment of primarily office assets in the US and Western Europe. The 2007 vintage fund, however, currently has an IRR of 2.7 percent year-to-date and -16.70 percent since inception, according the pension plan’s first quarter report. The state’s commitment – of which $20.5 million already has been called – currently has a net asset value of $10.2 million.

Other limited partners in Strategic Partners V included the California State Teachers’ Retirement System, New York State Common Retirement Fund, Pennsylvania Public School Employees’ Retirement System and Ohio Public Employees Retirement System.

The fund, which now is fully invested, has amassed a real estate portfolio that includes 42 office properties in the Washington DC and Seattle areas that were acquired in 2007 from The Blackstone Group for $6.4 billion. In recent years, Beacon has restructured the debt on the properties in the fund and has sold 10 assets with a total value of $3 billion over the past two years. Additionally, the firm has other deals pending, including the sale of Washington Mutual Tower, which reportedly will be acquired by MetLife and Clarion Partners for $550 million.

Beacon declined to comment, but a person familiar with the matter said the firm is close to resolving the debt issue that is of concern to Montana BOI. In addition, the debt restructuring and property sales, along with the still unrealized upside potential of the fund’s remaining assets, could improve performance prospects for the vehicle, which has four to five years of remaining life. As a result of its recent sales transactions, Beacon is expected to make additional distributions to investors in the near future.

Montana BOI has been investing in real estate since 2006 and had allocated 8 percent of its total portfolio to the asset class as of 30 June. Currently, the real estate programme is 30.7 percent invested in value-added assets, 21.2 percent in opportunistic investments and 42.3 percent in core open-ended funds. Additionally, it has allocated 5.8 percent of its real estate portfolio to timberland assets.

Year-to-date, Montana BOI has committed approximately $138 million to real estate, including two re-ups with value-added managers, one new timberland manager and one new value-added manager. The state’s real estate programme currently is focused on increasing its exposures to timberland and value-added investments, as well as scaling back on investments in commercial mortgage-backed securities, debt origination and other public securities-related strategies. The pension plan also may consider two additional new managers before year-end.