The New Jersey Division of Investment (NJDOI) has committed the total equivalent of $400 million to three European real estate funds, consisting of €75 million to Perella Weinberg’s Perella Weinberg Real Estate (PWRE) Fund II, £75 million (€88.93 million; $114.59 million) to M&G Investment Management’s M&G Real Estate Debt Fund (REDF) II and £125 million to M&G Real Estate Debt Fund III. The New Jersey State Investment Council (SIC), which oversees NJDOI’s investments, approved the commitments at its board meeting yesterday.
New York-based Perella Weinberg’s Fund II will pursue opportunistic real estate investments across property types and throughout Europe, with no more than 35 percent of total fund commitments to be invested in the region’s non-core, or emerging, markets. The €1.25 billion vehicle is expected to continue the investment strategy of Fund I, which had a projected gross multiple of 1.8x and a 21 percent internal rate of return as of December 31. New Jersey has a small exposure – less than $10 million – to Fund I through a fund-of-funds investment.
“This allocation will provide geographic diversification within the real estate portfolio and provide exposure to better risk-adjusted opportunities than available in the US,” NJDOI Director Timothy Walsh wrote in a recommendation to the SIC. Currently, only 6.6 percent of the pension’s real estate portfolio is invested in Europe.
Walsh highlighted Perella Weinberg’s European credentials, including managing partner Leon Bressler’s previous job as chairman and chief executive of European public REIT Unibail-Rodamco, as well as the firm’s extensive investment experience in the region, including operational repositionings, asset upgrades, leasing, managing real estate operating companies and workouts. “These attractive skill sets align well with the current environment in Europe, where the opportunities continue to be diverse and contain a wide variety of operational issues,” he said.
Additionally, Fund II contains LP-friendly terms, such as a staggered incentive compensation structure beginning at an 11 percent preferred return. Also, the firm and Bressler will make a combined co-investment of €85 million, or more than 5.6 percent of the fund, a larger percentage than most of its competitors in the market, according to Walsh.
The M&G vehicles also will target European investments, but in real estate debt rather than equity. M&G, which along with its senior mortgage lending affiliates, is one of the largest direct lenders in Europe and one of the few providers of whole loans in the region. A subsidiary of UK insurer Prudential, the firm typically allocates loans to three buckets: a senior tranche for its parent company’s insurance fund balance sheet and third-party clients, with targeted returns of LIBOR plus 200 basis points to 300 basis points; a senior subordinated tranche for Fund III, with targeted returns of 7 percent to 10 percent; and a mezzanine tranche for Fund II, with 12 percent to 15 percent targeted returns.
In a recommendation to the SIC, Walsh said the opportunity for real estate debt in Europe arises from the scarcity of available real estate financing in the region – excluding the most senior tranches of debt – along with an estimated €250 billion of real estate-related debt refinancings that are expected to occur every year for the next four to five years. “The M&G funds provide an attractive risk-adjusted substitute for lower-yielding fixed-income investments and are a prudent diversifier for the portfolio as presently the division has a small exposure to European real estate debt,” he wrote.
Assuming that both funds reach their capital-raising target of €750 million each, NJDOI’s investments would amount to 10 percent of Fund II and 16.6 percent of Fund III. In exchange for its sizable commitments, the state will pay a 0.70 percent management fee on invested capital in Fund III and a 1.25 percent fee on invested capital in Fund II.
Separately, the SIC approved the NJDOI’s fiscal year 2014 annual investment plan at yesterday’s meeting. Although the allocation target for real estate remains unchanged, the pension plan will split its current 4.9 percent allocation for the asset class into a 3.5 percent allocation for real estate equity and a 1.4 percent allocation for real estate debt in its upcoming fiscal year, which begins on July 1. Furthermore, it will move real estate debt out of what it calls a 'real return asset class' and into what it dubbed as the 'income asset class'.
Additionally, the pension plan will replace long-term targets with long-term ranges for asset classes and sub-categories, with a proposed long-term range of 2 percent to 7 percent for real estate equity and 1 percent to 4 percent for real estate debt. The proposed fiscal year 2014 allocation for real estate debt will be 2 percent, while the allocation for real estate equity will remain unchanged.