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New Mexico makes first non-core commitment in four years

The endowment’s $75 million allocation to The Blackstone Group is the initial capital outlay of approximately $225 million in non-core commitments that the state is expected to make this year.

After committing $410 million to core real estate since December, the $15 billion New Mexico State Investment Council (SIC) is now beginning to implement the non-core component of its 2012 real estate investment plan, beginning with a $75 million commitment to The Blackstone Group’s latest global real estate fund, Blackstone Real Estate Partners (BREP) VII.

The allocation to BREP VII, which was approved at a monthly board meeting yesterday, will help the SIC to meet three portfolio and performance objectives, according to a recommendation submitted by real estate consultant The Townsend Group. These goals include increasing the SIC’s target real estate allocation, which currently stands at 7 percent, to 10 percent by year’s end. Additionally, the commitment will allow the SIC to maintain its 43 percent target for non-core tactical investments in its real estate portfolio and select an established opportunistic real estate manager, the document stated. To maintain portfolio exposure in line with these targets, the pacing model for the council’s 2012 real estate investment plan calls for about $225 million in new non-core tactical commitments.

New Mexico has not made a non-core investment in real estate since late 2007, when it committed $75 million to Angelo Gordon Realty Fund VII. As of 31 December, the majority of the SIC’s portfolio – approximately 73 percent – was allocated to non-core real estate.

Since December, however, the council approved $410 million in core strategic commitments, including $225 million to UBS Trumbull Property Fund and $75 million to Jamestown Properties’ Jamestown Premier Property Fund; $75 million to Heitman’s HART Fund in March; and an additional $75 million to Prudential Real Estate Investors’ PRISA and $35 million to Clarion Partners’ Lion Industrial Trust. As a result of those new core commitments, New Mexico’s real estate portfolio exposure to non-core investments has fallen to 46.6 percent, slightly above its 43 percent target.

The increased real estate allocation to 10 percent of the endowment’s total assets “will allow the SIC to take advantage of new non-core tactical opportunities in 2012 when the return premium for non-core tactical relative to core strategic is attractive, but where manager selection and execution discipline is paramount to capturing this premium, given the tenuous stability of the global financial markets,” Townsend wrote in its recommendation.

New Mexico is the latest state pension to commit to BREP VII, following in the footsteps of Florida State Board of Administration, the State of Wisconsin Investment BoardNew Jersey Division of Investment and Pennsylvania School Employees’ Retirement System, among others. In an earnings call in April, Blackstone’s chief operating officer Tony James said the capital raise for BREP VII – which officially launched in April 2011 and closed on more than $10 billion in February –is now largely complete. However, the fund is expected to collect an additional $2 billion this year, which would make it the largest real estate opportunity vehicle ever raised.

Through the vehicle, which is targeting an internal rate of return of 20 percent, Blackstone expects to purchase debt to gain control of assets; to provide equity in restructurings or recapitalisations; and to privatise public companies, as well as to make investments in dispositions and bankruptcy situations, according to the Townsend document.