The Santa Fe-based New Mexico State Investment Council (NMSIC) is expected to approve commitments to two real estate debt funds sponsored by M&G Investments at tomorrow’s board meeting, making a total investment of $35 million. The $16.5 billion endowment will allocate approximately $22.5 million to M&G Real Estate Debt Fund II and $12.5 million to M&G Real Estate Debt Fund III.
According to its August 27 meeting agenda, the investments will help NMSIC to reach its 10 percent target allocation to real estate, increasing from an 8 percent target approved in August 2012. NMSIC’s current allocation targets within the portfolio include 52 percent for core strategic, 43 percent for non-core tactical and 5 percent for public real estate investment trusts.
The M&G commitments will increase the endowment’s non-core tactical allocation to 55.6 percent of its portfolio. However, once further investments bring NMSIC’s real estate exposure closer to its 10 percent goal, this over-commitment will be approximately 1.2x and fall within the recommended allocation range, according to The Townsend Group, the endowment’s consultant.
Run by M&G Investments, a subsidiary of UK insurer Prudential, the two funds will focus on assets in the UK, Germany and France, investing at least 50 percent of their capital in the UK. M&G Real Estate Debt Fund II will target a gross return in the low teens by providing mezzanine loans with a loan-to-value (LTV) ratio of approximately 65 percent to 85 percent. M&G Real Estate Debt Fund III will provide stretch senior loans with a gross return in the high single digits and an LTV from 50 percent to 70 percent. Each fund has a cap of £650 million.
Townsend cited M&G’s “compelling European strategy, strong platform and management team, track record and good alignment of interests” as reasons for committing to the funds. With the split commitment, NMSIC expects its average return to be in the low teens and an average LTV exposure of 60 percent to 80 percent.
Since December 2011, the endowment has made seven new non-core tactical investments totaling $390 million, as well as six new core strategic investments totaling $485 million. According to board documents, the M&G commitments are attractive additions to NMSIC’s portfolio because they will complement its recent $65 million commitment to Perella Weinberg Partners’ latest opportunistic fund. All three funds seek to capitalize on the current distress in European markets.