News analysis: CalPERS tie transformed MacFarlane

News this week that MacFarlane Partners has severed its ties with the California Public Employees’ Retirement System brings to an end a relationship that catapulted the private equity real estate firm into becoming a major player and, for a time, gave valuable political capital to supporters of so-called “double-bottom-line” investment programmes.

A Reuters article yesterday quoted a MacFarlane spokesperson as saying that “MacFarlane Partners, on its own initiative, resigned as manager of California Urban Investment Partners, LLC, for reasons agreed to and accepted by CalPERS.”

REIT Newshound has reported that San Francisco-based Stockbridge Real Estate Funds had been designated as a replacement manager for the platform. Representatives for MacFarlane and Stockbridge could not be reached for comment.

San Francisco-based MacFarlane Partners was formed in 1987 by former Aetna Life & Casualty executive Victor MacFarlane. The firm received a major boost in 1994 when it responded to and won a CalPERS request-for-proposal seeking a manager for a programme that would invest pension capital in “retail properties in underserved markets”.

In a 2008 interview with PERE magazine, MacFarlane said his firm was the only respondent to the RFP. CalPERS initially committed $51 million to the resulting investment platform, which initially included the participation of basketball great Earvin “Magic” Johnson, who later left to co-found Canyon-Johnson Urban Funds.

California Urban Investment Partners was a precursor to the much larger, and greatly ballyhooed, California Urban Real Estate programme, which by late 2007 had grown to a $3.4 billion allocation and was reporting a gross IRR of 22 percent. Within that, MacFarlane’s team had produced a net IRR of 33 percent, MacFarlane said in the PERE interview.

The backing of CalPERS and good track record allowed MacFarlane Partners to eventually raise a $1 billion fund – MacFarlane Urban Real Estate Fund II. In 2007, MacFarlane reported some $20 billion in total assets under management.

The success of CalPERS urban real estate programme was seized upon by politicians connected to the pension and by boosters of so called “double-bottom-line” investment programmes – ie, investment mandates that call for good returns as well as good ancillary social benefits such as social advancement, jobs and urban renewal.

A 2005 case study created for Harvard Law School and Oxford University cites California Urban Investment Partners as a landmark development in urban revitalisation policymaking and declares, “MacFarlane has delivered on CalPERS’ request”.
A press release issued the same year from then-state treasurer Phil Angelides hailed CalPERS’ California Urban Real Estate investments, saying it “proved once again that we can do well by doing good. . . generating solid earnings for taxpayers and pensioners, and at the same time creating housing, jobs and economic opportunity in California’s underserved communities”.
The next year Angelides made an unsuccessful run to be governor of California.

The relationship between CalPERS and MacFarlane grew more lucrative – and ultimately soured – through the creation of LandSource Communities Development. The platform involved $900 million from CalPERS and was controlled by a partnership between MacFarlane Partners and Weyerhaeuser Realty Investors. But last year LandSource declared bankruptcy.

In the 2007 interview MarFarlane told PERE of his success as a prominent investor in underserved markets: “It makes me feel good to make money and make a difference. I often say we have the best job in the world.”