North Carolina considers secondaries

The $78.1 billion pension system is weighing the possible sale of fund interests in its real estate portfolio.

One institutional investor that previously hasn’t been active in real estate secondaries is taking a harder look at the market. 

Susan Carter, director of real estate investments at the North Carolina Department of State Treasurer, noted that the state’s $78.1 billion pension system has made a couple of bids to purchase secondary interests in real estate funds in which the state already is an investor. However, “we are beginning to look at ways to reduce our exposure to managers, whether it might make some sense to sell a few of our funds” in the secondary market, she told the audience during an investors’ panel at the IPD U.S. Real Estate Investment Forum in New York late last week. 

The challenge is where the proceeds from a potential sale would go, Carter said, noting that the capital would not necessarily go back into real estate immediately. “That’s where we are, trying to weigh out the opportunity costs between selling in the secondary market and maintaining some of the upside that we have with some of our existing managers,” she said. “We’re trying to do the analysis right now.” 

Of the three investors on the panel, which also included the Canadian Pension Plan Investment Board, Harvard Management Company has been the most active on the real estate secondaries market. The university endowment has made a number of purchases and sales over the past few years, most notably a 2010 offering where it sold hundreds of millions of dollars’ worth of stakes in a number of its real estate funds. 

“We’ve done it to really cull where we think we’re a little bit overweight and overexposed,” said Dan Cummings, managing director of real estate at Harvard. Also, selling on the secondary market has freed up capital for Harvard to pursue new opportunities, reduce outstanding unfunded commitments and retain more investment flexibility for the future.

However, “it would be wonderful if the market became one that was a little bit easier in which to transact,” said Cummings. While so-called headline pricing has put discounts for real estate secondaries at 20 percent or greater, a bigger market could considerably narrow the bid-ask spread, he noted.