North Carolina State Treasury plans to reduce the number of real estate managers it employs in favor of pursuing fewer, “higher conviction” relationships, according to materials from the pension’s May 2020 investment management division meeting.
The pension did not respond to an inquiry asking for specifics on its manager reduction plan. However, North Carolina said in its meeting materials that it plans to “invest meaningful amounts with fewer best-in-class managers” by deploying capital in multiple strategies with each firm. It expects to negotiate more favorable fees and terms by consolidating its manager relationships.
The pension defines “higher conviction” managers as those with the highest probability of meeting or exceeding expected fund-level returns. As of March 31, 2020, 88 percent of North Carolina’s real estate portfolio was managed by higher-conviction managers, up from around 80 percent in March 2017.
North Carolina also plans to be active on the real estate secondaries market, from both the buy and sell side. The pension previously committed $100 million to Landmark Partners’ 2014-vintage real estate secondaries vehicle Landmark Real Estate Fund VII.
The pension is looking to increase its exposure to “high-growth” real estate sectors, such as industrial property, data centers and cell phone towers.
It also plans to increase investment in “low-capex“ property, which it defines as multifamily, self-storage and manufactured housing, and decrease its exposure to the “high-capex and higher-fee sectors” of office, retail and hotel.
As of March 31, North Carolina’s real estate allocation was valued at $8.85 billion and represented 9 percent of total plan assets, above its policy target by 1 percent.
Sixty-three percent of the pension’s real estate portfolio is in core strategies, which primarily comprise exposure to private core real estate via evergreen vehicles. The core portfolio has one-, three- and five-year returns of 4.5 percent, 6.7 percent and 7.2 percent, respectively. Historically, higher-conviction managers tend to contribute around the same returns as other managers to the core portfolio.
The pension’s non-core portfolio is worth 37 percent of the total portfolio and comprises special situations, value-add and opportunistic property investments, with one-, three- and five-year returns of 11.0, 11.8 and 12.5 percent, respectively. Historically, higher-conviction managers tend to contribute upwards of 90 percent of the returns to the non-core portfolio, with other managers contributing the rest.
The vast majority of North Carolina’s real estate holdings are domestic, with just 15.1 percent of its property holdings overseas.
Key real estate staff within North Carolina’s investment management division include Troy March, director of real estate, and Tinh Phan, portfolio manager, who have both worked at the pension for seven years.
North Carolina has made capital commitments to funds managed by Blackstone and Harrison Street Real Estate Capital in recent years.
Institution: North Carolina State Treasury
Headquarters: Raleigh, North Carolina
AUM: $100.81 billion
Allocation to real estate: 8.76%
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