The Oregon Investment Council has approved a $125 million follow-on investment to the Talmage Separate Account on behalf of the Oregon Public Employees’ Retirement Fund (OPERF). The state pension previously committed $300 million to the core separate account in 2008.
The Talmage Separate Account is an unlevered account that invests solely in commercial real estate-related debt instruments, such as whole loans, bank debt, mezzanine loans, commercial mortgage-back securities (CMBS) and collateralized debt obligations. The account was established both as a diversifier and a more liquid strategy to the remaining equity investments within OPERF’s core real estate portfolio.
Because the vehicle has been fully invested since late 2011, “there have been many subsequent opportunities the separate account has not been able to capitalize on without an additional capital allocation,” the council wrote in documents on the separate account. “With the pending debt market maturities coming due in the near future from the vintage year lending and the subsequent equity losses during 2005 to 2008, it is anticipated the strategy employed by the separate account is well-positioned to capitalise, in the short to medium term, on attractive debt opportunities and continue to achieve accretive returns.”
Talmage is a New York-based commercial real estate fund manager that was launched as Guggenheim Structured Real Estate Advisors (GSREA) in 2003 by Ed Shugrue III, the former chief operating officer of investment management company Capital Trust. From 2003 to 2011, GSREA was a unit of financial services firm Guggenheim Partners, but the two parties parted ways in January, with the latter rebranding as Talmage.
The renamed firm operates three business lines within the CMBS market, including an investment management entity that comprises six vehicles with approximately $1.7 billion in assets under management. That includes the OPERF separate account and the Guggenheim Structured Funds.
OPERF had invested with Guggenheim Structured Real Estate Debt Funds I, II and III, committing $50 million, $100 million and $150 million, respectively. Although Fund I met return expectations with an 18 percent gross and 13 percent net IRR, Fund II, which raised $770 million in 2006, suffered a complete loss of capital as a result of a margin call on the vehicle’s debt. With Fund III, which closed on $1.25 million in 2007, Talmage distributed securities not held in the collateral pool back to investors in order to completely de-lever the vehicle and protect investors from future margin calls. This resulted in an overall loss of 5 percent for Fund III.
Meanwhile, the OPERF separate account has called a total of $722.9 million and returned a total of $499.9 million to date, with current portfolio holdings valued at an estimated $350.3 million. The portfolio is projected to generate a net IRR of 12.1 percent and a net 1.7x equity multiple over the next four years. The returns on the separate account have allowed OPERF to recover prior losses for Funds II and III in a four-year period, according to pension documents.
The commitment to the Talmage separate account will be part of OPERF’s core real estate portfolio. The pension plan had an actual core allocation of 26.5 percent as of 31 March, against a target of 30 percent. Real estate assets represented 11.5 percent of the overall OPERF portfolio, slightly above its 11 percent target.