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PA SERS bucks the trend with new manager picks

Even as other institutional investors seek to pare down their manager pools, three-quarters of the $26bn pension system’s real estate commitments in the past year have represented new relationships.

The Pennsylvania State Employees’ Retirement System has opted primarily for new real estate relationships rather than existing managers in the past year, including its most recent round of commitments, which were disclosed last week.

The pension system earmarked $300 million to three firms, including two new managers, Chicago-based Singerman Real Estate and Irving, Texas-based C-III Capital Partners, at its board meeting last week. In its latest round of allocations, the pension fund earmarked $50 million for SRE Opportunity III, Singerman’s opportunistic fund, and another $50 million for a discretionary co-investment fund. The firm is investing capital from the vehicle across the US, according to SERS’ announcement.

Singerman, which declined to comment, has a $400 million target for the fund, according to a filing with the Securities and Exchange Commission posted last week. The firm closed its second fund at its $275 million hard-cap in April 2015, PERE previously reported. For Fund II, the firm was targeting an 18 percent net internal rate of return and a 1.75x multiple.

Meanwhile, SERS allocated up to $100 million to C-III Recovery Fund III, C-III’s value-added vehicle. The firm raised $568 million for the previous value-added fund, a 2013-vintage, according to PERE data. C-III could not be reached for comment.

SERS also wrote a $300 million check to Blackstone Property Partners, the core-plus platform run by Blackstone that invests in the US and Canada. BPP had $11.9 billion in committed capital as of June 30, according to the firm’s second-quarter earnings report. The platform generated a 15 percent net IRR as of the second quarter.

Since 2003, SERS has committed $250 million total to four of Blackstone’s opportunistic funds, according to its annual financial report.

The commitments to all three managers “confirm our belief that the firms and their investment strategies will help us meet our investment objectives,” a SERS spokeswoman told PERE.

In the past year, SERS’ sole other real estate commitment was a pledge of up to $100 million in April to Oak Street Real Estate Capital’s fourth fund, Oak Street Real Estate Capital Fund IV, focusing on single-tenant, triple-net or double-net lease assets. The Chicago-based private equity real estate firm is also a new manager for SERS.

One real estate advisory firm executive said SERS’ commitments to new relationships runs counter to the trend of institutional investors avoiding new earmarks in favor of re-upping with their existing managers. Despite investors’ bullishness about real estate generally, he said they are wary of picking untested relationships at this point in the real estate cycle.

SERS’ earmarks to two new managers come as some investors are culling even their existing relationships. One placement agent told PERE earlier this year that investors facing, for example, 10 re-up options in 2017 might only pick five commitments.

“The space is more crowded than ever, and it largely affects mid-size and smaller players,” the placement agent said. “Investors are considering what their portfolio needs are, and the answer is usually fewer new managers.”

Last week, SERS also said it would establish a transition manager program “that the system can utilize for asset restructuring on an as-needed basis.” A spokeswoman said the program will be used across asset classes.

SERS’ real estate portfolio was $2.3 billion in size and returned 3.2 percent in the year ending December 31, below its 9.9 percent benchmark, according to its most recent investment report. The pension system’s overall $26.3 billion portfolio returned 6.5 percent in the same time period, under its 7.3 percent benchmark.