While most US pensions are hamstrung by the denominator effect, the $80.7 billion Teacher Retirement System of Texas (TRS) wants to plough some $1 billion to $2 billion into real estate in 2009.
The pension already has between $4 billion and $5 billion in unfunded commitments made over the “last couple of years to various strategies”, managing director of real assets Eric Lang told PERE. TRS currently plans to tack on more than $2 billion in commitments by the end of the year, although investment targets are reevaluated each month as the pension fund's total value fluctuates.
We have about $3 billion invested in real estate and our current allocation with our fund value is about $8 billion, so we have about $5 billion left to get invested.
“We have about $3 billion invested in real estate and our current allocation with our fund value is about $8 billion, so we have about $5 billion left to get invested,” said Lang. “You typically will allocate more than the money you need to invest because it takes time for it to be invested and to get money back.”
TRS' current allocation to real estate was only 4 percent at the close of 2008, far short of the pension's 10 percent long-term target.
The majority of TRS' deployed capital this year will be invested in separately-managed accounts where the pension can “drive the investment decision a little bit” as opposed to investing in commingled funds, said Lang.
“We think that distress is a big area,” added Lang. “We have focused a lot on debt anywhere in the capital structure and our most recent transaction is a senior debt investment. We're also looking at purchasing distressed stable core real estate for our core portfolio where we're under allocated.”
On top of an ambitious investment target, TRS is rolling out two new programmes in 2009: an emerging manager programme and a co-investment programme.
We have quite a bit of dry powder set to deploy so we're actually excited about the future.
The emerging manager programme, intended to invest largely in managers on their first or second fund, is envisioned as two funds of funds, possibly set up with two different managers. The first programme will likely launch in the third quarter of this year with $200 million to $300 million in capital under management.
Timing for the second phase of the programme is uncertain. “We'll see how it goes. It all depends on how quickly and how prudently we get the money invested,” said Lang.
TRS' fledgling co-investment programme has been set up but not finalised and will probably remain dormant in 2009, according to Lang, who believes opportunities will be scarce. Transactions in the coming year will be relatively small in scale and funds will generally be able to handle them without external capital.
Lang thought that few investments of any size would be made by the pension fund's managers in 2009, however. “If they see a compelling transaction that we think we could underwrite in this market and be comfortable with we're all for co-investing in it, but I think most of them will take a conservative approach and hold tight until there's some clarity on the market,” he said.
On top of TRS' bullish investment stance going forward, Lang expressed optimism for the pension's current portfolio. Although the market is challenging and real estate investments made in 2007 and 2008 have not performed particularly well, the bulk of TRS' real estate portfolio is made up of unfunded commitments. With real estate markets going through a drastic revaluation this could work in TRS' favour.
“We have quite a bit of dry powder set to deploy so we're actually excited about the future.”