It’s rare for real estate separate accounts to be smaller than several hundred million dollars in size. In fact, many fund managers would argue that in order to achieve proper diversification, separate accounts need to be in the region of $500 million. John McClelland, LACERA’s principal real estate investment officer
However, the $34 billion Los Angeles County Employees Retirement Association is trying to buck that trend, as it eyes two separate $200 million accounts to help it break into the private real estate debt origination space.
The pension last month agreed to issue a request for proposals for up to two managers to target the subordinated debt sector, particularly with loan-to-value ratios of between 50 percent and 75 percent, with expectations it could initially invest up to $400 million in the sector. 
It provides us with considerably more control over the strategy than commingled funds.[We] want to be on the low side of the risk profile.
John McClelland, LACERA’s principal real estate investment officer, said the thinking behind the RFP came from the pension’s need for greater control over investments. It was, he said, the “preferred method of investing”.
Having scoured the real estate debt funds currently in market, he added many were too “broad in scope” for LACERA and also included higher risk profiles. That alone was one reason for the fund to consider separate accounts. “It provides us with considerably more control over the strategy than commingled funds,” he said, adding: “[We] want to be on the low side of the risk profile.”
But even LACERA is unsure whether their call for two $200 million accounts will work in practice. McClelland said the RFP would show whether subordinated debt investing on a separate account basis was “feasible”, but he was hopeful. “We are fortunate enough to have the size and appetite that allows us to access these sort of investments on a separate account basis and still get an adequate interest level from managers but also reasonable diversification.”
LACERA, which has a $2.9 billion real estate portfolio, does not have a specific strategy for the separate accounts but McClelland said the originations could take a number of forms, including A-B structures, B-notes, mezzanine pieces or preferred equity.
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