At the beginning of October, the $212 billion California Public Employees’ Retirement System (CalPERS) announced it had consolidated its entire core multifamily portfolio, with a net asset value of $1.1 billion and a gross asset value of $2.7 billion, with GID Investment Advisers.
The Boston-based firm, which just prior to the consolidation had a significantly smaller separate account relationship with the giant pension plan, was chosen to assume control of BlackRock Realty Advisors’ $1 billion-plus assignment, as well as increase its co-investment in the consolidated portfolio.
To the overall real estate market, the move by CalPERS was both surprising and not surprising. What wasn’t so surprising was the pension plan’s desire to consolidate its assets with a real estate operator, as opposed to a global allocator, through another co-investment vehicle rather than a fund. Indeed, many market players believe co-investment vehicles will be the investment model of choice for larger investors in the near future as they shun capital allocators and increasingly move towards direct deals. Of course, this shift is far from a death knell to allocators and funds, as only some of the largest institutional investors have the size and capabilities to invest directly or through co-investment vehicles today.
However, what was more surprising to the market was CalPERS’ selection of the lesser-known GID Investment Advisers, the primary operating division of The General Investment & Development Companies (GID). Founded 50 years ago, GID is an aggregation of privately held, diversified companies that is best known as an owner and operator of multifamily properties, although it also has core competencies in industrial flex and suburban office properties.
“Large institutional investors have discovered a couple lessons in making their way through the minefield of the past couple of years,” said Robert DeWitt, vice chairman, president and chief executive officer of GID Investment Advisers. “The first is that there is a strong advantage to allocating capital to a strategy in a separate account, or in a small club deal. The second is that working with an operator versus an allocator allows investors to retain more control and achieve better execution, as vertically integrated operators inherently can provide high levels of service at a lower cost. GID has been the beneficiary of those lessons learned, and it likely will continue to be a beneficiary.”
Who are these guys?
GID’s investment programme with CalPERS originally was much larger than the roughly $281 million in gross asset value it had at the time it was selected to take over BlackRock’s portfolio. The relationship began in 1998 when CalPERS selected GID to be its partner and advisor for multifamily investments in the eastern half of the US. At that time, CalPERS transferred a $135 million multifamily portfolio to Windsor Realty Fund III, a newly formed separate account between GID and the pension plan. It continued to grow until 2005 when GID, seeing that the valuation metrics for the housing sector were unsustainably high, decided to sell substantially all of the portfolio near the height of the market for approximately $1.3 billion, thereby generating roughly $497 million in gross realised profits for CalPERS.
“We take our fiduciary duty to equity seriously,” said DeWitt. “Certainly everyone had the same information we did at the same time. We just acted on our convictions, for which we are now being rewarded. It was certainly disruptive to shrink our operating platform by 50 percent, but as a co-investor and fiduciary to CalPERS, we acted in the best interest of our investor.” Since becoming a core partner to CalPERS in 1998, GID has produced an annualised 11.7 percent return on its investments through the partnership, including an annualised 20.5 percent realised return as of the 2005 disposition.
GID also has several institutional relationships beyond CalPERS, including ones with the California State Teachers’ Retirement System (CalSTRS), the Oregon Public Employees’ Retirement Fund (OPERF) and an undisclosed Fortune 50 corporate pension plan. Together, these relationships represent an aggregate of $1.6 billion in invested capital and a gross asset value of $3.8 billion.
GID always invests through co-investment vehicles and doesn’t manage investments on behalf of third parties in which it doesn’t have a significant equity stake, DeWitt noted. Like it has with CalPERS, GID has separate account relationships with CalSTRS and OPERF that are focused on multifamily investments.
Outside the multifamily sector, GID manages and has co-invested in a club deal with CalPERS, OPERF and the Fortune 50 pension fund that focuses on industrial flex properties. It also manages and has co-invested in a separate account with the Fortune 50 pension fund that focuses on suburban office properties.
Other projects
Given its view of real estate valuations in 2005, GID decided to sponsor a hedge fund in part to short companies that still were bullish on the real estate sector. The hedge fund, Merestone Partners, was seeded solely with capital from GID, but it recently has attracted money from high-net-worth, domestic and international investors and family offices and currently stands at more than $42 million. It has helped that, since its inception in January 2006, the hedge fund has beaten the S&P 500 index by more than 3,300 basis points.
Still, the hedge fund is largely off the radar of institutional capital. “Until you have greater than $50 million in assets under management and demonstrated momentum with capital inflows, institutional investors can’t and won’t look at you,” DeWitt said. “As a result, we are actively marketing the fund with the goal of achieving that threshold next year.”
In addition, GID is looking to grow its international presence, which has blossomed out of a portfolio investment in an Indian merchant bank. That participation allowed GID to become acquainted with another investor in the venture, which together decided to form a new development company called Piedmont Development. That company is now overseeing the construction of its first project – a 500-unit condominium complex called Taksila Heights, in which GID owns a controlling equity interest – in Gurgaon, a high-tech suburb of New Delhi.
GID also is in the exploratory phase of entering the Brazilian real estate market, as it likes the high GDP scenario, middle-income market household formation and underserved residential supply in that country, which also is the rationale for its investment in India. In either market, GID’s strategy is to form a joint venture with a local firm in order to share market risk, minimise initial equity exposure and better understand the local business, economic and regulatory climate, DeWitt explained. In fact, the firm likes these markets so much he believes that, in 10 to 15 years, its international presence could be equal to its domestic one.
Initial focus
GID’s first order of business, however, will be focusing on its expanded relationship with CalPERS. “We are a scalable organisation, but even a scalable organisation that essentially doubles the size of its operating platform still needs to show it can handle it,” DeWitt said.
GID is still a small company on a relative basis, with just over 400 employees as of the end of October. The firm expects to boost that number to 625 by year’s end through the addition of site personnel, including some of the existing site staff for the BlackRock portfolio, as well as other professional staff in Boston and around the US. It also plans to continue to invest in its technology and systems, specifically by expanding its back office infrastructure to accommodate the substantial growth to its managed portfolio.
GID believes its expanded relationship with CalPERS is a validation and confirmation of its capabilities and an appreciation for its co-investment format and style of management, both of which DeWitt said provide for a strong alignment of interests between itself and its institutional partners. Beyond the multifamily operator space, where GID already is pretty well known, the assignment advances its brand, particularly among the institutional and pension plan communities, he noted.
Indeed, GID has received numerous calls from consultants and equity placement agents since winning the assignment, asking what the firm’s next step is and whether they can aid in that next step. “We have been thrust into a different spotlight,” said Brian O’Herlihy, senior vice president and chief financial officer of GID. “It is our hope that, over time, this will provide us with new and interesting opportunities.”
GID is interested in growing its platform, particularly in arenas where it has core competencies and in conjunction with institutional capital partners, DeWitt said. And while it has significant liquidity and a strong balance sheet, the firm will do so at a pace that makes sense and ensures the highest probability of accomplishing its strategic and financial goals, he added.
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