It seems US pension plans have increased their focus on emerging managers of late. In fact, two Texas retirement systems in particular are making a concerted effort to mentor and invest in real estate firms looking to break into the fund management business.
The Employees Retirement System (ERS) and Teacher Retirement System (TRS) of Texas are seeing the value of fostering emerging real estate managers. In addition to co-hosting a sold-out gathering focused on the subject in Austin last month, the two pension plans have launched two separate yet similar emerging real estate manager programmes and are reaching out to potential participants.
At the inaugural Real Estate Emerging Managers (REEM) Summit hosted by the two Texas pensions and global investment advisory firm Morgan Creek Capital Management, investors and managers met to discuss an array of topics from what an emerging managers is (there is no consensus) to why institutional investors should consider committing capital to them. Indeed, the two-day event was a chance for LPs to meet a select group of emerging managers as well as an opportunity for those managers to learn the ins and outs of pitching to pension plans and getting their proposals in order.
Robert Sessa, director of real estate at ERS, said it can be difficult for emerging managers to catch the attention of institutional investors, so the REEM Summit was organised “to create a forum for the GPs and LPs to learn from one another” and for both groups to “learn about the benefits and opportunities.” Not only that, the Summit also was a way for ERS and TRS to spread the news about their respective emerging manager initiatives.
Launched in December 2010 and managed by Morgan Creek, the ERS Private Real Estate Emerging Manager I is a $50 million fund of funds for firms with less than $2 billion in assets under management (AUM) and interest in launching a first, second or third fund of between $100 million and $300 million. “Morgan Creek can help mentor the emerging manager as it builds up its platform,” Sessa said, adding that ERS commits an average of $5 million to $10 million per fund and expects the $50 million commitment to go up over time.
Meanwhile, the $110 billion TRS of Texas has a similar enterprise designed to aid and advise US real estate firms with less than $1 billion in AUM ready to enter the fundraising game. Initially launched in 2005 for private equity shops, the $850 million TRS Emerging Manager Program was expanded in October 2010 with the help of Credit Suisse Asset Management to include a $500 million arm for real estate firms. Now, after running the real estate arm for a full calendar year, TRS is seeking potential managers that aren’t yet in the market.
Primarily for managers looking to launch their first or second fund ranging between $100 million and $500 million, the real estate arm of the TRS Emerging Manager Program typically commits an average of $15 million to each participant. In addition to providing start-up capital, the pension plan guides these firms in shaping their procedures and conditions and even advises them whether they should launch a fund.
“We see guys that have done great deals,” said Stuart Bernstein, the investment manager at TRS who runs the Emerging Manager Program. “But that doesn’t necessarily mean they should be managing a fund.”
Similar to the way Morgan Creek oversees the fund at ERS, Credit Suisse Asset Management has discretion over $200 million of the total $500 million that TRS has reserved for real estate. TRS oversees the remaining $300 million allotment directly.
Peter Braffman, the partner in Credit Suisse’s Customized Fund Investment Group who works closely with Bernstein on the emerging manager platform and has discretion over the $200 million allocation, said managers both seasoned and green are able to benefit from the programme. “For the more mature managers, we can help them get over the hump of landing that first close. For the less mature ones, we can help them on their policies, budgets and terms for their funds.”
In 2011, one dozen real estate managers took part in the TRS Emerging Manager Program. Bernstein, who’s been speaking to an average of three to four managers per week about the platform this year, said he expects anywhere between 10 and 20 to be involved in 2012. While ERS made only one commitment on behalf of its emerging manager fund in 2011, it expects to make about three to five commitments in 2012.
“There are a lot of different potholes and risk associated with this space,” said Sessa. “Our goal is to help GPs where they might need a little extra guidance.”
Bernstein added: “We help managers built credibility in the marketplace, participate in their fund early to help with fundraising momentum and integrate them with our team. We help them get ready to come to market.”