More than a few heads were turned last month when the California Public Employees Retirement System (CalPERS) committed an additional $300 million to a separate account mandate with Singapore-based ARA Asset Management. Including the re-up, the total committed capital of ARA China Investment Partners now stands at $830 million.
Given China’s status as a developing country and CalPERS’ recent emphasis on refocusing its real estate portfolio toward safer core assets, a follow-on commitment to China Investment Partners seems a little out of place. China’s dearth of institutional-grade real estate is no secret, and the $265 billion pension has committed to few other Asian real estate vehicles in recent years. Still, the largest US pension plan seems to have particular confidence in its relationship with ARA, the backing of which now has grown to $1.33 billion.
CalPERS first started building that relationship in 2007, when the Singapore-based real estate investment manager began marketing its maiden fund, ARA Asia Dragon Fund I. ARA as a firm did not have a track record at that time, but CalPERS made the call to get to know its people and strategy. “They even parked a few people in our office for a few months to observe how we functioned on a day-to-day basis,” an ARA spokesman recalled.
By the time CalPERS completed its due diligence, it was most impressed by ARA’s discipline in its investments and operations and decided to take the first step. It became the anchor investor in that first fund, committing $500 million of the $1.13 billion raised.
Returns from ARA Asia Dragon Fund I did not disappoint, earning Cal-PERS a 19.2 percent return for the full-year period ending March 31, 2012. Over the three years through that same end date, the fund had an annual average return of 8.4 percent, according to the pension plan.
When ARA came along with its second fund, CalPERS pitched its own idea: rather than a commingled fund, it wanted a separate account with the fund manager. According to ARA’s spokesman, the firm consequently decided to split its $1 billion target for ARA Asia Dragon Fund II, raising $441 million for the fund and forming China Investment Partners, the China-specific vehicle that CalPERS wanted, to focus on core and core-plus assets. In August 2012, the US pension committed $50 million to the fund and $480 million to the separate account.
“ARA is a disciplined investor with a strong bench of senior executives and capabilities in many aspects of real estate operations in Asia,” Ted Eliopoulos, senior investment officer for CalPERS’ real estate program, said earlier. “The team has performed well for our fund over the years.”
The additional $300 million that CalPERS granted to the discretionary China Investment Partners vehicle represents the pension’s most recent vote of confidence. To date, $300 million of the separate account’s committed capital has been deployed and, as each investment requires sizeable equity checks, the remainder likely will be invested quickly, according to ARA.
“We appreciate the continued strong endorsement from CalPERS,” ARA Group chief executive John Lim said in a statement. “Our private funds division has grown from strength to strength, and it will continue to attract global institutional capital.”