In an effort to reduce investment spending, the Massachusetts Pension Reserves Investment Management (PRIM) Board is tackling real estate fees through the latest phase of its two-year-old investments initiative, Project Strategic Analysis for Value Enhancement (SAVE).
Project SAVE analyzes cost structure and investment strategies to ensure PRIM is attaining the highest possible value across all asset classes. When it comes to real estate, this means increasing the pension plan’s allocation to co-investments and, for the first time in its history, direct joint ventures. Through the program, PRIM has identified opportunities for value enhancement totaling more than $100 million per year across all asset classes.
The PRIM board outlines its main objectives through Project SAVE as the following: lowering investment management fees, enhancing performance, creating additional sources of deal flow, increasing its investment capabilities and internal process and creating a process that allows for speed of execution.
The new co-investment and direct joint venture initiative will be a part of PRIM’s non-core real estate portfolio. Documents from the pension plan note that, for co-investment opportunities, PRIM will leverage existing relationships to source attractive investments at lower fees. As for joint ventures, PRIM hopes to partner with “strong operators with an institutional capacity and mindset” and eliminate the second layer of fees by managing assets internally.
Both strategies could lead to significant savings for PRIM. A $100 million direct investment with a five-year hold could amount to $1 million in fee savings per year, or a total of $5.1 million in fee savings, according to board documents. “Our initial analysis suggests we can realize a fee savings of about one percent of invested capital through this initiative,” added a PRIM spokesperson.
Currently, PRIM plans to focus the strategy on all major property types in the US in order to maintain diversification, preferring unlevered investments that optimize its use of portfolio debt. However, the pension will be “opportunistic and flexible” with its criteria for investments in order to “capture the best opportunities,” according to pension documents. PRIM will focus on existing partners for deal flow, but new operating partners or advisors may be considered in the future.
The $57.9 billion pension plan has a real estate target of 10 percent, with a current allocation of 8.6 percent to the asset class. Within its real estate allocation, PRIM targets 70 percent in core strategies, 10 percent in non-core strategies and 20 percent in real estate investment trusts. According to the board’s 2014 Real Estate and Timberland Annual Plan, 3.3 percent of the pension’s non-core target (approximately $200 million) has yet to be allocated and could be available to invest in these new strategies.
PRIM is just one of many institutional investors looking into more direct strategies as a way to cut costs. The $83.41 billion State of Wisconsin Investment Board (SWIB), for example, has long focused on investing in real estate as a sole owner or through direct joint ventures. Since implementing this strategy, SWIB has increased the Wisconsin Retirement System’s internally managed assets from 20.8 percent in 2007 to 57 percent as of February of this year. Indeed, SWIB’s model served as an inspiration for PRIM, and staff visited SWIB to study its program prior to launching Project SAVE.