Separate ways

In February, LaSalle Investment Management announced the revamp of its US separate accounts business through the creation of the custom accounts group, expanding the Chicago-based firm’s former separate accounts business to also include one-off joint venture investments and club deals. Illustrating its focus on foreign investors, LaSalle appointed firm veteran Karen Brennan to lead the group, based largely on her previous experience working on cross-border capital from Asia as well as Europe, the Middle East and the UK.

Meanwhile, in March, CBRE Global Investors secured a $200 million discretionary mandate to build a core and core-plus real estate portfolio in the US and Europe from a group of affiliated Asian insurance companies, the identity of whom has been kept under wraps. Though it is not, by any means, the first foreign account that the Los Angeles-based firm has won, the client’s interest in investing primarily in debt and its choice to grant discretion to CBRE represents the investors’ increased comfort with the market, the structure and the manager.

“So much of cross-border capital doesn’t go into closed-ended commingled funds,” says Peter DiCorpo, Americas head of separate accounts at CBRE Global Investors.  “Foreign investors know what they want and need the structure to control their investments. That has really been a major factor in the increase in separate account activity.”

Catering to Asian capital 

According to the 2013 International Capital Sources report, published by Jones Lang LaSalle (JLL) in January, the top foreign capital sources in the US market—apart from Canada—were China and Australia, while investors from Singapore and South Korea are expected to export capital to the US on “a large and increasing scale” in 2014 and beyond. Accordingly, when ramping up their separate accounts businesses, both LaSalle and CBRE Global Investors have seen a surge of activity from Asian investors.

Jason Kern, chief executive officer for the Americas at LaSalle, explains that his firm has recognized Asia as a “significant growth area going forward” because of the new pockets of capital that have been opening up, many of which are looking into US real estate exposure for the first time. “It’s one of the reasons why we asked Karen to focus her time on that flow of capital in recent years, especially given her history out in Asia,” he says. Indeed, Brennan was based in LaSalle’s Singapore and Hong Kong offices from 2008 to 2012.

“Asian investors are really hot right now,” DiCorpo tells PERE. “They have a lot of capital to deploy, but they’re not able to put it to work in their home country or in their home region for a similar kind of return. As a result, they’re becoming very active in the US.”

The American angle 

While some foreign investors are getting their first exposure to the US markets, US pension plans similarly are putting capital to work in new frontiers through cross-border separate accounts.

In March, LaSalle won a £250 million (€300 million; $419 million) mandate from the Alaska Permanent Fund to make its first investments in European real estate. Through the allocation, the $50 billion sovereign wealth fund is targeting exposure to investments in UK commercial real estate in order to “provide diversification benefits.”

In forming the account, Alaska joined the ranks of such US pensions as the California Public Employees Retirement System, New York Common Retirement Fund and the Oregon Investment Council, all of which employ separate accounts structures for investments abroad, thereby further contributing to cross-border capital flows.

On the other hand, there also are US investors restricting their separate account activity to domestic mandates. The Los Angeles County Employees’ Retirement Association (LACERA) has been investing in real estate through separate accounts since 1992, but the pension only invests internationally through commingled vehicles. The pension plan calls the structure its “preferred vehicle” due to “excellent control and flexibility and lower investment management fees,” as well as the “lack of lock-up period and ability to fine tune the investment mandate as market circumstances change.”

As of June 30, 2013, LACERA’s real estate portfolio was comprised of 87 percent in separate accounts and 13 percent in commingled funds. Earlier that month, the $44.9 billion pension made news when it invested in its first new separate account managers in 10 years, allocating $200 million each to Heitman, Stockbridge Capital Group and Clarion Partners. 

“The opportunity to control the pace of investing and the flexibility that comes with structure and typically the lower fees that are available in a separate account structure tend to attract attention from investors,” says John McClelland, principal investment officer for real estate at LACERA. However, he notes that an appetite for increased investments also can be a factor of maintaining allocation targets. “If you’re at your allocation and the fund is growing at a pace of 5 percent per year, then you allocate 5 percent more to the prior allocations.”

Thinking inside the box 

Many investors are choosing separate accounts over commingled funds in order to gain control over investments. However, with the often lengthy nature of approval processes, limited partners need to relinquish some of that control, especially when looking to invest in core markets.

CBRE Global Investors’ recent $200 million mandate with a group of Asian insurers represents an instance where creating a ‘box’ defining discretionary boundaries at the start of the mandate gives managers more freedom to act quickly in today’s fast-paced investment environment. 

“Typically, there’s a learning process with foreign capital sources because they’re used to their home countries, where the process is significantly different and in some cases more flexible in terms of timing,” comments DiCorpo. And when a transaction is slowed down by approval processes in nondiscretionary accounts, investors can lose out.

In contrast, CBRE Global Investors is in the process of closing on three deals in the first month with its recent discretionary account. “That’s just the nature of the beast,” DiCorpo says. “You can be a lot more active for your client and do an excellent job for your client with an element of discretion.”

For McClelland and LACERA, ‘discretion in a box’ is no new concept. The ‘box’ is the mutually agreed upon investment criteria within which the manager is allowed to have discretion and, outside of that, managers go to LACERA for variance from the defined criteria. “In any strong transaction market, buyers that don’t have the ability to perform in a timely manner are really at a disadvantage,” he notes. “Rather than be our own worst enemy and impede the progress, it’s much more effective for us to define the discretionary boundaries and let managers exercise that discretion.”

For LaSalle, this discretion element has become a major factor in deciding which separate accounts to take on. “I’d say if there’s one reason that we have turned down potential business recently, it’s been because it is a nondiscretionary account that’s too multi-level or too bureaucratic or too drawn out to the point where we would sacrifice speed to market and therefore we wouldn’t be competitive,” says Kern.

Going global 

Nevertheless, investors and managers alike see global mandates coming into vogue. As investors look for the diversification provided by investments in multiple markets, they are deferring to single managers to perform the task.

“As investors look to increasingly have cross-border investment programs all over the world, the ability to deploy that capital through a single manager is attractive,” says Brennan.

DiCorpo notes that CBRE Global Investors secured two “fairly sizeable” global mandates in 2013 and expects to see more in the coming year, especially given the limited number of managers able to operate accounts on a global basis. “If people are looking at global accounts, they’re looking at us and only a handful of other folks who have the ability to do it effectively, so we’re seeing an uptick in interest,” he says.

Both DiCorpo and Kern note that the interest in global accounts often stems from investors’ aversion to global commingled funds due to negative experiences with such vehicles during the global financial crisis. While LACERA does not have any global separate accounts, McClelland notes that the pension prefers diversified accounts as opposed to specifying by sector with each manager. “Working with firms that have broad capability is efficient for us,” he says. “I would rather have one manager doing all four property types than four managers with each one doing one property type.”