PSERS commits $300 million to real estate

The $49.5 billion pension system will make sizable investments in new value-added funds from Blackstone and Paramount, as well as its own co-investment and secondary program.

The Pennsylvania Public School Employees’ Retirement System (PSERS) has made its first real estate commitments of 2013, earmarking a total $300 million for investments in funds, co-investments and secondaries.

The state pension plan committed $100 million to The Blackstone Group’s new value-added real estate debt fund, Blackstone Real Estate Debt Strategies (BREDS) II, which seeks to generate 13 percent returns primarily by purchasing and originating performing loans. According to documents from PSERS, which previously committed to four other Blackstone real estate funds, the $3 billion vehicle will pursue “equity like returns while taking debt-like risk” and yield nearly half of its total return through current income. Potential investments may include junior mortgage debt, mezzanine debt, whole loans, participations, commercial mortgage backed securities and preferred equity.

During an earnings call in October, Blackstone president Tony James said the New York-based private equity and real estate giant was raising a new real estate debt fund. The firm previously raised $2 billion in 2011 for a predecessor vehicle now known as BREDS I, which has generated a 13.3 percent net internal rate of return to date. BREDS II is expected to hold a first close during the first quarter of this year and invest up to 30 percent of its capital outside of the US.

In addition, PSERS has agreed to invest $100 million in The Paramount Group’s Paramount Group Real Estate Fund VII. The value-added vehicle will make equity investments in trophy-quality office properties, with 40 percent to 60 percent of the capital targeting New York City, and 20 percent to 25 percent each targeting San Francisco and Washington DC. “These markets exhibit lower vacancy rates and higher rental growth, but they can be volatile, which creates opportunities for experienced operators,” the PSERS documents noted.

The New York-based investment manager anticipates raising $600 million to $1 billion in capital for the vehicle, which is targeting a net IRR between 10 percent and 14 percent and a 2x multiple. The commitment to Fund VII represents PSERS’ first investment with Paramount.

Lastly, PSERS committed an additional $100 million to its in-house real estate co-investment and secondaries program. The program, which received an initial $100 million commitment from the pension plan last January, will invest in co-investment opportunities and secondary fund purchases in funds where PSERS already is a limited partner.