PSERS earmarks $300m to real estate

The $50.4 billion pension plan has made follow-on commitments to two existing opportunistic managers, as well as to its in-house real estate co-investment and secondaries program.

The Pennsylvania Public School Employees’ Retirement System (PSERS) has committed $200 million to two of its existing managers, The Carlyle Group and Ares Management. The pension plan also expects to invest an additional $100 million in its in-house real estate co-investment and secondaries program.

Carlyle and Ares each will receive $100 million for their latest opportunistic real estate funds, Carlyle Realty Partners (CRP) VII and Ares European Real Estate Fund IV, respectively. CRP VII, which is targeting $3 billion to $4 billion in commitments, was launched last year and also has attracted capital from the Kentucky Teachers’ Retirement System, which committed $60 million last month, and the San Diego City Employees’ Retirement System, which agreed to invest $50 million earlier this month.

CRP VII will invest in debt or equity interests in real estate and real estate-related companies in 11 property sectors, including senior living, multifamily, for-sale residential, distressed residential, student housing, manufactured housing, hotel, retail, office, industrial and self-storage. Its investment strategy is similarly broad geographically, with primary target markets in New York, California, Florida and Washington, DC, as well as additional markets such as Boston, Seattle, Dallas, Houston and Atlanta.

Carlyle typically focuses on acquiring single assets that are in need of recapitalization or are stressed as a result of difficult capital markets situations, making investments where it maintains control over decisions. Average deal sizes will range between $15 million and $30 million, with no deal representing more than 5 percent of capital commitments to the fund.

CRP VII, which has a net return target of at least 16 percent, represents PSERS’ sixth real estate investment with Carlyle, having previously committed to CRP III, IV, V and VI, as well as Carlyle European Real Estate Partners III. CRP III currently is generating a net multiple of 2.43x and a 32.29 percent net internal rate of return, while CRP IV is yielding a 0.92x net multiple and a -2.15 percent net IRR. CRP V and VI both are returning a 1.29x net multiple and net IRRs of 8.05 percent and 24.39 percent, respectively.

Meanwhile, Ares European Real Estate Fund IV previously was launched by AREA Property Partners in March 2012 and was being marketed as AREA European Real Estate Fund IV prior to AREA’s merger with Ares Management last year.  The vehicle, which has a $1 billion target, will be focused on retail, office, residential and industrial investments, with approximately 75 percent of its strategy concentrated on the UK, Germany and France.

The fund’s strategy will capitalize on ongoing distress in Europe by injecting capital and actively managing distressed property portfolios and funds; providing intensive asset management and capital to undermanaged and underinvested properties; and taking advantage of certain growth opportunities, such as developments and redevelopments in prime markets.

“Investable opportunities for the current fund should arise from stressed borrowers with too much debt and insufficient fresh capital to fund property maintenance and/or improvements, banks and other financial institutions looking to reduce their overall exposure to commercial property, the limited availability of capital for development finance and limited new supply of commercial property,” stated Steven Novick, chief operating officer of consulting firm Courtland Partners, in a memorandum to PSERS’ board.

The Ares vehicle will target 12 percent to 16 percent net IRRs over a projected three- to five-year holding period. As with Carlyle, PSERS previously had made multiple investments with AREA, with commitments to AREA Real Estate Finance Corporation; AREFIN Co-Investment Corporation; AREA European Real Estate Fund III; AREA Value Enhancement Fund VII and Ares US Real Estate Fund VIII. AREA European Real Estate Fund III, a 2008 vintage fund, currently is producing a 6.2 percent net return and 1.2x net multiple.

Additionally, PSERS agreed to invest an additional $100 million to its in-house real estate co-investment and secondaries program, through which the pension plan will make co-investments and secondary fund investments in real estate funds where PSERS already is a limited partner. Each investment will be no more than $15 million in size.

The institution launched a combined private markets and real estate in-house co-investment and secondary program in 2012 with a $100 million commitment and allocated an additional $200 million to the initiative the following year. That $300 million has now been set aside solely for private equity. Meanwhile, the pension plan has authorized $100 million each to be allocated to the real estate and private debt in-house programs. Of the $100 million to be allocated to real estate, PSERS committed $30 million, with $70 million left to be invested before additional allocations will be need to be approved.

In board meeting documents, Charles Spiller, managing director of private markets and real estate at the pension plan, cited cost savings, added due diligence with the fund sponsor and the potential for better returns with no or reduced fees and carry among the benefits of an in-house program. Internally managed programs also were a “current trend in the industry,” he stated.