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SDCERS commits to Carlyle, CBRE

The San Diego city pension has made two new commitments totaling $70 million to Carlyle Realty Partners VII and CBRE Strategic Partners US Value VII.

The San Diego City Employees’ Retirement System (SDCERS) has made two new commitments totaling $70 million to funds sponsored by The Carlyle Group and CBRE Global Investors. The $6.4 billion pension plan approved a $50 million commitment to Carlyle Realty Partners (CRP) VII and $20 million to CBRE Strategic Partners US Value VII at its March 13 meeting.
With CRP VII, Carlyle is targeting its largest property fund to date, hoping to bring in up to $4 billion for its opportunistic strategy. According to a presentation by Carlyle at the SDCERS meeting, CRP VII’s investment strategy will employ a research-driven, value-based investment approach to identify underpriced fundamentals and acquire high-quality assets at discounts to replacement cost. The fund will focus both on the commercial real estate market recovery (hotel, office, industrial and retail) as well as the US housing recovery (apartments, senior living, self-storage and manufactured homes). 
Meanwhile, CBRE Value VII is targeting $1.5 billion to purchase, reposition, lease and sell institutional-quality properties in select US markets. According to pension documents, CBRE expects to devote some $1 billion of the fund’s equity to office, industrial, retail and hotel properties, while using the remaining $450 million or so for multifamily investments. The fund is targeting a 12.8 percent net leveraged internal rate of return and expects to employ maximum leverage of 60 percent of the projected total portfolio cost. CBRE will make a co-investment of up to 2 percent of the total capital commitments, not to exceed $30 million. Value VII expects to hold a first close by April 1. 
Currently, SDCERS has allocated 9.4 percent, or $605 million, of its total portfolio to real estate. The pension has a target of 11 percent for the asset class. At its September 19 board meeting, consultant Hewitt EnnisKnupp recommended that SDCERS invest $40 million to non-core funds each year in 2014, 2015 and 2016 in order to reach this target allocation. The consultant highlighted that the ideal strategy would be focused on distressed themes and that the ideal manager would offer a high degree of transparency, with strong risk management practices, a well-established team and a well-defined and disciplined investment process.
 Although the $70 million to Carlyle and CBRE almost doubles SDCERS’ intended allocation to non-core in 2014, investment officer Jamie Hamrick noted in a staff recommendation that he believes the constraints of an asset allocation “should not preclude SDCERS from accessing interesting and attractive opportunities.”