For all the talk of the denominator effect impacting the allocation decisions of institutional investors in the US, pension funds in particular, have been keen to renew their commitment to the asset class over the past few months.
The Employees Retirement System of Texas, created in 1947 to oversee retirement benefits for Texas state employees, has but two percent of its investment portfolio in real estate. Yet this summer the $23 billion pension formally announced it would significantly increase its real estate allocation – by another six percent, to eight percent.
The Austin-based pension's board opted for the new target on August 19. It follows an asset allocation study that took place over the last several months, a spokesperson for the Texas pension told PERE. The pension plan's current real estate investments stand at 1.9 percent.
By increasing its exposure to real estate, Texas is planning to protect itself from the volatility of global equities and fixed income. The fund plans to decrease its allocation to both areas, from 59 percent last year to 45 percent for equities and from 39 percent to 33 percent for fixed income.
And despite industry concerns that the denominator effect would decelerate LP commitments to real estate – and prompt investors to reduce the number of fund manager relationships – other US pensions have been strengthening their commitments to real estate, and some real estate vehicles. The $234 billion California Public Employees' Retirement System (CalPERS) disclosed in September a $700 million commitment to two funds, including a $500 million allocation to JER Partners' Latin America Fund I, and $200 million to GI Partners' latest buyout fund, which also invests in real estate, GI Partners Fund III.
CalPERS is also working towards a five-fold expansion of its investments in emerging market real estate. As part of a strategic review of the real estate asset class over the next five to 10 years, the pension will invest up to 20 percent of its real estate pot, valued at $23.6 billion, towards emerging markets. Meanwhile, the $154.5 billion New York State Common Retirement Fund (NYCRF) – the third largest public pension in the US – also recently disclosed commitments to Lone Star Funds, including $100 million to Lone Star Fund VI, the private equity firm's distressed debt vehicle. The fund has raised approximately $7.5 billion in capital.
Although it seems much ado has been made about the denominator effect for GPs on the capital-raising trail, the environment is not yet bleak for real estate fund managers. Indeed, as real estate continues to outperform most other asset classes, institutional investors will be looking to increasingly balance their portfolios and take advantage of such performance.
RE is hero in North Carolina
The North Carolina Retirement System was the latest North American pension fund to record a loss on its investments in the year to June 30, after revealing the fund lost 2.07 percent. The $72.3 billion fund blamed the credit crunch and falling stock markets for the overall loss, with investments in equities returning negative 10.45 percent. The fund's real estate investments was the strongest performer reporting gains of 8.74 percent. North Carolina has a target allocation to real estate of five percent and 3.5 percent to private equity. However it invests more than a third of its portfolio in fixed income and more than half in domestic and international equities. During the past two months a host of US pension funds have reported losses in their portfolios, including the Florida Retirement System, which lost 4.4 percent during the same period; and the California Public Employees' Retirement System, which lost 2.4 percent; the California State Teachers' Retirement System, which lost 3.7 percent; the West Virginia Investment Management Board, which lost 6.5 percent and the Maryland State Retirement and Pension System, which lost 5.4 percent.
AvalonBay closes below target
Alexandria, Virginia-based AvalonBay Communities has closed its AvalonBay Value Added Fund II on $333 million, lower than its expected target of $500 million. The private equity real estate vehicle had commitments from four institutional investors, including a $150 million commitment from Avalon-Bay. The fund will target multifamily apartment communities in “high barrier-to-entry” US markets including the Northeast, Mid-Atlantic, Midwest, and West Coast regions. AvalonBay Value Added Fund II has a term of ten years, plus two one-year extension options.
Coventry targets $400m for retail fund
Coventry Real Estate Advisors is raising its third retail vehicle targeting $400 million, according to people familiar with the matter. New York-based Coventry, which was founded in 1998 by former Morgan Stanley Real Estate professional Peter Henkel, closed its predecessor fund, Coventry Real Estate Fund II on $330 million in 2004, around $80 million more than its initial target. Coventry Real Estate Fund III, which the firm is already starting to invest, will adopt the same strategy of acquiring retail properties for redevelopment, ground-up development with joint venture partners and acquiring stores from retailers. Investors in Fund III are believed to primarily be US pension funds, endowments and foundations, although there are some international investors.
Our feature last month misstated the role of Apollo Real Estate Advisors partner Bradford Wildaver. He oversees all of Apollo's debt investments.