While championing women- and minority-owned firms is important, it is not the primary goal for the emerging manager program at the Employees Retirement System of Texas – nor should it be, according to the pension plan’s senior investment officers.
Robert Sessa, ERS’s head of real estate, said that a manager’s profile is not the top criteria when selecting a manager. “Our goal is economics,” he said, speaking with PERE at the Real Estate Emerging Managers Summit in Austin earlier this month. “We are a fiduciary to our constituents. A byproduct of this program is definitely supporting women or minorities, but we’re out there to earn returns.”
Within private real estate, the emerging manager portfolio outperformed that of the total portfolio, with a since-inception net internal rate of return of 17.44 percent, compared with an overall net IRR of 12.88 percent, according documents from ERS’s December board meeting. The broader real estate portfolio has a 38 percent allocation to non-core real estate, while the emerging manager portfolio is nearly 100 percent allocated to non-core real estate.
Deputy chief investment officer Sharmila Kassam noted that women and minority representation “is definitely a consideration” for the pension’s overall emerging manager program, which currently supports investment managers with assets under management of $2 billion or less in public equity, private equity, private real estate, hedge funds and fixed income.
However, “at the end of the day, it’s not the only factor and it can’t be, and I don’t think the managers would want it to be, either, if emerging manager programs want to stay established and keep deploying capital,” she added. “That’s one of the things that we learned from our peers is trying to stay focused on that exclusively sometimes undermines the managers.”
Limiting an emerging manager program to exclusively women and minority representation, without taking competitive investment performance into account, would not lead to a viable program, Kassam added. “Emerging manager programs that show good performance over appropriate investment horizons will be the ones that succeed and last,” she added.
About 26 percent of real estate emerging managers overall are minority and women-owned business enterprises, firms where minorities or women comprise a meaningful portion of the ownership or team, according to Chicago-based Oak Street Real Estate Capital, which oversees ERS’s fund of one emerging manager program. The program itself has allocated about $100 million to MWBE firms through 20 direct or indirect investments, out of approximately $160 million in aggregate capital invested in emerging managers.
At the same time, both Sessa and Kassam observed that there was less representation of women- and minority-owned firms in real estate than in private equity.
“It’s the front-end supply in particular in real estate,” said Kassam. “It doesn’t seem like women and minorities necessarily go into this asset class.”
Larissa Herczeg, managing partner at Oak Street, agreed that anecdotally women and minority participation is considerably greater in private equity than real estate. “I think to a degree, this is because private equity is a bit more developed as an industry than real estate,” she said.
It was therefore important to expose women and minority college students early to investments and different asset classes, Kassam said. To help address the issue, ERS has worked with groups that focus on women and minorities, such as Robert Toigo Foundation and Sponsors of Educational Opportunity, for internships for the past three years. To date, the program has had at least three interns focused on real estate.
“Getting exposed to a multi-asset class pension where they can see investments isn’t just picking stocks on Wall Street, they may now have more of an incentive to go into these alternative asset classes,” she said. “So you have to start somewhere. I think that’s where we have some ability to contribute, and it’s good for staff, too, because every time you bring in an intern in, they’re able to reflect on why they started in this profession in the first place.”
Even when a manager does not count women or minorities among its principals, ERS has encouraged such firms to partner with these diversity organizations with the goal of making more women and minority hires, Sessa said.
The ERS real estate emerging manager program, which was launched in 2010, is a hybrid of a fund-of-one program with Oak Street and direct or co-investments with other smaller managers. Forty-six percent of the program’s portfolio is invested with firms that include minorities and women in their management teams.
“Overall, there are still fewer MWBE managers than there should be,” said Herczeg. “It is very refreshing, however, to see that the numbers are really increasing and there are a lot of talented MWBE firms emerging.”
ERS’s overall emerging manager program represented $977 million, or 9 percent, of the pension plan’s $10.8 billion in total externally managed assets as of September 30. Private real estate represented 14 percent of the $977 million.
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