The Employees Retirement System (ERS) of Texas has formalized its early-stage manager investment program, approving the Emerging Manager Program Annual Tactical Plan at its February 25 meeting. Through the plan, the Austin-based pension aims to commit an additional $100 million to real estate emerging managers over the next five years. In addition, the $25.3 billion pension is targeting a $1 billion investment to emerging managers across all asset classes by 2019.
“We’ve been reviewing the program annually with the board,” said Shar Kassam, chief of staff in the ERS investment division. “This is the culmination of our efforts. Now, we’re taking it to the next level.”
Since the inception of its emerging manager program in 2010, ERS has invested $105 million to real estate through its external advisers Morgan Creek Capital Management and Oak Street Real Estate Capital. ERS has made a $50 million investment through a fund of funds structure (of which, $16 million in commitments have yet to close), two $20 million investments to sidecar vehicles and one $15 million investment to its only ‘graduated’ manager of the last four years, Pennybacker Capital.
“Our fund of funds partners offer a great opportunity to get to know the underlying managers,” said Kassam. “We found that Pennybacker was a very good fit for our core real estate program.”
The goal of the emerging manager program is to commit 10 percent of ERS’ externally managed assets to early-stage managers. Thus, the pension plan’s $1.75 billion real estate target now includes a formalized $175 million emerging manager target. ERS expects to reach this goal by making $50 million in real estate emerging manager commitments every three years.
Aside from the fact that Texas state law mandates investments in new managers, ERS particularly likes emerging funds as they are good alpha generators, can provide solid risk-adjusted returns, afford portfolio diversification across markets and sectors and allow the pension to discover rising talent. “We like to identify the next up-and-coming managers and be able to get in early with them,” ERS real estate director Bob Sessa told PERE in January.
Meanwhile, the February ERS meeting also revealed that the pension’s overall real estate portfolio is on track to reach its target allocation by 2015. The chief investment officer report noted that the asset class, which has a 7 percent target, currently is at 6.76 percent.