The Employees Retirement System (ERS) of Texas is gearing up for an active four years in private real estate, with plans to commit a total of $1.05 billion from fiscal years 2015 to 2018. Of that amount, the largest allocation – $325 million, comprising three to 15 investments – has been designated for fiscal year 2015, which will begin in September.
The upcoming fiscal year will involve a number of new real estate initiatives for Texas ERS. One key objective will be to create a co-investment program, as well as considering its first separate accounts. “We still haven’t done a co-investment to date,” said Robert Sessa, ERS’ director of real estate, in its board meeting yesterday. “We’re exploring those opportunities, which will help to customize our portfolio.” The pension also has not invested through any separate accounts to date, but it is interested in setting up separate accounts focused on niche strategies, such as self-storage.
Co-investments and separate accounts also will allow ERS to directly access real estate, added Adam Cibik, real estate portfolio manager. “In many cases, it’s the same type of real estate that we would look to invest in through a fund, but [such structures] offer better economics, better control, better alignment and, most importantly, better fees.”
Additionally, the pension plan intends to make more real estate investments in Asia and potentially deploy real estate capital in Latin America for the first time. “We’ve done a decent job of getting capital deployed in the US and Europe,” said Sessa. “We have holes in Asia and Latin America, but we’re looking to fill those. We’re looking at opportunities in those regions selectively.”
To date, ERS has invested 13 percent of its real estate portfolio outside of the US through a so-called hub-and-spoke strategy, where the hub is a fund of funds focused on smaller managers or niche strategies, and the spoke targets larger managers with pan-regional strategies. Of its international real estate holdings, 3 percent is in Asia, compared with 32 percent in the UK and 65 percent in continental Europe, according to a board presentation yesterday.
On Latin America, Sessa remarked: “That another part of world that has had tough times. It’s time to start kicking the tires in that region.” However, Cibik pointed out that the pension plan would increase its real estate exposure to both Asia and Latin America “only if we get comfortable with pricing and if we can find best-in-class managers.”
Other fiscal year 2015 initiatives include committing to commingled funds or club deals where ERS has the potential to drive terms and conditions and investing in niche strategies such as medical office, student housing and timber, which typically offer greater value than transactions in traditional property sectors. Moreover, the majority of the pension system’s real estate dollars will be designated for value-added and opportunistic strategies, primarily because ERS’ core allocation already is funded.
Additionally, the board approved ERS staff’s request to move forward $150 million in capital commitments for fiscal year 2015 to the current fiscal year. Through March 31, the pension plan had committed a total of $344 million across eight deals for fiscal year 2014, against an original target of $345 million. However, it anticipates making at least another three to four deals totaling $150 million to $200 million before the end of the fiscal year. “We’re bumping against our ceiling for fiscal year 2014, so this would give us more flexibility,” said Sessa.
Subsequent to fiscal year 2015, ERS is targeting three to 12 commitments totaling $200 million in fiscal year 2016; three to 13 deals totaling $225 million in 2017; and four to 14 commitments totaling $300 million in 2018. As of March 31, the pension system held $1.8 billion, or 7.1 percent of its total assets, in real estate against a 10 percent target. Of that $1.8 billion, $1.2 billion – or 70 percent – is in private real estate, while $620 million – or 30 percent – is invested in global listed securities.
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