The $23 billion Employees Retirement System (ERS) of Texas has approved $450 million in capital commitments for fiscal year 2012, with a focus on investing in non-core real estate and continuing the global diversification of its $325 million private real estate portfolio.
Based on recommendations by consultant RV Kuhns & Associates, ERS said it would seek value-added and opportunistic managers that employ lower leverage to achieve return targets and that do not have legacy issues related to prior funds. The pension said it also would focus on working with innovative real estate managers that can offer more favorable terms than the large, well-established sponsors, as well as look for direct operators as opposed to capital allocators.
In documents posted on its website, ERS said “opportunities to target non-core, equity-oriented real estate will be ripe” in fiscal year 2012, and it expects to be able to achieve favorable investment terms, including lower asset management fees and more favorable incentive compensation structures.
In fiscal year 2012, ERS’ proposed funding will consist of four to 12 investments totaling $450 million; in fiscal years 2013 and 2014, three to eight investments totaling $270 million; in fiscal year 2015, three to seven investments totaling $260 million; and in fiscal year 2016, one to six investments totaling $110 million. The pension said the significant capital commitments proposed for fiscal years 2012 and 2013 would “take advantage of what should be a favorable pricing environment for value-added and opportunistic strategies.”
The pension, however, acknowledged that the sizable commitments did pose a risk. Indeed, if ERS’ private real estate funds were to underperform in fiscal years 2012 and 2013, it could negatively impact the real estate portfolio’s overall performance.
As of 30 June, ERS’ private real estate program had a net asset value of $325 million, representing eight funds and $685 million in commitments. That represents a substantial increase from the previous fiscal year, when the portfolio comprised just two funds with $230 million in commitments. Half of the current funds focus on core investments, three funds invest in value-added equity and debt and one concentrates on opportunistic strategies.
ERS targeted $550 million in capital commitments for fiscal year 2011 and had committed a total of $485 million for six funds as of 30 June. It also closed on a $125 million commitment to the Prudential US Real Estate Debt Fund on 19 July and may make an additional $100 million commitment before the fiscal year ends on 31 August. This would bring its fiscal year commitments to $710 million, just below the $733 million upper end of its target range, and keep the pension on track to reach its full targeted allocation of 6 percent by 2015.
In fiscal year 2011, ERS made its first international investment with a European mezzanine debt fund, and it is in the process of implementing a “hub and spoke” approach with respect to real estate investments in Europe. Under this approach, the hub is a fund of funds focused on small- to mid-level managers for a particular region and the spokes are larger international real estate funds. The pension currently is in the process of committing to that fund of funds, and it also is planning to employ a similar approach for investments in Asia in fiscal year 2012.