Teacher Retirement System of Texas, the $176.9 billion US pension fund, is keen to further expand its international portfolio by pursuing opco-propco deals.
Craig Rochette, director for real estate at the Austin-based fund, said in a keynote interview at PERE Global Summit held virtually this week that these are the type of transactions the firm is the “most excited about doing in Europe going forward.”
“The number one way we will be doing investments in Europe is through an opco-propco [route]. We want to either buy into an existing opco or performing new opcos,” he said.
Opco-propco is a type of a deal structure in which the property is bifurcated from its holding or operating company, allowing firms the option to take control of just the real estate, or just the operating company.
Rochette said in the keynote that Texas TRS has already made three to four such investments in Europe in a range of property type-focused companies and markets over the past year and a half. This includes investments in a Spanish logistics company, a UK residential and a French office company. The investor has an office in London with a staff of six.
“What we want to see are groups that are entrepreneurial and want a partner like us to build their business,” he said, describing the firm’s objective behind such investments.
Such operating company-focused investments are also favorable from a returns standpoint. In the case of the French office investment, which is structured as a value-add deal, for example, Texas TRS has plans of holding the asset over the long term and turning it into a core product. That, as Rochette noted, would also help create value for the operating company.
“There will be a sticky AUM with this opco we have created. [So] not only are we getting the real estate return, but also this quasi-private equity type return.”
While Texas TRS would like to do something similar in Asia, Rochette talked about how propco transactions were harder to find in the region because of the huge competitive demand for such deals and the type of scale required.
“It is harder to find [deals] in Asia because the good ones get snapped up really fast,” he said.
Texas TRS first started out by investing via pan-regional, commingled fund vehicles both in Europe and Asia. In Asia, the investor continues to invest indirectly through funds and co-investments, and also pursues programmatic joint ventures such as an industrial development venture in Japan. Approximately 15 percent of Texas TRS’s portfolio is invested internationally.
Within the US, Texas TRS is focusing on a few select sectors, including industrial, multifamily, life sciences and media studios. According to PERE data, the pension fund also recently approved a $150 million commitment to Harrison Street Real Estate Partners VIII, a 2020-vintage opportunistic fund that has so far raised around $720 million against a $1.5 billion target.