TPG lands RE separate account

New Jersey’s $350 million commitment represents the first major investment by a US pension plan in TPG’s growing real estate business.

TPG Capital has created a new real estate-focused investment vehicle, a separate account with the New Jersey Division of Investment (DOI).  At its board meeting today, the $71.8 billion pension plan agreed to invest $350 million in a strategy targeting investments in real estate operating companies.

In a memorandum to the State Investment Council, Timothy Walsh, director of New Jersey DOI, said a major advantage of investing through the separate account was its primary focus on investments in real estate related-operating businesses. This differs from the majority of the pension plan’s real estate investments, which have been focused on the acquisition of assets or portfolios of assets.

“Corporate platform transactions are subject to less competitive bidding than single assets and offer more flexible financing and exit opportunities,” Walsh wrote. Investments, which will be limited to the US and Western Europe, may include transactions in private platforms, corporate control, public companies and, to a lesser extent, individual real estate assets.

The commitment from New Jersey represents the first major investment by a US pension plan in TPG's real estate platform, which was launched early last year with the hire of former Westbrook Partners managing principal Avi Banyasz. Over the course of last year, the Fort Worth, Texas-based private equity firm went on to expand its real estate team with additional hires, most notably former General Growth Properties chief executive Adam Metz and former Morgan Stanley head of private capital markets Bob Weaver.

To date, TPG has invested $1 billion of equity in five real estate transactions, including the acquisition of Flagler, a Coral Gables, Florida-based private REIT, for $1.2 billion early this year and the purchase of a 43 percent stake in Parkway Properties, an Orlando-based REIT, for $200 million in June. Previously, the firm bought a large commercial real estate portfolio from ProLogis for $505 million in December 2010 and took over the North America businesses of UK homebuilder Taylor Wimpey, in partnership with Oaktree Capital and Joe Hussain, in March 2011.

Prior to starting up its real estate platform, TPG invested in real estate through its buyout funds, the $15 billion TPG Partners V fund and TPG Partners VI, which closed on $18.8 billion in 2008. It has yet to raise a dedicated real estate fund. TPG officials declined to comment.

Meanwhile, the TPG investment marks the second real estate separate account that New Jersey has approved this year, following its $200 million commitment to a real estate separate account with Och-Ziff Capital Management at its board meeting in August. Like other US pension plans, New Jersey has been more actively investing through separate accounts because of the greater control offered by such vehicles, including the rights to veto private investments, suspend the investment period and adjust the amounts of capital committed to investments. Additionally, investors typically are able to secure more favorable terms when investing through separate accounts than through commingled funds.

Indeed, with TPG, New Jersey was able to negotiate an attractive fee schedule that included a management fee of 95 basis points on invested capital and a reduced catch-up rate of 30 percent to TPG over the preferred return of 8 percent, according to pension documents. The pension plan also has discretion over investments made on behalf of the separate account.