Washington State commits $400m to new FoF

The $78.6 billion pension plan will invest in a new internally managed fund of funds that will target emerging real estate markets such as Turkey and sub-Saharan Africa.

The Washington State Investment Board has approved a commitment of $400 million to Emerging Markets Fund of Funds (EMFOF) II, a newly created fund of funds that will be managed by the pension plan’s real estate staff – who will select the underlying fund managers – and focus on investments in emerging real estate markets in Asia, Latin America and Africa.

Through the new fund, Washington State will actively target two new markets: Turkey and sub-Saharan Africa. In a board presentation last week, the pension plan’s private markets committee cited Turkey as an attractive investment target because of its large, young and increasingly urban population; its stable, democratic government; and the presence of quality developers. The committee noted that the sub-Saharan African nations of Nigeria, Ghana and Angola also had sizable populations with median ages of 21.4 years or younger, as well as promising GDP growth.

Beyond those markets, EMFOF II will continue to invest in China, Brazil, India and Vietnam, areas where Washington State already has exposure through its previous fund of funds, Emerging Markets Fund of Funds I, which the board approved in March 2007. It allocated $400 million to that fund and transferred $125 million in existing commitments.

Underlying real estate funds in EMFOF I include Hong Kong-based LimeTree Capital Partners’ Emerging Beachfront Land I and II, which invest in emerging coastal land for development in the Asia-Pacific region, and Indochina Land Holdings 2 and 3, which are managed by Vietnam’s Indochina Land and focus on real estate development projects in that country. That FoF is now close to fully invested and has yielded a net internal rate of return of 11.7 percent since inception.

Like its predecessor fund, EMFOF II is considered a low-cost investment strategy that will offer Washington State attractive risk-adjusted returns, portfolio diversification and access to new real estate markets. However, the pension plan’s private markets committee acknowledged that the risk factors of investing in emerging markets programmes, such as rate of change, corruption and lack of an exit strategy, were numerous, and said a fund of funds strategy presented challenges in governance, leverage and concentration.

The emerging markets funds of funds currently represent Washington State's sole real estate fund investments, accounting for 3 percent of the pension plan's real estate portfolio. The vast majority of the pension plan's real estate investments are made through controlling interests in real estate operating companies.

Washington State’s commitment is the latest allocation by a US pension fund to an international real estate multi-manager strategy. Earlier this year, the Employees Retirement System of Texas said it was targeting a commitment of $75 million to $100 million to an international fund of funds, through which it plans to make real estate investments in Europe and Asia. ERS is expected to close on its investment by the first quarter of 2012.