The California Public Employees’ Retirement System (CalPERS) is launching a new real estate strategy investing in small- to mid-sized office buildings in San Francisco and New York, but while experience is required for the new roles, not too much experience.
The investment strategy is new. CalPERS officials hope the real estate mandate will complement its investments in larger office buildings in the hot Bay Area and New York City real estate markets. But the managers they are looking for are also novel: so-called transition managers.
It’s not that the nation’s largest retirement plan, with more than $355 billion in assets under management, doesn’t want external managers with strong track records in building real estate funds that produce solid investment results. It’s that the solicitation that began on August 1 is aimed at filling a niche for the $27 billion real estate manager program. CalPERS already has a real estate emerging managers program that targets newer real estate managers raising their first, second, and third real estate funds.
The new transition program targets real estate managers who have already raised their first three funds and want to build their fourth, fifth, and sixth fund.
Under the program, CalPERS would give one and possibly more managers between $200 million and $400 million each to make equity real estate office investments in the Bay Area and New York City. The idea is the transition managers would eventually graduate to managing larger allocations for CalPERS’s real estate program.
“We want to find firms that can add to overall investment performance,” Clinton L. Stevenson, the retirement system’s investment director, investment management engagement programs, told CIO.
The other idea, said Stevenson, is to identify promising firms “that have room to grow” as part of the CalPERS portfolio.
It remains to be seen whether CalPERS can help successfully incubate promising real estate managers on a consistent basis, building their allocations over time. In 2014, CalPERS Chief Investment Officer Ted Eliopoulos told a manager forum that the system’s emerging manager program, which targets early-stage money managers, had mixed investment results over the last two decades. This included real estate, private equity, and global equity managers.
“Some extraordinarily terrific results,” he said, “as well as some really, I guess the politically correct way to say not so good, is really terrible results,” Eliopoulos said.
A distinction, however, for the transition program, is that CalPERS officials say they are specifically looking for managers that have already proven themselves with solid investment returns over a longer time period than emerging managers.
Over the years, CalPERS had been under intense political pressure from California lawmakers, particularly from those in urban communities, to hire a more diverse set of money managers.
While California state law prohibits set asides based on race or gender, many of the emerging managers are women or minorities.
The deadline to be hired under the current solicitation is Sept. 7.
CalPERS officials hope to hire one or more transition real estate firms by the end of the year.