The Los Angeles Fire and Police Pension Plan (LAFPP) has employed its staff and consultant Townsend Group to initiate feasibility studies for the possible implementation of an in-house real estate direct investment arm in its $22.2 billion portfolio.
The strategy is rare. After studying the topic using publicly available data, the pension staff found only one retirement system that employs a direct investment strategy for its real estate portfolios, the State Teachers’ Retirement System of Ohio (STRS).
STRS has a real estate portfolio with $7.9 billion in assets, 85% of which are primarily managed internally after the board and executive director delegated investment management and implementation decisions to its staff. A report noted that their responsibilities include “buying, selling, managing, and monitoring individual securities, real assets, and other investment transactions; retaining, managing, and terminating external investment managers, and preparing, negotiating, and executing external investment manager mandates.” Approximately one-fourth of its 100+ investment team has direct involvement in the real estate portfolio.
Direct investment arms are normally regarded for their higher returns relative to commingled-fund strategies. Given that the pension’s staff is experienced and makes profitable investments, the absence of management fees could benefit a given portfolio significantly.
A report from LAFPP also noted the feasibility studies were intrigued by the Canadian model of internally managed investment portfolios to generate strong performance numbers. But although those pensions regularly use an in-house arm for their equities, fixed income, and private equity portfolios, a direct real estate arm was absent from two of the country’s largest public pension plans: the Canada Pension Plan Investment Board (CPPIB) and the Ontario Teachers’ Pension Plan. Caisse de dépôt et placement du Québec (CDPQ) formed an external subsidiary called Ivanhoe Cambridge to manage their real estate portfolio, through the acquisitions of Ivanhoe Corporation and Cambridge Shopping Centres about twenty years ago and merging it with Societe Immobiliere TransQuebec.
The $22.2 billion LAFPP’s real estate portfolio is valued at approximately $1.87 billion as of last December and is inclusive of four REITs ($609 million), commingled funds ($774 million), and two separate accounts ($490 million).