GLOBAL - The California Public Employees' Retirement System (CalPERS), the largest public pension fund in the US, has allocated as much as $200m (€140m) for real estate emerging managers.
The new programme will have a regional focus, aiming to locate all emerging managers and real estate investments in California.
The assets will be in urban environments and have a 'core-plus' approach across a variety of sectors, including multi-family, office and industrial.
Rob Feckner, CalPERS board president, said: "We hope to find investment opportunities in underserved sectors for sound long-term returns."
As part of its asset allocation plan adopted in December 2010, CalPERS expects its real estate investments to generate a 7% after-fee return.
In his presentation to the CalPERS investment committee on 15 August, Ted Eliopoulos, senior investment officer of the real estate unit, said the programme aimed to achieve "appropriate risk-adjusted returns", access investment opportunities "that may not otherwise be pursued" and "increase diversity among our pool of investment managers".
An emerging manager is defined as an investment manager with less than $1bn in assets under management who has handled no more than three commingled funds or separate account investments.
The selected managers will be expected to make a "modest" co-investment and be limited to 50% leverage at the asset and fund level.
In a memo to the investment committee, its real estate consultant Pension Consulting Alliance (PCA) said: "CalPERS has a long history in supporting emerging managers that fit this definition. However, there has been no overarching strategy or guiding principles behind the pursuit of these prior investments. Furthermore, investment performance has not been uniformly successful and governance has not been consistent."
CalPERS' real estate unit has 10 emerging manager investment strategies active today. The unit has 16 current and prior emerging manager investments, ranging from $50m to $175m, with a total allocation of $1.3bn.
These managers, as PCA pointed out, have had a mixed performance, generally underperforming benchmarks over three and five-year time periods.
This new programme will have a five-year term. The staff will update its success annually, take a detailed look after two years and return to the investment committee after five years to assess the programme and consider, at that time, a second phase.
CalPERS' staff retained a consultant, Crosswater Realty Advisors, to assist in research, design and programme development. Led by Olena Berg and Ted Leary, formerly of Lowe Enterprises, Crosswater found that only 20-50 firms meet the emerging-managers criteria, and they are typically "under the radar", making sourcing them a time-intensive and complex effort.
Crosswater advised that "mentoring is critical", and so the CalPERS staff will rely on existing real estate investment managers with proven track records and certain competencies to select, oversee and mentor the emerging managers.
Wayne Davis of CalPERS told IPE "it's too soon to know who will run the programme with Ted Eliopoulos and other members of the real estate staff, but PCA will continue to be involved as the board's real estate consultant."
CalPERS has approximately $228bn in market assets. It administers retirement benefits for 1.6m active and retired state, public school and local public agency employees and their families.