UNITED STATES - The California State Teachers Retirement System made a total commitment to real estate of just $41.1m (€29.3m) in the first quarter of 2009, compared with over $1bn in the same period last year.

The activity demonstrated by one of the US' largest pension funds is now typical of many of the large public pension funds in the United States as most funds are finding they are over-allocated thanks to the denominator effect of falls in asset values elsewhere.

CalSTRS had real estate assets worth 14.7% of its $111.6bn in total plan assets by the end of March even though its targeted to real estate is 13%, after making three investments in the first quarter of this year.

 The largest of these was a $20m commitment to the Fortress III 20% PIK Notes as a follow-on investment to Fortress Fund III to which the pension fund invested $250m in September 2004.

According to pension fund officials, the PIK Notes will provide incremental capital to the commingled fund in the form of fund level debt, to be used in accretive cases where existing investments require additional equity.

And CalSTRS is projecting to receive a net IRR return of 20% on its capital as the fund's strategy is to generate high risk-adjusted returns by snapping up US and Western Europe investments at a discount where the underlying value is damaged through structural complexity, distress or disfavour within the capital markets.

At the same time, CalSTRS has made a second follow-on investment with the Fortress Group: a $9.9m investment into the entity known as "GAGFAH", as the stock price is said to be substantially below the company's net asset value.

It first committed $100m to GAGFAH in October 2006  but its real estate independent fiduciary Courtland Partners recommended the extension as GAGFAH is primarily designed to enhance returns by capitalising on overseas regulatory changes.

The pension fund's remaining real estate commitment in the first quarter was a $12.2m investment into SH Group I, the hotel operating company run by Starwood Capital Group which is now looking to raise another $100m in equity.

CalSTRS made this investment based on a recommendation by real estate independent fiduciary, Capital Hotel Management.