UNITED STATES - Pennsylvania Public School Employees' Retirement System intends to allocate up to $641.5m (€436.1m) in new real estate investments through a variety of commingled funds, in a bid to tap advantages thrown up by the credit crisis.

Commitments will be invested in a mixture of value-added or opportunistic strategies as the pension fund believes these strategies will be most affected by the change in the debt markets since the summer credit crunch.

Property had at that time attracted a significant amount of interest from highly-leveraged investors, the amount of leverage employed often being 80-90%, however, these players have now been taken out of the equation by the difficulties in obtaining cheap credit in the market.

As a result, Pennsylvania Public School has agreed to work with Fillmore for the first time through its West commingled fund, which has an expected annual rate of return of 14% over the lifetime of the funds. Pennsylvania will place assets worth up to 25% of the committed capital of the fund or no more than $100m.

Fillmore West is a structured finance fund which taps gains to be had in first mortgages, B-note debt, mezzanine loans, corporate debt, preferred equity and equity while deals are also expected to be focused on non-commodity sectors such as lodgings, senior housing and healthcare in the United States.

Another value-added fund committed to by Pennsylvania Public School is Apollo Real Estate Advisors' Value Enhancement Fund VII, having against agreed to place 25% of committed capital, or no more than $150m, to gain a projected gross IRR of 15-18%.

Most of the deals signed by this fund are expected to be in US existing office, industrial, retail and apartment block properties that can be improved by releasing, redevelopment or better management, and in areas with diverse economies, well-developed transportation networks and long-term growth potential.

Taking the opportunistic route, Pennsylvania Public School has also committed up to $300m to the £4bn Lehman Brothers Real Estate Partners III fund which invests in European, Asian and North American real estate.

More specifically, this fund seeks opportunities in capital market dislocations, government and corporate divestitures, distressed debt and recapitalization of over leveraged portfolios.

Similarly, Pennsylvania Public School has agreed to increase its commitment in Apollo Real Estate Finance Corporation from $150m to $241.5m.

Apollo Real Estate Advisors has asked its existing investors to bump up their commitments in the commingled fund by 62% so total equity commitments in the fund could be as much as $1bn.

The real estate manager feels there are many strong investment opportunities in the marketplace given the changes in the debt markets which occurred in the second half of 2007, so Apollo will either be a buyer or originator of debt in the marketplace.


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