UNITED STATES - Pennsylvania State Employees Retirement System has approved a $15m (€9.5m) into Arden Real Estate Fund I - a distressed real estate fund.
The pension fund decided to make the investment at its board meeting on July 16, assisted by its real estate consultant, The Townsend Group.
Rob Kochis, principal at Townsend, oversees the Pennsylvania account and said: "This is an opportunity for our client to invest with a manager that has 20-years in the sector. "
The amount approved by the pension fund was a little lower than normal, according to officials, as the fund would typically make commitments of at least $25m into real estate commingled assets, though there were a couple of reasons for the commitment being lower, according to Kochis.
"One factor was that the fund is only seeking a total capital raise of $125m. This forced us to approve a smaller allocation. Another issue was that the fund was the manager's first capital raise with institutional capital. Arden has successfully managed small investments for high net-worth individuals in the past," he added.
The projected return for investors is 20% net IRR and the investment strategy is to focus on distressed real estate such as hotels, office buildings, housing and resort sectors.
Assets will be invested primarily in the Eastern regions of the US, with an emphasis on the Caribbean, Florida and Chicago, where the manager thinks some strong distressed investment opportunities will appear.
Around 40% of the return in the commingled fund is targeted for income and 60% is set for capital appreciation.
Pennsylvania State views Arden as an emerging manager so the capital it is raising will be done for a blind pool of assets and no properties will be placed in the fund until all of the capital has been raised.
Arden does have a history of investing along with local real estate operating companies in its transactions but Townsend does have some concern about the fund investing in residential as Kochis continued:
"Investing in housing can be a double-edged sword. Good managers may be able to capitalise on deep distress to generate high returns. On the other hand, if residential markets remain over-supplied and weak for a long time period, maybe a few years, it will be difficult for any manager to carry projects while awaiting the market recovery and still generate the high level of returns promised by Arden."