US Pension Plans’ Private Markets Activity – June 2017 Recap
July 12th, 2017
Derived from intelligence available in eVestment Private Markets each month eVestment highlights the top news and activities of US public pension plans across private markets strategies. Here’s a recap and summary of five of the most viewed documents by our users in June.
1. San Diego County ERA Recommend Termination of Contract with Townsend Group’s Consulting for Real Estate Services – https://publicplaniq.com/doc_pdfs/113420
At the beginning of June, San Diego County Employees Retirement Association (SDCERA) filed the recommendation to terminate their contract with The Townsend Group and replace this service through Albourne and Aon Hewitt.
This was a result of SDCERA removing their hedge fund investments, approved by the board in November 2015, that allowed them to amend their existing relationship with Albourne to switch out hedge fund consulting duties to real estate. Aon Hewitt have been reviewed as an additional resource for Real Estate consulting. The plan states that these changes will streamline their investment consulting team and provide annual net cost savings of approximately $280,000 a year.
2. Investment Recommendation of Brookfield Real Estate Debt fund for South Carolina Public Employees’ – https://publicplaniq.com/doc_pdfs/113762
This month, a document outlining an investment recommendation to Brookfield’s latest Real Estate Debt fund for SC Retirement garnered a lot of interest from users.
The document, authored by SC investment professionals and their consultant, Aon Hewitt, outlines the recommended commitment of up to $100m to BREF V: a $3bn real estate debt fund managed by Brookfield, targeting US assets primarily and originating whole loans. The rationale for investment outlined in the document includes the view that the market is at the latter stage of a cycle and so real estate debt investments are “sensible” to “position ourselves in a more defensive posture while still achieving returns.”
Considerations noted on the fund included increased fund sized compared to prior vehicles, increased deal competition from debt funds, and potential bank deregulation. Concerns were mitigated by staff due to Brookfield’s larger team size and longer investment period, Brookfield’s ability to finance large whole loans due to their size and breadth and differentiate from other funds, and the view that any changes in bank regulation will take several years to implement, if at all.
The document also outlines BREF V’s fund terms (1.4% mgmt. fee, 15% carried interest and a 6% hurdle rate), as well as other details on Brookfield, the BREF fund series and real estate market, including:
- Prior fund performance
- Recent fund property strategy
- Real estate debt market opportunity and analysis
3. Texas Municipal 2017 Private Equity Search Process and Recommendations by Stepstone –
Topping the interest in private equity related documents was the PE search process and recommendations document presented to Texas Municipal Retirement System (TMRS) by StepStone.
The document provides an overview of the YTD commitments for TMRS’ goal of $600m of PE exposure in 2017, recommended by StepStone in Dec 2016.
At date of presentation, May 15, TMRS had committed $116.25m across 3 funds. StepStone, on behalf of TMRS, are still looking to recommend commitments to managers throughout the year to meet the allocation goal. The presentation outlines in detail their plans for this period, including:
- Continue to round out buyout portfolio and add opportunistically to growth and credit funds.
- Identify and commit to top quartile performers that will produce returns consistent with overall PE objective of Russell 3000 + 3.00%
- Take a measured approach to global geographic diversification with a conservative and minority exposure to international funds.
The document goes on to outline their manager search process in detail, including their scoring review breakdown and questions/elements required at each stage and applies this to a new set of funds recommended to TMRS: $132.5m recommend across Capital Partners Private Equity Income Fund III, Altaris Health Partners IV, and Altaris Constellation Partners IV.
4. NEPC CLO and Direct Lending Education and Recommendations to Detroit General Retirement –
Although available in Public Plan IQ since April, NEPC’s comprehensive presentation to Detroit General Retirement on CLO and Direct Lending investing continues to be of interest to our users. Perhaps unsurprising given the general interest in the private debt space and investors’ plans to increase private debt’s share of private markets allocations.
The 60-page report provides detailed information on the CLO market history and evolution, with breakdowns of the differences between CLOs pre vs. post 2008/2009 credit crisis, insights into the components of CLO Equity strategies and more.
The Direct Lending portion of the report reviews recent market activity, offering expert analysis and commentary from NEPC, and also comprehensively analyzes differences between US and European direct lending.
NEPC also present a detailed breakdown of private debt funds raised since 2009, split by geography and target EBITDA to give TMRS and other readers insight into the key market participants.
5. San Joaquin County ERA Private Real Estate Portfolio Overview –
Courtland Partners’ recent Real Estate strategy review and plan for San Joaquin County Employees’ Retirement System (SJCERA) rounds out our list of top documents in June.
The presentation to SJCERA includes details on their current Private Real Estate portfolio, future portfolio projections and an overview of real estate market conditions.
Notable highlights include:
- Over 20% of SCJERA’s plan is invested in real estate related assets, with 10% in private real estate strategies across Core, Value and Opportunistic.
- Real Estate Debt comprises 8% of total plan assets
- Almanac, Angelo Gordon and Colony are highlighted by Courtland as attractive opportunities for a commitment to a new fund.
- SJCERA’s current Target Tactical Allocation across public and private real estate is: Core 40%, Value 40%, Opportunistic 20%, which Courtland recommend to maintain to best meet objectives.
- Courtland are looking for managers with a strong current income component to add to the portfolio.
During their market overview, Courtland cite a variety of data to build a comprehensive picture of conditions:
- Cap rate spreads have compressed slightly with T-bills gaining from their low.
- Cap rates across NACREIF Property Index (NPI), Apartment, Industrial, Office and Retail are at all time lows.
- NPI and Industrial vacancies are at 10 year lows (6.8% and 3.9% respectively), while office vacancy rate is at 11.2%, below average and below prior 4 quarters.
- Private Real Estate dry powder is at record levels ($237bn as of Dec-16) and is increasing competition for deals.