CalPERS Real Estate Consultant Finals

23 May

CalPERS Real Estate Consultant Finals

On Monday May 16th, the CalPERS Investment Committee met to select a new consultant for their real estate portfolio, hearing pitches from the two finalists, Courtland Partners and Pension Consulting Alliance (PCA).

Courtland presented their pitch first, with their focus and experience as a real asset specific firm serving as their key selling point. Courtland highlighted their experience working with other public plans, four of which were in the state of California, and their existing partnership with CalPERS in the form of annual investment reviews (2011-2016). Also of note was their claim of cost effectiveness, striving to provide superior service at a lower rate (50% less than PCA), and their international experience gained from their new London office. If selected, Courtland pledged to open a new office in Sacramento to better facilitate their relationship with CalPERS.

PCA’s major selling point was their pre-exiting relationship with CalPERS as their current consultant. This relationship, they claimed, allowed them better understanding of CalPERS’ values and goals, as well as familiarity with the current staff, which a new firm would lack. PCA made note that under their supervision, the CalPERS real estate portfolio has made significant strides towards their investment goals, with lower risk and better than expected returns, in addition to weathering the turbulent markets of several years ago. In contrast to Courtland, PCA highlighted their broader role as a consultant, focusing on more than just real estate, which allows them better perspective on key issues such as ESG. Both perspective consultants made note of their willingness to speak their opinions, even when it disagreed with staff, and commitment to reconciling those disagreements should they arise.

In terms of market outlook, both PCA and Courtland advised a more defensive investment strategy to better prepare the portfolio for the next market correction. Both firms also stressed the importance of long terms investments, a strategy which CalPERS’ size and patience makes even more beneficial.

After each pitch, the prospective consultants were questioned by the members of the committee. Courtland were questioned as to how they able to provide service at such a lower rate than PCA, and if that lower rate would affect the quality of service provided. Courtland attributed their reduced rate to lower overhead, and assured the committee the lower rate did not mean lower caliber of service. Courtland was asked how they differed from PCA, and what advantages they could bring that PCA couldn’t, and in response again highlighted their real asset focus and experience, as well as their European connections and London office. When asked how CalPERS could compete with smaller sovereign funds, the Courtland team again suggested targeting a longer term, patient investment strategy.

The majority of questions to PCA centered on the nature of their current relationship with CalPERS, with concerns being raised over PCA’s ability to bring in a new perspective, and the level of independence they really have given the relationship history. To the first point, PCA pointed to the changing of staff and staff roles to bring in fresh perspective, as well as they dynamic nature of the consulting process. When addressing the second point, they assured the committee of their intent to voice strong opinions when they disagree with staff, and hammer out the differences before they report to the committee.

Both PCA and Courtland were questioned about their plans in regard to ESG. Courtland highlighted their ability to track what managers are ESG compliant thorough their proprietary manager database, and make ESG a key focus during the manager interview process. They also mentioned their long standing commitment to ESG even before it became popular, and their concern for projects and investments which promote better standards of living and create jobs.

PCA made frequent mention of their role in drafting the Responsible Contractor Policy, as well as their goals of reducing the number of managers and a move towards a separate accounts model to improve the “Governance” in ESG. They also recommended a strategy on investment in sustainable buildings and projects of the highest quality.

After both Q&A sessions, the committee opened the floor for discussion. There was a general consensus that Courtland’s offer to establish a Sacramento office was both pandering, and unnecessary. There was contradictory statements and disagreement over the relative strength and weakness of both Courtland’s focus on only real assets and PCA’s broader focus. All members of the committee expressed concern over PCA’s fee versus Courtland’s. Most committee members highly valued the preexisting relationship CalPERS has with PCA, while some felt it would be better to “change for change’s sake” as well as to bring in new talent and perspective. Ultimately, the incumbent bias prevailed and the committee voted in favor of PCA on the stipulation that PCA lower its fee by 15%.