CalPERS Real Estate Returns Lagging, Rethinking Europe Post brexit

09 Aug

CalPERS Real Estate Returns Lagging, Rethinking Europe Post brexit

Yesterday CalPERS reported fiscal year end performance. The $30B real estate portfolio lagged the policy benchmark by 550 bps for the fiscal year, -112 bps for the 3yr period, at benchmark for the five year period, the 10yr period in excess of 900 bps underperformance. The PCA real estate review cited the write down of several non-core partnership interests and emerging markets investments as the primary contributors to underperformance.  PCA noted that relative to the policy benchmark, the CalPERS portfolio has higher leverage levels and exposure to emerging markets which are excluded from the benchmark. PCA concluded:

“The ability of CalPERS to be effective at scale in higher risk strategies and off shore locations is not proven. Much effort and costs have been expended into trying to design a program of non-core property investments. To date, CalPERS has not been paid an adequate return for the risks undertaken. The current Strategic Plan provides for a minority of the portfolio to be invested outside of core. Given the liabilities, resources, and structure of the System, future non-core investments should be approached with extreme caution.”

 In June just prior to the Brexit vote, San Bernardino approved a European real estate debt commitment. Last week following an investor update by the manager, the $25 million commitment was approved.  In the management update, it was noted lower expected transaction activity will shift the portfolio towards a larger portion of refinancing and less toward acquisition funding.  A reduction in the availability of senior debt, combined with lower LTV ratios will provide more “funding gap” opportunities.Several commitments were announced last week.  IL Muni committed to a North American opportunistic fund and two value added investments: fund one, fund two.  LACERS is scheduled to approve a value added commitment today. NM PERA committed to Starwood XI,a global opportunist fund, note no documents provided the audio of the presentation is here, forward to 27:45 in.