by Cameron Nicol, Senior Marketing Manager – eVestment Private Markets
More than 10 years on from the Global Financial Crisis and in the midst of the longest bull run the US and European markets have experienced, some investors are still feeling the sharp bite of the crash in their real estate portfolios.
Pre-Crisis Investments Drag on LACERS’ Performance
One such investor is Los Angeles City Employees’ Retirement System (LACERS), a $16 billion public pension plan. In a June document from LACERS, one of the most viewed documents on our Market Lens platform in the month and highlighted in the latest edition of the eVestment Private Markets Monthly Monitor, LACERS reported significant under-performance of their Non-Core portfolio against their policy benchmark across all periods. This was attributed to their pre-GFC investments.
Within the LACERS Non-Core portfolio, 14 Opportunistic funds are pre-GFC vintages and identified as the drag on overall performance. While Value Add investments have outperformed on a since inception basis, the Opportunistic portfolio trailed the policy benchmark (NFI-ODCE + 300bps) across 1-, 3-, 5-year and since inception periods. The most pronounced underperformance was reported for the 1-year period, with a delta of 1280 bps for the portfolio vs. benchmark return (net).
While LACERS expects these Opportunistic funds to begin to liquidate, the legacy of the crash will still be present in the portfolio for a few years to come: nine of the non-core investments will still be held through the end of 2019, and three through year end 2022, according to the document.
Outlooks for Real Estate
While just one example, the LACERS portfolio does exemplify the lasting impact of a crash on more illiquid real estate investments’ performance and with markets experiencing a 10+ year bull run, the question that is omnipresent is ‘when will the next correction be?’ An eVestment Private Markets survey conducted in early 2019 explored this and found that two-thirds of both investor and fund manager respondents believed another market correction would take place in 1-2 years (figure 1).
This highlights the need for private fund managers raising capital in this environment to have a comprehensive understanding of how their target investors are shifting allocations to real estate and specific strategies based on their outlooks. With this context, managers can ensure they are spending their limited time on the targeting the right investors and creating tailored and personalized communications for each investor to address specific concerns, gain their confidence, and win commitments.