When CalPERS Moves, the Industry Notices
It’s no secret that the pension fund industry moves in lock step at times, an almost herd mentality, when it comes to real estate investing. There are a few clear leaders at the front of the pack, and their movements are considered a bellwether for the future.
That's why the recent moves by the CalPERS are so significant. When America’s largest public pension plan, with $228 billion in assets under management, makes a move, and makes it very publicly, that’s something that rightfully draws attention. After all, CalPERS has more than $18 billion invested in global real estate, which is about 8% of its total investment portfolio.
Of course, the big fund can invest monies from its substantial coffers on just about anything it chooses, so when it purchased a $100-million stake in real estate investment advisor Bentall Kennedy in late June, it sent the entire CRE industry into a dither. But why, and who’s Bentall Kennedy anyway?
First, they’re not an American outfit, but rather they’re based in Toronto. Bentall Kennedy is touted as one of North America’s largest real estate investment advisors, also with $18 billion in assets under management, and it’s no small fact that they have been a CalPERS client for the better part of 15 years. Bentall Kennedy itself is the result of a merger of Toronto-based Bentall with Seattle-based Kennedy Associates in 2010.
This isn’t Bentall Kennedy’s first rodeo when it comes to fund ownership. CalPERS purchased its stake from Ivanhoe Cambridge, the real estate subsidiary of another big pension fund, Canada’s Caisse de depot et Placement du Quebec. Caisse sold its interest as part of a new initiative to bring its real estate advisory services in house. The remaining two-thirds of the company is now split evenly by yet another major pension fund, British Columbia Investment Management, and the Bentall Kennedy senior management team.
What’s also interesting is that Bentall Kennedy earned the top spot on the Global Real Estate Sustainability Benchmark Foundation’s report as the highest‐ranking fund manager in the Americas. The report, based on a survey of 340 of the world’s largest property funds, measures the social and environmental performance of listed and private property funds.
That kind of pedigree means something to a socially minded entity like CalPERS. The deal for Bentall Kennedy was initially touted by CalPERS as evidence that it aligns with like-minded firms when it comes to sustainability and corporate governance. “This relationship will allow our real estate team to further expand on trends and opportunities in real estate investment and management,” noted Rob Feckner, president of the CalPERS board of administration.
All of this is a good thing for the entire commercial real estate industry, and here’s why. The deal gives the largest public institutional player in the US a uniquely deeper understanding of real estate as an asset class and provides a more “insider” view of the industry’s dynamics. Again, CalPERS is the bellwether, and other pension funds, and the entire institutional investment spectrum, have now been given a virtual green light to partner up with outside investment advisors.
While it’s true that only a handful of funds have the same capital firepower, you can be sure that every institution must now consider, at the very least, creating strategic alliances with advisors. After all, advisors were hammered during the last economic recession right along with their institutional clients. Today, their fees (not to mention results) are under enormous scrutiny and pressure, and more institutions are finding new ways to bring their real estate investment expertise back in house where they can better control efficiencies, timing and costs.
Pension funds themselves must make some radical moves to remain solvent, considering the pressure to maintain their still-lofty investment return targets. For example, the CalPERS investment in Bentall Kennedy came only one month after its Sacramento-based cross-town rival, CalSTRS, purchased multifamily property developer LCOR for $820 million in May 2012.
A new study by researcher Preqin also noted that some 80% of the 472 institutional investors it surveyed are either handling their own real estate investing or considering the move. These include some of the largest investors around, like the $3- billion Harvard University endowment, the Abu Dhabi Investment Authority and the Canada Pension Plan. In other words, green light means go.