OCERS on the hunt for RE debt manager

The pension system is considering at least five possible real estate debt funds for a $75m commitment.

At its October 30 investment committee meeting, the Orange County Employees Retirement System (OCERS) approved its portfolio for a new, $75 million investment to a commingled US real estate debt fund. Currently, only 1.7 percent of the $10.6 billion pension plan’s investment portfolio is exposed to the real estate debt space.

In its reasons for considering a debt fund, OCERS’ consultant RV Kuhns & Associates noted that debt provides “attractive risk-adjusted returns with a significant portion of the return coming from current cash yields while limiting potential downside risk, versus exposure to real estate equity investments that reside in a ‘first loss’ position.”

According to board documents, the current funds under consideration include Colony Capital’s Distressed Credit and Special Situations Fund III, Mesa West Capital’s Core Lending Fund, Oaktree Capital Management’s Real Estate Debt Fund, Square Mile Capital Management’s Square Mile Credit Partners and True North Management Group’s Real Estate Fund III.

Board documents noted that the possibilities are not limited to these five managers. Any type of investment management firm will be considered, as long as it has at least $250 million in total US real estate or real estate debt assets under management and at least five years of performance history managing US real estate or real estate debt as of September 30. The commingled fund size must be large enough that OCERS will not have more than 20 percent ownership of the total fund, and the combined investment period and fund term for closed-ended funds cannot exceed 13 years. Furthermore, the fund must invest in US real estate debt backed by multifamily, hotel, industrial, office, retail and self-storage assets only.

The investment staff will “review the competitive landscape” with RV Kuhns before returning to the board with one or more finalists to consider during the first quarter of 2014, according to an OCERS memorandum regarding the approval.

The new commitment will serve as a part of OCERS’ non-core real estate allocation. Recently, the pension earmarked an additional $200 million for non-core real estate commitments, which is scheduled to be invested over the next few years. Non-core real estate investments currently make up 15.04 percent of the real estate portfolio, but the pension system has a long-term target of up to 30 percent.