FROM: Don Pierce, Chief Investment Officer
SUBJECT: TPG Credit - Essential Housing IV
RECOMMENDATION:
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Recommend that the Board approve $150 million commitment to TPG Credit - Essential Housing Fund IV, subject to finalization of legal documents.
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BACKGROUND:
TPG Credit’s Essential Housing Fund IV (“EHF4” or the “Fund”) is a growing business platform that provides homebuilders in the United States with off-balance sheet financing for land inventory. The fund focuses on land inventory with discrete attributes - namely, short-duration and close-to-production land that typically is in the final stages of development or held for imminent construction.
SBCERA has been investing in the Essential Housing Fund series from TPG Credit (formerly known as TPG Angelo Gordon) since 2024, with an initial commitment of $150 million to Fund III. TPG, a firm with over $300 billion of assets under management, is a global multi-strategy alternative assets platform founded in 1992. The organization currently has over 1,900 employees spread across 25 offices globally and is active across public and private markets.
The genesis of this strategy began in 2020 through conversations with one of the largest publicly-held US homebuilders. That firm was seeking a financing partner as part of their overall strategy to evolve to an “asset-light” business model - a strategic shift to enhance the company’s overall operational and financial efficiency. Since that time, multiple additional homebuilders have mirrored this strategy and have become partners of the Fund.
Staff and NEPC believe that EHF4 is a compelling opportunity for SBCERA for the following reasons:
- Shared philosophical alignment and unified vision.
o For homebuilders, EHF4 offers a dependable and institutionally scaled solution that is a key part of their overarching corporate strategy (i.e., shift to asset-light model with greater off-balance sheet financing).
o For EHF4, this strategy allows for predictable and contractual cash flows with limited downside, due to the inclusion of built-in structural features (e.g., builder deposits, shorter investment/harvest periods, ongoing amortization with no entitlement/development risk, etc.).
- Long-term competitive advantage due to scale.
o As the first institutional product in the space, EHF4 has created structural and/or functional exclusivity with homebuilders, granting the Fund access to the largest and highest margin projects.
o This resulting diversified portfolio of projects is supported by a large asset management team and proprietary technology; these resources allow EHF4 to consistently and reliably serve as a programmatic partner for the industry.
o Finally, the diversity and velocity of project turnover within the Fund drives cheaper financing with EHF4’s counterparties, allowing for the most attractive pricing versus competitive offerings.
- Differentiated source of idiosyncratic risk-return for the SBCERA portfolio.
o EHF4 delivers a unique return stream to our portfolio that has substantial built-in downside protection - this allows for steady, predictable and uncorrelated returns over a relatively short period of time.
o Returns are contractual in nature given the requirements in place for homebuilder partners.
§ Homebuilder deposits of ~20% represent ‘first loss’ capital and are non-refundable.
§ EHF4 has ‘put-back’ rights to either push the project back to the homebuilder or select another project (with pre-approved criteria) in its stead.
§ As lots are taken down, EHF4 receives monthly cash flows that represent both a return of and return on capital deployed, which improves both the return and capital at risk framework.
EHF4 represents an attractive fit within SBCERA’s portfolio, namely as a scaled source of uncorrelated returns from an established alternative asset management firm. The strategy has been well-constructed and generates benefits for all stakeholders. Moreover, it has strong philosophical alignment with SBCERA’s core investment beliefs and has been risk-tested through the volatile housing cycle of the past six years.
From an asset allocation perspective, SBCERA’s real estate allocation currently sits at 3.9% of plan assets, below the Board-approved target of 5% (with a permitted range of 0-10%). The lower allocation has resulted from two main factors:
- A mixed level of deployment over recent years.
o 2025: $165 million deployed versus $145 million budget ($20 million overage)
o 2024: $150 million deployed versus $120 million budget ($30 million overage)
o 2023: $10 million deployed versus $100 million budget ($90 million shortfall)
o 2022: $45 million deployed versus $110 million budget ($65 million shortfall)
o 2021: $93 million deployed versus $110 million budget ($17 million shortfall)
- Shifting real estate valuations/capital calls/distributions within larger portfolio performance.
This allocation will encompass much of our real estate pacing plan for 2026 (approved for $155 million, with an upcoming mid-year update). Staff and NEPC are recommending the Board approve the investment into EHF4 with a commitment of $150 million (approximately 85 bps of plan assets). Both Staff and NEPC are comfortable with the sizing given the under-allocation to real estate, our view of the upcoming pipeline, the uniqueness of the strategy, and our confidence in the strategy to produce reliable and consistent returns.
BUDGET IMPACT:
Investment Costs are deducted from Net Asset Value.
STRATEGIC PLANNING GOAL/OBJECTIVE:
Prudent Fiscal Management
STAFF CONTACT:
Thomas Kim
ATTACHMENTS:
Exhibit A: TPG Essential Housing IV Presentation
Exhibit B: TPG Essential Housing IV Supplement (confidential)
Exhibit C: NEPC Memo - Essential Housing Fund IV (confidential)