FROM: Don Pierce, Chief Investment Officer
SUBJECT: 2025 Real Estate Pacing Plan
RECOMMENDATION:
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Recommend that the Board approve the 2025 Real Estate Pacing Plan.
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BACKGROUND:
Each calendar year, investment staff and SBCERA’s Investment Consultant propose target commitment levels to real estate strategies for the upcoming year. For calendar year 2025, NEPC and staff are recommending a target commitment budget of up to $145 million, of which about $75 million is reserved for each private core real estate (which includes real estate debt) and about $70 million for private non-core real estate.
Within the real estate program, SBCERA currently holds assets of approximately $611.9 million, equal to 3.8% of total plan assets, and has an additional $307.7 million, 1.9% of total plan assets, in existing uncalled capital commitments to real estate funds. The top sector exposures across the portfolio are residential (39%), office (20%), industrial (19%) and retail (6%). Most of the exposure is in North America at 81%, Europe makes up 9% and Asia accounts for 10% of the real estate exposure.
In 2024, SBCERA committed $150 million to one new real estate investment. The Board approved an investment in The TPG Angelo Gordon Essential Housing Fund III in April of this year. Given this was a greater than the $120 million 2024 pacing plan, there was a very high bar for additional real estate investments during the balance of the year. No additional real estate commitments were made in 2024.
The recommended 2025 commitment pacing plan of up to $145 million is designed to build real estate exposure to the plan’s long-term strategic target allocation of 5%. The recommendation aims to achieve the asset allocation target over a multi-year period to maintain strategy and vintage year diversification. NEPC and staff will recommend necessary adjustments to the yearly commitment pacing to maintain and manage the real estate program with respect to SBCERA’s asset allocation target. The year-over-year increase in the pacing plan amount is largely driven by growth of the overall SBCERA portfolio and the underperformance of the real estate portfolio relative to the total plan.
SBCERA's real estate investment policy contemplates investments in private core (which includes real estate debt) and non-core real estate and in public core real estate securities, with ranges to allow sufficient flexibility to allocate capital to the most attractive opportunities based on market conditions and available manager opportunities. SBCERA’s policy requires that the real estate portfolio be managed to a long-term composition of at least 50% private core (which includes real estate debt), at least 30% private non-core, and no more than 20% public core real estate investments.
The proposed real estate pacing plan will be implemented primarily through investments in both open-end and closed-end funds, and potentially co-investments alongside such funds. Preference will be given to existing manager relationships in which staff and NEPC have a high level of confidence including, where possible, strategic long-term partnerships established by SBCERA utilizing the MCA structure. The benefits of these structures include favorable economic terms, greater transparency, and enhanced information flows between SBCERA and its investment managers.
Potential Real Estate Investments for 2025:
|
Manager |
Relationship |
Opportunity |
Indicative Size |
|
Kayne Anderson |
MCA |
Kayne Anderson Real Estate Partners Fund VII |
$0-50 million |
|
Partners Group |
MCA |
Direct & Co-investments |
Case Dependent |
|
PGIM |
Existing Manager |
PRECap VIII |
$0-50 million |
BUDGET IMPACT:
Investment costs are deducted from Net Asset Value.
STRATEGIC PLANNING GOAL/OBJECTIVE:
Prudent Fiscal Management
STAFF CONTACT:
Jacob Abbott
ATTACHMENTS:
Exhibit A: NEPC 2025 Real Estate Pacing Plan