Investors - JULY 14, 2014

SBCERA commits $125m to real estate and infrastructure

by Reg Clodfelter

The San Bernardino County (Calif.) Employees’ Retirement Association has committed $125 million to real estate and infrastructure, divided between two funds: the Fortress Transportation and Infrastructure Fund and the Partners Group Real Estate Secondary 2013 Fund. The $7.6 billion retirement association also approved a new asset allocation plan that included a reduction to its real assets target from 6 percent to 5 percent.

FTIF, managed by Fortress Investment Group, targets infrastructure and related infrastructure equipment with a particular focus on rail, airport, port and telecom assets. The fund reopened for commitments after initially closing in January 2013 with $395 million in commitments, and is now looking to raise an additional $600 million. Having invested $309 million of capital as of Dec. 31, 2013, the fund has been able to produce a net IRR of 12.0 percent (gross 18.5 percent), including an annualized 8 percent income component.

According to board documents, Donald Pierce, chief investment officer with SBCERA, likes the fund’s high upfront income component, as well as the fact that SBCERA is buying into an existing pool of assets.

SBCERA has a 1 percent allocation to infrastructure, 70 percent of which is tied up in a $53 million investment in AIG Highstar Capital III from August 2007. According to documents, Pierce expects the Highstar investment to wind down over the next few years and the Fortress investment to concurrently ramp up, keeping SBCERA reasonably close to its target allocation to infrastructure.

Partners Group Real Estate Secondary 2013 Fund, managed by Partners Group, is a closed-end real estate fund that launched in March 2013 and targets mature real estate secondary assets in North America, Western Europe and select regions in Asia Pacific. The fund has a total of $2.1 billion in commitments from investors and, as of March 2014, has committed $161.6 million across 22 portfolios from a seller profile that includes two European banks, a real estate investor, an insurance company, a hedge fund, a fund of funds and a public pension plan. The fund’s secondary acquisitions have an average purchase discount of 19 percent.

According to board documents, Amit Thanki, investment officer with SBCERA, likes that “investments in real estate secondary funds have the benefit of purchasing funds with a readily identifiable pool of assets, not having to participate in the J-curve portion of the funds’ fee structure and shorter investment periods.”

In addition, SBCERA has decided to reduce its allocation to real assets by 1 percent, or approximately $76 million, per a recommendation from consultant NEPC. In a document to the board, the consulting firm stated, “We don’t view inflation as a near-term threat and see other asset classes as more attractive based on current market opportunities.”

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