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U.S. retirement system commits $650m to energy and real estate

by Reg Clodfelter

The $52 billion Pennsylvania Public School Employees’ Retirement System has committed $450 million to energy and $200 million to real estate, with the total capital divided between four separate funds.

The larger of the retirement system’s two energy plays is a $250 million commitment to Carlyle Energy Mezzanine Opportunities Fund II, a $2.5 billion fund managed by The Carlyle Group that targets privately negotiated mezzanine investments in energy and power projects and companies based in the United States and Canada, though it can invest up to a third of its capital outside of North America.

The fund will look to generate an IRR between 15 percent and 18 percent investing across the energy spectrum, including upstream and midstream oil and gas, energy-related infrastructure, traditional and renewable power generation as well as natural resources. Investments will typically range in size from $30 million to $500 million, though most will be greater than $75 million.

Carlyle will co-invest a minimum of $75 million into the fund. A first close for CEMOF II is expected to occur sometime this month. PSERS invested $200 million in CEMOF I and has invested more than $1 billion in Carlyle’s real estate funds over the years.

PSERS’ other energy investment is a $200 million commitment to Avenue Energy Opportunities Fund, a $750 million fund managed by Avenue Capital Group. The fund primarily targets debt, select equity securities or other obligations of stressed or distressed North American energy and utility companies, with more than half of investments made in senior secured debt. PSERS has invested in 10 funds managed by Avenue Capital Group.

On the real estate side, the retirement system committed $100 million each to Almanac Realty Securities VII and Senior Housing Partnership Fund V.

ARS VII, managed by Almanac Realty, is a $1 billion fund that targets private placements of growth equity capital into public and private real estate companies, and will generate capital gains by growing the company’s equity value through acquiring, developing and/or repositioning real estate assets. The commitment is PSERS’ third with Almanac, having invested $100 million in Almanac Realty Securities Fund V in 2007 and another $100 million in Almanac Realty Securities VI in 2012.

SHPF V is a $500 million fund managed by Prudential Real Estate Investors that targets value-added returns, including a large component of income yield, through investments in senior housing real estate assets in the United States and up to 20 percent in Canada. It will invest primarily in stabilized, income-producing assets with occupancy levels typically above 50 percent, and will diversify by property type, investing in independent living, assisted living and memory care communities, as well as properties that offer a combination of the three. PSERS committed $100 million to predecessor fund SHPF IV in December 2011.

As of Sept. 30, 2014, PSERS had 13.8 percent of its assets invested in real estate, just above its 13.5 percent target allocation. During the fiscal year ended June 30, 2014, PSERS’ real estate portfolio produced a 16.44 percent return.

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