Sacramento County swaps separate accounts for fund stake

In an unusual real estate secondaries deal that one executive called a ‘no-brainer,’ the $8.6bn pension system is trading six assets for a $250m interest in an open-ended fund.

Sacramento County Employees’ Retirement System is in the process of exiting its core separate accounts to bring diversity to its real estate portfolio.

The $8.6 billion pension system is planning to trade its six core separate accounts for a stake in an open-ended core fund that it has yet to pick, according to documents released in November.

SCERS and its real estate consultant, Cleveland-based Townsend Group, began considering how to pare down its core real estate separate accounts in January. The pension system is planning to invest in core real estate solely through fund structures.

“SCERS and Townsend believe that the dispersion of returns within core real estate, whether by separate accounts or open end commingled funds, is not significant,” chief investment officer Steve Davis told sister publication PERE.

The pension system has not previously sold multiple separate account properties in aggregate, he said.

SCERS explored both a sale of the separate accounts and a swap for a stake in a core vehicle. The pension system picked the latter option to gain immediate exposure to an open-ended fund; to expedite the sale process compared with exiting the assets individually; and to save on third-party commissions, according to pension documents. The estimated gross asset value of the properties was about $466 million as of 30 June, according to Townsend.

The open-ended core manager will buy the six assets, and the proceeds – which SCERS expects to total about $250 million – will be reinvested in that core manager’s open-ended fund.

Townsend started the swap process by gauging the market’s interest to participate in the deal, sending 17 invitations to open-ended fund managers to garner feedback. Out of that group, 13 responded positively and Townsend cut the list to seven potential managers.

The consultancy is evaluating the managers for their fit with SCERS’ real estate objectives and for which manager will bid highest for SCERS’ assets. Townsend is also obtaining property appraisals for the separate account assets, which range from a fully-leased Seattle office to an 81 percent-leased industrial property in Houston. BlackRock manages five of the assets and Barings manages the other property.

The transition is expected to be implemented in the first quarter of next year, Davis said.

“It seems like a no-brainer to try as the pension fund would potentially trade a concentrated core portfolio from an asset perspective to broadly diversified core fund, albeit with a single manager,” one secondaries executive who is not involved with the deal told PERE.

“But it may be cumbersome to orchestrate unless SCERS is willing to contribute the assets at a nominal discount to appraised value,” the executive added, noting few core funds would likely want to buy all of the assets.

SCERS managed $723.5 million, or 8.4 percent of its portfolio, in real estate, as of 30 June, including interests in seven core funds totaling $333 million.

One executive at a US-based secondaries firm likened the deal to one executed last year by San Francisco Employees’ Retirement System, in which the pension system transferred a $700 million real estate separate account to CIM Group from Deutsche Asset Management, as PERE previously reported. The executive noted that separate account had underperformed under Deutsche, with the assets now managed by an open-ended CIM vehicle.

SCERS’ separate accounts returned 10.9 percent net in the year ending 30 June and 4.6 percent since their September 2008 inception, according to the pension’s half-year report.