CalPERS’ ‘Game Changer’—In-House Debt Plan Approved

The $293B public pension to launch an unlevered separate account in which the plan—not GPs—adds portfolio-level leverage

The California Public Employees Retirement System is to test adding its own leverage to property deals in what could be a “game-changer” for the U.S. institutional real estate industry.

The $293B pension plan’s investment committee today approved a plan to pilot a separate account that would buy real estate assets without debt and for the CalPERS’ real asset investment team—rather than GPs—to apply leverage at the portfolio level.

“The pilot leverage program is potentially a game changer and should really be pursued,” consultant and Wilshire president Andrew Junkin told the committee.

CalPERS’ head of real assets, Paul Mouchakkaa, said the pilot program, likely to be run over the next five years, would test the pros and cons of internally-applied leverage.

“What we believe can come out of it is better cost efficiency, greater transparency and greater alignment between investment manager[s] and ourselves. So this is an area that is very new and in some cases is groundbreaking,” Mouchakkaa said.

In a memo to committee members, Junkin said an unlevered separate account would allow GPs to “simply be focused on maximizing the returns due to real estate expertise and not machinations around leverage within the portfolio”.

Instead, Junkin wrote, CalPERS’ investment team would “maintain significant control over the amount of leverage in the program from a holistic perspective, rather than a manager who is simply focused on one particular sleeve of the portfolio.”

The unlevered pilot program was presented as part of a plan to merge CalPERS’ real estate, infrastructure and forestland programs into one real assets silo. During the presentation of the five-year strategic plan, Mouchakkaa also revealed CalPERS would cap development to 10 percent across the entire real assets portfolio and limit the number of managers to 15 for real estate and 10 for infrastructure and forestland combined.