UPS Buys Debt to Prepare for Big Market Correction

UPS Group Trust, a $30B corporate pension plan, has amassed a $400M real estate war chest of debt investments, in preparation for a market correction.

Greg Spick, the trust’s real assets portfolio manager, has invested 20 percent of his $2B real estate portfolio in a combination of listed and unlisted senior and junior real estate debt positions to provide the pension with liquidity, in the event of a financial crisis. Spick told PrivcapRE that UPS had been working for the past two years to hedge risk in the overall pension portfolio and accumulate a dry powder “in case there’s a re-pricing of the market”.

“The concept behind the strategy is to build a portfolio of debt positions that have varying maturities so we can better manage our liquidity and reinvestment over the next few years,” he told PrivcapRE.

The amount could be almost doubled in the future, he said.

“No one knows if we are in the fifth or ninth innings of the recovery, so we are trying to be in front of any correction by having a portfolio we think will perform favorably in all environments.”

The goal, he said, was to preserve capital, provide liquidity for the pension when needed and generate a return. “To preserve capital is absolutely critical, not least when things are at peak values.”

“Everyone seems to be utilizing real estate equity these days as an alternative to bonds; however, the truth is we don’t know what the residual value of a real estate equity investment will be. We are coming off a major appreciation period here,” Spick said. “It’s the same across all the asset classes and the truth is there’s a great deal of risk right now.”

He conceded that by investing in debt, UPS was forgoing the opportunity to earn higher yields. “It’s part of the trade-off, I have to accept that.”

Spick said when making investment decisions, he consulted with colleagues in fixed income, equity and other asset classes in the pension plan.

“There is an opportunity cost to making an investment, meaning that if we do a real estate debt investment, we need to know that we are getting relative value to what we can achieve elsewhere and the exposure is efficient,” he said.

“What we are all doing today, and how we structure our investments, will determine how they behave in the next type of environment. That’s why debt makes sense to us.”