Ever wonder how institutional investors find sponsors to manage their billions? Here's an example.
-- In 2020, the Iowa Public Employees' Retirement System (IPERS) increased its allocation to private credit (i.e., loans made to borrowers outside of bond markets) by 500 bps.
-- IPERS received proposals from 90 firms across five different private credit strategies: Core real estate debt, opportunistic real estate debt, infrastructure debt, leasing strategy, and other real assets credit.
-- The group was narrowed down to 14 finalists, and 8 were recommended to the Pension's investment committee for approval with a recommended investment of $950M.
The following real estate sponsors were selected:
1. Heitman Credit:
An open-ended vehicle focused on bridge and development loans, 3-5 years in term, 65-85% LTV, with fund-level leverage up to 45% of collateral value. Targeting 6.5-8.5% net IRR.
2. Principal
Similar to Heitman, an open-ended vehicle targeting higher-yielding real estate credit, such as mezz/B-notes, bridge loans, and construction loans. Targeting 6.5-8.5% net IRR.
3. Kayne Anderson
Investments in Freddie Mac-related structured products and directly sourced junior debt positions in niche sectors. Targeting 10-12% net IRR.
4. Oaktree
Separately managed account, where Oaktree targets credit within four verticals: (i) private loan origination, (ii) regulatory-driven opportunities, (iii) real estate structured credit, and (iv) real estate-related corporate debt. Targeting 12-14% net IRR.
5. Oak Street Net Lease Property Fund
Focused on financing single-tenant, free-standing properties NNN or NN leased to investment grade tenants with 17+ years of lease term and 6-7% cap rates. Targeting 10% IRR.
There are interesting profiles in the deck that broadly explain IPERS' grading system...
10% on the sponsor's organization
30% on the product focus
20% on the investment process
20% on performance/track record
20% on terms (which are toward the back of the deck)
These selections were made only two years ago, but that was a lifetime ago in CRE years. How do you think these funds are doing? Do you think IPERS is pleased with its selections?
Ps - Notice that very few small sponsors made it to the recommended list.
Pps - This shift into more credit fits with the trend of institutions being more dedicated to credit strategies, despite many sponsors reporting difficulty sourcing favorable opportunities.
You can view the entire slide deck for the Iowa Public Employees Retirement Plan Discussion here.
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