Equity Pledges by Pensions Fell 18% in 2016
U.S. public pension systems reduced their equity commitments to real estate vehicles by nearly 20% last year, the first decline since 2013.
Pensions tracked by FPL Consulting pledged $38.8 billion to commingled funds and separate accounts, down 18% from $47.2 billion the previous year, which was by far the highest level since the market crash.
FPL principal Timothy Kessler noted that even with the drop, commitments were still above the average of recent years, and he added that investors remain relatively bullish. “It’s a big decline off a big year,” he said. “But the reason why I am not alarmed is that the demand is still there from the investor view. It’s just that the deal flow hasn’t been there, and the ability of the managers to put out capital effectively has been more constrained. There’s absolutely a backlog.”
Kessler said uncertainty about the presidential election put “a pause on the system,” resulting in just $6.7 billion of pledges from October to December, the lowest quarterly tally since the third quarter of 2013.
Given the prospect of rising interest rates, questions on the new administration’s tax policies and the difficulty of finding suitable real estate investments, Kessler expects pledges to be roughly flat this year.
The share of commitments to value-added and opportunistic strategies continued to rise last year, to 70% of the total dollars, up from 64% in 2015 and 59% in 2014. Core and core-plus vehicles corralled 30% of commitments, down from 36% in 2015 and 41% in 2014.
Investors also continued to gravitate toward closed-end funds, which attracted 57% of committed dollars, up from 50% the prior year and 47% in 2014. Pledges to separate accounts dropped to 33%, from 38% in 2015. Open-end funds received 10% of pledges, down from 13%.
The average commitment to separate accounts was $252 million, up from $212 million in 2015. The average commitment to closed-end funds jumped to $86 million, from $75 million. There were 359 total commitments, down dramatically from 470 in 2015.
The largest firms continued to dominate the action. The top five shops garnered 31% of committed dollars, even with 2015 and up from 21% in 2014. The top 20 snagged 61% of the money, up from 56% last year and 51% in 2014.
Fewer dollars flowed to vehicles focused on a single property type, which attracted just 17% of pledges, down from 26% in 2015 and 41% in 2014. Kessler said that reflected the increased move toward higher-yielding funds, because such vehicles tend to invest across asset classes.
Vehicles focused on North America garnered 56% of pledged dollars, down from 65% in 2016 and 72% two years ago. Funds that invest globally attracted 26% of commitments, roughly even with the prior year. European funds rose to 11%, from 6%. Asian vehicles attracted 6% of commitments, up from 4%.
The 200 pension systems tracked by Chicago-based FPL have $262 billion of real estate assets and $3.4 trillion of total assets under management. They are believed to represent the vast majority of assets held by public pension systems. FPL will release a report summarizing its findings this week.