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CalPERS Real Estate Investments Take A Beating

November 13th, 2008

The $189 billion California Public Employees’ Retirement System, the largest and most closely watched pension fund in the country, has revealed a huge hit to its real estate portfolio. Its housing related assets are down 35% to $6.1 billion as of June 30. Until recently, the big fund was still reporting double-digit increases in its real estate investments. According to a report that will be presented to the fund’s investment committee on Nov. 17, CalPERS’ overall real estate portfolio is down 11.2% for the fiscal year that ended in June.

The fund seems to have made some very basic investment mistakes, including over concentration in its once red-hot home market of California. Among its biggest disappointments is a nearly $1 billion investment in a partnership involving homebuilder Lennar, forestry giant Weyerhaeuser and private equity firms Cerberus and MacFarlane Partners. That partnership, called Land Source, is now in bankruptcy. A report prepared for the fund by independent consultant Le Pastrier Development Consulting found that high-levels of leverage contributed to the volatility of the fund’s housing investments.

CalPERS, known for agitating for corporate governance changes at big companies it invests in, is adjusting its own policies in the wake of the real estate debacle. The fund is busily restructuring its partnerships to reduce debt. In the future, real estate investments will have to pass muster with an internal review committee, an independent fiduciary and a board consultant. CalPERS is still looking for a new chief investment officer. The fund’s previous top manager, Russell Read, bailed out last spring.

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