Questions raised about potential conflicts in CalPERS real estate sale

  • Blackstone brought in co-investors to help fund the deal
  • Sale included a ‘deferred payment’
  • Largest trade of real estate secondaries

Some secondary market participants questioned the fairness of CalPERS’ recent sale of a $3 billion real estate portfolio to Blackstone Group’s Strategic Partners division because the deal was brokered by Blackstone’s former placement agency.

CalPERS told Buyouts that it ran a broad auction that had an independent review.

Park Hill Group, which ran the sale for CalPERS, spun out of Blackstone earlier this year into newly formed boutique investment bank PJT Partners. Blackstone maintained a stake in PJT.

The close relationship has raised eyebrows, especially considering Strategic Partners could not pay the full amount up front, sources said. Strategic Partners got the transaction done by bringing in co-investors from the United States and abroad, according to a person with knowledge of the sale.

The transaction also included a “deferred payment,” according to a secondary market source. This meant Strategic Partners did not have to immediately pay the full amount to take over the portfolio. Deferred payments have the benefit of giving a buyer time to use distributions from the acquired portfolio to pay the balance.

Strategic Partners is said to be out raising its sixth real estate secondaries fund, but it’s not clear how much dry powder was left in the prior real estate secondary fund.

Park Hill Group ran a broad auction, a “full, formal process” that attracted “at least a dozen institutions,” according to the person familiar with the sale.

Also, CalPERS, the largest U.S. pension system with $293.4 billion in total assets, hired an “independent fiduciary” to oversee the sale. This fiduciary “delivered an opinion that there was no conflict,” said CalPERS spokesman Joe DeAnda.

“We also had a separate independent fiduciary deliver a fairness opinion of the bid and it was found to [be] fair,” DeAnda said. He declined to disclose the identities of the independent fiduciaries.

The CalPERS real estate sale marked the largest trade of a portfolio of real estate fund stakes. One secondary market buyer said it was impressive that the whole portfolio got sold, considering the real estate secondary market is a relatively small niche.

For context, intermediary Greenhill Cogent estimated real estate secondaries volume could “grow rapidly” to $9 billion this year. That compares to full-year 2014 secondary volume, including both private equity and real estate, of around $42 billion, according to the firm’s first-half volume report.

Action Item: Greenhill Cogent’s first-half secondary market volume report is available here:

Photo: Tony James, President of the Blackstone Group, speaks during the Reuters Investment Banking Summit in New York, November 14, 2006. REUTERS/Keith Bedford