HOUSTON - The $6 billion defined benefit plan for Shell Oil Co. is almost finished selling its $100 million real estate commingled fund portfolio.
It sold off the biggest chunk - $66.2 million - last month in the largest trade of commingled fund shares by the Institutional Real Estate Clearinghouse.
Shell still has about $90 million in direct property holdings in separate accounts, according to Pervis Thomas, chief investment officer of the Shell Retirement Funds.
"We have not decided what we will do with real estate," Mr. Thomas said.
"We still have our separate accounts; we will look at REITs (real estate investment trusts)," he said.
But the fund's "whole focus is to get out of commingled accounts because it didn't work out."
Shell sold its shares in five commingled funds for $66.2 million last month, the single largest piece since it began liquidating last year, according to Mr. Thomas. The buyer of the largest chunk was the Praedium Funds, a real estate partnership sponsored by New York-based Credit Suisse First Boston. The General Electric Pension Trust, Stamford, Conn., participated in the transaction because Praedium is not a qualified buyer of commingled fund group trusts, said industry sources.
John Myers, president of GE Investments, which oversees GE's pension fund, was unavailable for comment.
Also, industry sources said investors in two of the commingled funds exercised rights of first refusal, which allowed them to buy the funds at the price agreed to by Praedium.
In the transaction, Shell sold its shares in Heitman Real Estate's Fund II and 1211 Acquisition Corp; ERE Yarmouth's Asset Enhancement Fund and U.S. Prime Property Inc.; and Cabot Private Partners.
Investors in the Cabot and 1211 funds exercised their rights to buy Shell's units.
Shell had more than 10% of its total assets in real estate in 1993-1994 when the defined benefit plan was about $4 billion, said Mr. Thomas. Real estate is now about 1.5% of the $6 billion fund.
Real estate does not have an allocation at the Shell pension fund; it is a component of the fixed-income allocation, he said.
Shell's decision to sell its real estate commingled funds is representative of the greater effort by pension funds to extricate themselves from illiquid real estate securities by selling in the secondary market.
"There is no question that we have seen a dramatic increase," said Brent Donaldson, president of Liquidity Financial Advisors, an Emeryville, Calif., firm that specializes in secondary market purchases of commingled funds.
"We will see nearly $1 billion of trading come through our shop this year."
Mr. Donaldson attributed the increase in secondary market activity to plan sponsors finally investing in other alternatives and to the improved real estate markets, which narrowed the discounts to net asset value by which the funds usually trade.
Anthony Labozetta, managing director with New York-based Cantor Fitzgerald, which executes trades for the Institutional Real Estate Clearinghouse, said his firm is working on transactions larger than the one between Shell and Praedium.
Landmark Partners Inc., Simsbury, Conn., a private equity fund, just closed a $400 million fund to buy commingled real estate funds, said Richard Maine, director. Landmark buys partnership interests in the secondary market in a variety of investment classes.
The firm bought the real estate commingled fund interests of the State of Connecticut Trust Funds last year.
Russell Appel, managing director with CS First Boston, said his company will pursue other secondary market buys of real estate commingled funds.
Peter Levine, a former vice president with Cantor Fitzgerald, was brought in as a consultant to assist with the purchase of the Shell commingled fund units, said Mr. Appel.
"Our general strategy is to identify inefficiencies in the marketplace and capitalize on those," he said. "These funds are difficult for people to understand.
"There are a large number of issues to investigate for a small investment," said Mr. Appel. "You are buying a partial interest in a pool of assets and to do it right, you have to underwrite the entire pool. You have to understand the asset management issues and their strategy."
Mr. Appel also opened the door to aggressive shareholder activism to maximize the values of commingled funds.
"We are more willing to be more aggressive in how we approach the investment manager than other investors," said Mr. Appel. "We have access to capital which allows us to do things that a pension fund doesn't have the resources or stomach to do.
"There may be value added to (other investors) by our participation," he said.
Mr. Thomas declined to provide return information on Shell's commingled fund investments or if the commingled fund units were sold at a discount to net asset value.
According to Mr. Donaldson, the average discount to net asset value on the transactions completed this year by Liquidity Financial is in the range of 15%. Discounts last year ranged between 20% and 25%, said Mr. Donaldson.
