SACRAMENTO, Calif. - The CalPERS board approved a $125 million commitment to the CIM California Urban Real Estate Fund, after rejecting a staff proposal that the pension fund establish a $50 million separate account with the real estate manager.
The confrontation was another sign of growing tensions between board members and staff. Already, four senior investment staff have left the $171 billion fund since January, including former Chief Investment Officer Sheryl Pressler and Senior Investment Officer Bob Boldt and two top real estate officers. There are rumors that other staffers might leave as relations between the board and staff members have become more fractious during the past year.
After a sometimes contentious debate last month, the board of the California Public Employees' Retirement System, Sacramento, voted seven to three, with one abstention, to approve a motion by board member Charles Valdes to invest with the fledgling money manager.
But the vote didn't occur until after Mr. Valdes had accused CalPERS staff of trying to block any investment with CIM. "Why not just be honest and say you are opposed to investing with this firm?" said Mr. Valdes, who stepped down as Investment Committee chairman last February.
In a testy exchange, current committee Chairman Michael Flaherman ruled Mr. Valdes out of order for impugning the motives of others.
The vote followed months of delays in deciding whether CalPERS would invest with CIM Group LLC, a Hollywood, Calif.-based real estate firm. In May, the board rejected a proposal by board member William Rosenberg to invest $250 million with CIM; the staff had not made a recommendation to invest with the firm.
The CIM Group has a limited track record as a manager, the staff noted; an earlier letter from a CalPERS consultant noted the firm had only $35 million in assets under management and sought to raise $400 million for the new fund. Staff also repeated a recommendation that the California fund negotiate to take an equity interest in the manager.
CalPERS staff said an initial allocation of $50 million could be increased later should the manager prove itself. CalPERS officials also had met in July with their counterparts at the California State Teachers' Retirement System, Sacramento, to discuss the idea of creating a joint separate account to invest with CIM.
However, CIM Managing Member Richard Ressler said the pooled vehicle structure offers more investment flexibility and that CIM's pooled fund fees appear to be lower than industry separate account fees. He added that the group is too big to accept a $50 million separate account; the company has $1.3 billion of possible real estate projects in the pipeline.
California Treasurer and board member Phil Angelides said allocating $125 million to CIM would take CalPERS over its target allocation of $806 million to in-state real estate investments, adding that a proposal to increase commitments to Southern California urban real estate will be considered in October.
Mr. Angelides said he didn't think CIM had "worked hard enough ... to develop a structure" that would meet the staff's needs. He said both sides could meet their respective objectives. "I think you guys have dug in a little too hard," he added, referring to CIM.
Nori Gerardo Lietz, representing PCA/E&Y Kenneth Leventhal Real Estate Group, a Portland, Ore.-based joint venture between Pension Consulting Alliance and Ernst & Young, said CIM officials incorrectly had compared fee structures between separate accounts and pooled funds. She reminded CalPERS board members they had received some of their worst returns from real estate pools because of lack of control by the pension fund.
But board member Fred Buenrostro, representing state personnel chief Marty Morgenstein, said those earlier pools lacked incentives to be liquidated.
Board members also raised concerns that CIM lacked commitments from other pension funds besides CalSTRS. Explained Thomas R. Hester, managing principal for the McMahan Group, San Francisco, which CalPERS had engaged to evaluate CIM and its new fund: "CIM has been put at a disadvantage in their marketing because staff has put something new on the table." He said other pension funds were waiting to see whether CalPERS would commit to the manager.
CalPERS staff members noted they had a very productive meeting with CIM officials during the previous week but no agreement had yet been reached.
But Mr. Valdes lashed into staff members. "In my 17 years here, I've never seen staff recommend something that hasn't been negotiated. ..." He also noted that previous joint ventures with CalSTRS have run into difficulties.
He then suggested staff was trying to block any investment with CIM. After the waters were calmed, Mr. Valdes' motion was adopted, with only board President William Crist, Investment Committee Vice Chairman Sean Harrigan, and Mr. Angelides voting against the proposal. William Barnes, representing State Controller Kathleen Connell, abstained.