New Mexico State Investment Council, Santa Fe, committed up to $1.1 billion to alternative investment strategies at its meeting Tuesday spokesman Charles Wollmann said.
The council oversees $43.1 billion in endowments.
The council committed up to $300 million each to Atalaya Asset Income Fund Evergreen, a private credit fund of one managed by Atalaya Capital Management, and HPS Specialty Loan Fund Strategy, a direct lending fund of one managed by HPS Investment Partners. New Mexico SIC also committed up to $150 million each to LS Power Equity Partners V, a conventional, renewable and distributed energy infrastructure fund managed by LS Power Group; opportunistic value-added real estate fund Bain Capital Real Estate III; and Blackstone Real Estate Partners Europe VII, a European opportunistic real estate fund.
During the discussion about the Blackstone commitment, staff and the council's real estate consultant noted that the fund's fees are above market averages. The fee details were disclosed privately to the council and not reported in public session. The higher fees are partly due to Blackstone's strong historical performance, a staff memo said.
However, due to rising financing costs Blackstone's latest European real estate fund would likely use less leverage than prior funds, which could cut into returns.
"Blackstone expects that the impact on LP (limited partner) returns will be minimal because more difficult borrowing conditions are likely to allow the GP (general partner) to acquire properties at larger than usual discounts," the staff memo said.
In addition, Blackstone's real estate holdings, including a €113 billion ($123 billion) portfolio in Europe, make Blackstone Europe's largest landlord and give it an information advantage. The downside to Blackstone's size is that firm executives have challenges finding exits for its large portfolios. So Blackstone executives have been breaking the portfolios up into smaller pieces to exit by either selling them or recapitalizing them, the staff memo said.
Both staff and Townsend Group, the council's real estate consultant, recommended the commitment, saying that the fund's high fees were mitigated by its historical performance. According to a Townsend report provided for Tuesday's meeting, the council's $75 million commitment made in 2019 to predecessor fund Blackstone Real Estate Partners Europe VI earned a one-year total net return of -4.3%, a three-year total net return of 6.7% and a since-inception internal rate of return of 16.5% as of Dec. 31.
The council also committed up to $50 million to Sweetwater Private Equity III, a non-traditional secondaries private equity market fund managed by Sweetwater Capital Partners that invests in companies rather than in limited partnership interests of commingled funds.
Chris Cassidy, director of private equity, told the council that this strategy is attractive, calling the typical secondary private equity market investments in funds' limited partnership interests "a beta play." He said this strategy also avoids the double layer of fees — the fund and the underlying funds — that come with secondary funds investing in LP interests. Investors in Sweetwater's strategy also can conduct asset-level due diligence, which is "impossible to do when buying LP stakes," Mr. Cassidy said.