CalPERS on Monday replaced the investment firm that oversaw a controversial New York real estate deal that cost the California pension fund $500 million.
The California Public Employees' Retirement System said it hired GID Investment Advisers LLC to manage a $1.1 billion portfolio of apartment buildings in 13 states.
GID replaces BlackRock Inc., a big New York investment firm that managed a $500 million deal for CalPERS that ended disastrously.
BlackRock teamed with real estate firm Tishman Speyer in 2006 to buy a $5.4 billion Manhattan apartment complex called Stuyvesant Town and Peter Cooper Village. CalPERS and CalSTRS, the California teachers' retirement fund, were among the institutions that bought equity stakes in the project from BlackRock and Tishman.
The deal proved controversial after tenants complained that the landlords were driving them out in order to raise rents. With New York's strict rent-control laws, rents generally can be raised only when new tenants move in. Tenants won a major lawsuit against the landlords, although by then the investment was already imploding because of the weak real estate market. The apartment complex was lost to lenders.
CalPERS lost its entire $500 million, and CalSTRS lost its $100 million. Along with a similar investment that went sour in East Palo Alto, the deal tarnished CalPERS' reputation as a socially responsible investor, and both pension funds adopted a policy prohibiting investments that depend on dislodging tenants from rent-controlled units.
Dumping BlackRock marked the second time CalPERS, stung by huge real estate losses the past two years, has dismissed a big investment partner. Last fall it announced the resignation of MacFarlane Partners, which was responsible for CalPERS' ill-fated $920 million investment in LandSource Communities. LandSource controlled vast tracts of residential land around the country, notably a major swath of undeveloped Southern California property called Newhall Ranch. LandSource filed for bankruptcy protection, costing CalPERS its entire investment.
In announcing the switch Monday, CalPERS said GID has been managing real estate for CalPERS since 1998. "GID has been an exceptional partner and manager over the years in a difficult market and will enter into an alignment of interest relationship by making a significant co-investment in the new venture," said Ted Eliopoulos, CalPERS' senior investment officer for real estate. "We anticipate lower costs, improved efficiency and enhanced performance as we reposition our real estate program for long-term growth."
Last March, in an interview with Vanity Fair magazine, BlackRock Chief Executive Laurence Fink called the Stuyvesant investment "an embarrassment" and added, "I mean, my mother gets her pension from CalPERS."
Fink also sent something of a shiver through CalPERS officials a year ago. Speaking at a retreat, he was quoted as saying CalPERS' overall investment returns will be "subpar for many years."
CalPERS disclosed last fall that it was reviewing its ties with BlackRock.
BlackRock told Bloomberg News on Monday that it would have no comment on CalPERS' decision. The firm has been managing CalPERS' apartment building portfolio, known as Western Multifamily LLC, since 1998. Western Multifamily will now be run by GID, an affiliate of Boston-based General Investment & Development Companies.