Employees’ Retirement System of Rhode Island Nears Allocation Targets for Non-Core Real Estate and Real Assets Sectors

By David G. Barry

The Employees’ Retirement System of Rhode Island (ERSRI)
is poised to be at its 2022 targets for non-core real estate and real assets after receiving approval to invest in a pair of funds.

The Rhode Island State Investment Commission (RISIC), which oversees the $9.9 billion ERSRI, approved a $25 million commitment to Raith Real Estate Fund III and $50 million to Homestead Capital USA Farmland Fund IV. ERSRI had previously invested $35 million in Raith’s prior fund, which was raised in 2018, and $25 million in Homestead’s previous 2019 fund.

ERSRI’s target allocation to non-core real estate is 2.5%. As of August 31, it was at 2.3%. Its pacing plan for the asset class for 2022 is $70 million to $80 million. With the commitment to Raith, it is now at $70 million. As for private real assets, ERSRI’s target is 4%. It was at 3.2% at the end of August.

Raith targets a diversified range of property types within the United States. The new fund is projected to be overweight in industrial properties, according to a report by ERSRI staff. The fund also will have a “high conviction to multifamily.” Raith invested 75% of its prior fund in industrial assets.

To date, Raith has used the new fund to make two investments – one in multifamily and one in industrial.

In turn, Homestead focuses on making middle market farmland investments diversified across five target regions in the U.S.: Mountain West, Pacific, Pacific Northwest¸ Midwest and Delta. The firm primarily invests in farms producing row crops and adds diversification and return potential through permanent crop investments. The new fund also can make select credit investments, primarily in short-duration opportunities often ignored by traditional agriculture lenders.

For the fiscal year ended June 30, ERSRI returned negative 1.4%, beating its benchmark return of negative 2.9%. Additionally, RISIC gave the Rhode Island OPEB System Trust approval to invest $500,000 in Raith’s new fund and $2 million in Homestead Capital’s new fund.

Earlier this year, RISIC approved a plan to diversify the OPEB’s allocation mix. Under the plan, OPEB is moving from having 65% of its portfolio in U.S. large cap public equities and 35% in U.S. aggregate bonds to having 40% in globally diversified public equities, 26% to bonds, 21% to credit strategies, 5% to private equity and non-core real estate and 4% allocations to core real estate and real estate.
Non-core real estate is set to comprise 20% of the private growth segment. The Raith fund represents OPEB’s third non-core real estate investment. It will look to commit $3 million to the sector in 2022.

Previously, it committed $1.25 million to Crow Holdings Realty Fund X and $1.25 million to GEM Realty Fund VII – funds that also were backed by ERSRI.

OPEB’s target allocation for private real assets will be 4%. As of August 31, it had not actually allocated any capital to the sector. The plan is to commit a total of $10 million to two to four funds in 2022.

The OPEB Trust was established by Rhode Island’s General Assembly to prefund non-pension retiree benefits. Previously, the state had funded such benefits on a pay-as-you-go basis. Since being funded in 2011, the fund has grown to approximately $523 million.