Stewart Tillyard might speak in a jovial way, but he is dead serious about his ambitions as head of unlisted property at Future Fund, Australia’s sovereign wealth fund with assets of A$148.8 billion ($108 billion; €94 billion) as of the end of September 2018.

In June 2018, he took over the reins of a real estate portfolio valued at A$10.47 billion, representing 7 percent of the fund’s total assets, and has spent the subsequent months honing a strategy intended to make it stand apart from other state investors.

“Our key philosophy is to create a differentiated and high-performing portfolio, which we think will be completely different from most of our peers,” says Tillyard. “A key element to that has always been to be very flexible, dynamic and nimble. Part of this is that we focus on fundamentals and do not follow the herd.”

His appetite to stand apart was evidenced in 2018 when Toronto-based alternative markets giant Brookfield Asset Management bid $14.8 billion to take the retail real estate trust General Growth Properties private. That investment, at a time where retail globally is declining in appeal due to the challenge of e-commerce, turned heads for all parties involved.

Brookfield helped bring the US mall giant back from the verge of bankruptcy when it originally invested $2.5 billion in a 30 percent stake in GGP shortly the after the global financial crisis. The money came from its non-discretionary club, Real Estate Turnaround Consortium, in which Future Fund was among the investors.

Our key philosophy is to create a differentiated and high performing portfolio, which we think will be completely different from most of our peers

Tillyard and his team sifted through 125 mall assets in the GGP portfolio and carved out 23 malls that fit Future Fund’s investment preferences. In August, they were placed into a joint venture where Brookfield’s capital accounts for 51 percent and Future Fund 49 percent.Future Fund has been a limited partner with Brookfield since 2009 and has also invested in the manager’s Brookfield Strategic Real Estate Partners global opportunistic fund series. Tillyard saw potential when Brian Kingston, senior managing partner and chief executive officer of Brookfield Property Group, the firm’s real estate business, reached out to hear whether the sovereign wealth fund might be interested to take a stake in the GGP portfolio via preapproved capital held in a separate account.

“In our retail portfolio, we have tried to get a high proportion of malls. Fifty percent of the GGP malls are what we call ‘the only game in town.’ We love that dominance,” says Tillyard.

He declined to elaborate on the amount Future Fund invested in the carved out malls, but insists: “We think the market has been overly penalizing them in the structure, and we think we acquired them at an attractive price.”

The 23 assets have the common denominator of being among the most operationally intensive of the GGP portfolio, according to Kingston. A headache for some organizations, Tillyard however believes that means they have the most upside potential from repositioning or redevelopment. That might mean adding additional density onsite like apartments, hotels or other uses.

As of June 2018, and prior to the GGP investment, retail accounted for 29 percent of Future Fund’s real estate exposure. Despite that exposure rising with the new assets, Tillyard emphasizes he shares the general concerns regarding the future of retail following the rise of e-commerce. “Dominant high-quality malls at the right pricing are attractive. Here, the negative perception has been so significant that we think it has been too bearish, so we will buy assets such as the GGP in the US,” says Tillyard.

“We are definitely not proponents of retail in secondary locations. Therefore, a significant part of that 29 percent in retail going forward is going to be US malls that we think are attractively priced, and we think that we are getting a historically 400 basis points return greater than we normally would have for dominant malls.”

Accordingly, the philosophy has led to sales. Future Fund has, for instance, domestically sought to sell its 50 percent stake in Lakeside Joondalup, a shopping center in Perth, and 25 percent stake in Harbour Town Brand Outlet in Gold Coast. The two assets were jointly owned with Lendlease’s Australian Prime Property Fund Retail. The fund took over Future Fund’s interest in Watertown for around A$180 million, but was understood to have waived its right to buy the half-stake in Lakeside Joondalup. 

Fifty percent of the GGP malls are what we call ‘the only game in town.’ We love that dominance

Carrying the baton

When Tillyard stepped up as head of unlisted property at Future Fund in June 2018, he took over from predecessor Barry Brakey, who had led the sovereign wealth fund’s real estate investments since it ventured into global real estate markets in 2008.

Tillyard was a natural successor, given he was Brakey’s first director, hired months after he took the post. Tillyard recollects how the two of them would joke about how they divided their managers around the world during the forming years of the real estate portfolio; he would visit them during the northern and southern hemisphere’s winters while Brakey would travel during summers.

As such, Tillyard’s ascension embodies continuity in a team that has always had a limited headcount. Even today, it consists of just four investment professionals covering unlisted real estate that makes up 98.2 percent of the total real estate portfolio.

Other than a higher degree of accountability, Tillyard says his role has not changed much after becoming head of unlisted property. The job still entails a lot of travel to visit managers, and he estimates each member of his team is also close to matching his 12 weeks of travel per year.

“The investment model of the Future Fund is that we look at it from a whole portfolio perspective, without set allocations to real estate or any other sectors per se. We try to find the best risk adjusted return as an organization across the various asset classes,” says Tillyard.

Indeed, ever since the Future Fund was established in 2006 to help pay for future unfunded government liabilities in public sector superannuations, it has never saddled its property team with allocations or weightings to regions or sectors. As such, Tillyard has a broad framework. If anything, his limiting factor it that the core strategy has to be majority exposed to the US, Europe and Australia. The three regions made up 56 percent, 16 percent and 17 percent of the real estate portfolio as of end-June 2018, respectively. For such a small team to administer a mandate that is so undefined, reliance on asset managers around the world plays a key role. Manager selection is therefore critical, particularly as Future Fund is not permitted to own more than a 50 percent stake in direct real estate investments.

Besides allocations and preapproved co-investment capital to commingled funds or club vehicles, Future Fund’s direct investments are thus carried out via separate account vehicles owned equally by Future Fund and the manager in question. Here, capital is preapproved by the sovereign wealth fund’s investment committee, allowing Tillyard to deliver swift execution to the managers when they present the right investment opportunities.

Joining Brookfield on the pre-approved list is: investment banking giant Morgan Stanley’s property unit Morgan Stanley Real Estate Investing, Dallas-based Hillwood Investment Properties and Seattle-based Columbia Pacific Advisors.

Speaking to both Tillyard and top executives from these key managers, it is clear the sovereign wealth fund runs its real estate investment in a way where it regards its managers as partners. MSREI chief executive officer and chief investment officer Olivier de Poulpiquet recalls how the relationship started in 2014 when Future Fund backed its global opportunistic fund, North Haven Real Estate Fund VIII.

Prior to making a commitment to the fund as one of the first investors, including preapproved sidecar capital, the Future Fund team travelled to all 17 of MSREI’s country offices to get to know the team. This familiarity, coupled with a good performance from its first commitment to Fund VIII – the fund was generating a 28 percent IRR, according to PERE’s coverage in January 2018 – meant as North Haven Real Estate Fund IX was launched, Future Fund was the very first investor to commit. The fund ultimately corralled $2.7 billion in fund equity from investors also including China Investment Corporation, China’s sovereign wealth fund, and PFA Pension, the Danish pension manager.

“The Future Fund property team is sharp and commercial, with a truly global perspective. The beauty of the partnership is that they are extremely responsive and quick to make decisions.

on any extraordinary investments in or outside the fund,” de Poulpiquet says. He elaborates: “If I call Stewart and present an investment to him over the phone, and he likes the dynamics of the investment, the asset profile, or the business plan, he or one of his team members jumps on a plane to go see it and make a decision pretty quickly, since they have preapproved the capital.”

As a member of the funds’ advisory board, de Poulpiquet describes Tillyard as relatively opinionated and a man who takes leadership in asking insightful questions but who also is equally adept at issuing praise for good performance.

Expanding senior housing strategy

Future Fund’s other manager partners echo de Poulpiquet. In 2017, the state fund started investing in senior housing together with Columbia Pacific Advisors. Through a separate account with the manager, Future Fund now has exposure to approximately 100 operating community assets, with another 20 in various stages of development across the US and Canada, and it is currently looking at a structure to enter the UK.

Alex Washburn is managing partner and co-founder of Columbia Pacific Advisors. He recalls how an update meeting in the summer of 2018 with Tillyard became a day of fielding questions about the asset class. In fact, he says, Tillyard’s questions pre-empted every slide in the Columbia team’s strategy presentation.

“Beyond Future Fund’s thorough due diligence, our ongoing dialogue with them is carried out in a congenial manner,” Washburn says. “We are flexible operators and flexible investors, and our operational expertise within senior housing often enables us to unlock value in situations where others may not be willing to invest. We are pleased that our opportunistic approach aligns with Future Fund’s goals.”

The right risks

We are under invested but appropriately under invested

Tillyard is not able to disclose the specific performance of the sovereign wealth fund’s real estate investments, however indications are available from certain US investors, such Pennsylvania State Employees’ Retirement System, which has also backed Brookfield’s BSREP series. PSERS says the series’ second fund was generating a net IRR of 12.8 percent and 1.1x equity multiple, while the first fund was  producing a net IRR of 21.7 percent and 1.8x multiple.

“We do not have a set basket of returns,” Tillyard explains. “We will look across the risk spectrum, and what we appreciate in our manager mandates is to create very flexible approaches where we can think across the spectrum. For that point of view, we think it is dangerous to only look for a 15 percent IRR because you will naturally take on more and more risk over time as it gets later in the cycle.”

Future Fund’s aforementioned managers seek to allocate capital into strategies that go above core risk and return profiles, spanning value-add and acquiring other companies and their portfolios as well as investing alongside, or via, commingled funds of various sizes.

Its partnership with Hillwood Investment Properties has run since 2012, spanning six logistics club-style vehicles in the US, Canada, Germany, Poland, and most recently, the UK in early 2018. The six vehicles have just below $2 billion dollars of combined equity and total assets of more than $6 billion, with Future Fund behind most of the capital in each. “It is sometimes challenging to find ­­investors capable of these larger strategies and willing to play the market opportunities which give them the greatest risk and return balance across strategies,” says Todd Platt, chief executive officer at Hillwood Investments. “However, we consider Future Fund extremely competent in their focus and attention to alignment of interest, which makes them the perfect partner for us.”

PERE askes Tillyard to look into his crystal ball at Future Fund’s future strategy to which he sees greater emphasis on logistics, alongside senior housing. Big picture, however, he does not foresee the real estate portfolio’s size and allocation shifting significantly until the cycle resets. He accepts that means its exposure is less than some of its state fund peers. “We are underinvested, but appropriately underinvested. Right now, we want to be under-allocated to a sector that is late in its cycle, compared to what we would traditionally do,” says Tillyard.

Keeping the property asset base smaller is arguably another contrarian philosophy given so many other large institutional investors remain bent on increasing their allocations. But then given the man’s desire to keep things different, that should hardly be surprising.