New Jersey to take minority stake in former GSO exec’s new shop

  • $71.5 bln pension commits $600 mln to Owl Rock
  • Commitment includes co-investment, minority stake in parent
  • New Jersey slashes allocation to hedge funds

New Jersey Division of Investment will take a minority stake in Owl Rock Capital Partners, the middle-market lender formed by top executives at Goldman Sachs, GSO Capital Partners, Kohlberg Kravis Roberts & Co. and TPG Specialty Lending.

The stake is contingent on the completion of a $400 million commitment to Owl Rock Capital Corp, a business-development company seeking $3 billion to $5 billion. New Jersey will also co-invest $200 million in a sidecar vehicle that will not charge fees or collect carried interest, state documents say.

New Jersey State Investment Council approved the commitment, subject to legal negotiations, at its Aug. 3 meeting. The deal will entitle New Jersey’s $71.5 billion pension to revenues generated by Owl Rock’s parent.

New Jersey has a longstanding relationship with Owl Rock co-founder Doug Ostrover, who co-founded GSO before Blackstone Group acquired the business in 2008. The pension system committed $1.6 billion across five GSO funds from 2007 to 2012, all of which counted Ostrover as an investment committee member, according to state documents.

New Jersey’s become increasingly aggressive in negotiating favorable terms and conditions on larger commitments, having haggled for veto rights on its $200 million commitment to a co-investment vehicle managed by Vista Equity Partners. As with Owl Rock, New Jersey paired its co-investment with large allocations to Vista’s pooled investment vehicles.

New Jersey will pay a 0.75 percent management fee and Owl Rock will collect no carried interest on the commitment to the BDC. Should Owl Rock Capital Corp go public, management fees and carried interest will increase to 1.75 percent and 20 percent.

New Jersey also will pay a 1 percent management fee and 20 percent carry in relation to its stake in the holding company. How Owl Rock will calculate those fees is unclear.

Division staff declined requests to confirm the size of its stake in Owl Rock. The firm couldn’t be reached for comment.

“The total amount of initial fees and expenses, including the expenses related to the revenue share, represent a significant discount from typical fund fees,” a staff memo says.

Trimming the hedges

In addition to its commitment to Owl Rock, the State Investment Council approved a new asset allocation that would halve its target allocation to hedge funds to 6 percent from 12.5 percent. New Jersey joins a growing number of public pensions, including California Public Employees’ Retirement System and New York City, that have reduced or eliminated their hedge-fund holdings.

New Jersey has redeemed $1.6 billion of its hedge-fund holdings over the past year. The Division of Investment will seek another $1.3 billion of redemptions by year’s end.

Even as it cut its allocation to hedge funds, the State Investment Council approved as much as $1 billion to a separate account managed by BlackRock Alternative Advisors for hedge-related strategies at its Aug. 3 meeting. The first tranche of New Jersey’s investment with BlackRock won’t exceed $500 million.

Action Item: New Jersey:

A falconer releases a Bengal Eagle Owl during a falconry demonstration in Tokyo on Jan. 2, 2010. Photo courtesy Reuters/Kim Kyung-Hoon