Garden State Plants Seeds of PE

The New Jersey State Investment Council (SIC) made its first-ever commitments to private equity with $325 million spread among three funds.

The SIC awarded $200 million to Warburg Pincus, which has a goal of raising $7.5 billion for buyout, venture and other structured investments. The fund has a 1.5% management fee and a 12-year term with a two-year extension, according to the SIC.

The SIC also committed $75 million to Oak Hill Capital Partners, which is raising a middle-market buyout fund with a goal of $1.75 billion. The management fee of the fund begins at 1.75% and drops to 1.25% after its commitment period. The fund has a hurdle rate of 8%, according to the SIC.

Lastly, the SIC made a commitment of $50 million to Quadrangle Capital Partners. The firm’s second fund is a middle-market buyout vehicle with a $1.25 billion goal. The fund has a 1.75% management fee with an 8% hurdle rate, according to the SIC.

Strategic Investment Solutions is so far the sole private equity advisor to the SIC.

The state pension fund manages nearly $70 billion in assets. The SIC earlier approved a 13% allocation to alternative investments to be achieved in the next five to seven years. Of the total allocation, 5% is earmarked for private equity investments, 4% is allocated for real estate and the remaining 4% is reserved for hedge funds. The SIC will commit between $1.5 billion and $2 billion in the first fiscal year of the private equity program, about $1.5 billion in the second year and $1 billion in the third and fourth years.

Previously, New Jersey pensions had invested in stocks and bonds. But the pension system took heavy losses with the bursting of the tech bubble four years ago and dropped from a market value of $82.6 billion in June 2000 to $60.2 billion by August 2002. These large losses underscored the state’s need to diversify, says New Jersey State Treasurer John McCormac.

McCormac’s office had commissioned a report by Independent Fiduciary Services that was published last year and called on New Jersey to “more broadly diversify its investment portfolio [by] adding further, nontraditional asset classes and strategies” through outside managers.

The Communications Workers of America and the New Jersey Teachers Association have filed lawsuits seeking to block the proposed changes. They claim that the SIC needs the approval of the state legislature to make the proposed changes. Union activists concede that the plan will not cost any state workers their jobs. But they maintain that it is too risky to put money into alternative assets and to pay millions of dollars in fees to outside investors. The lawsuit is pending in the Superior Court of New Jersey in Trenton.

Meanwhile, New Jersey State Sen. Peter Inverso and his assembly colleague Rep. Bill Baroni, both Republicans, have begun efforts to have the legislature assert its authority and block any changes to the state’s pension investments without the legislature’s approval. Their district is home to a large number of state workers.