The Garden State has planted the first seeds of its private equity program. The New Jersey State Investment Council (SIC) made the first commitments to private equity with $325 million spread across three funds. The approximately $70 billion state pension fund has made the first steps in what could be up to a $5.5 billion commitment to private equity over the next four years. Opponents of the plan are still battling in court, however.
The SIC approved a 13% allocation to alternative investments to be achieved in between five to seven years. Of the total allocation, 5% is earmarked for private equity investments. Four percent 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, approximately $1.5 billion in the second year and $1 billion in the third and fourth years.
The State Investment Council announced that it made three commitments to the following private equity funds:
The Council committed $200 million to Warburg Pincus IX, which has a goal of $7.8 billion for buyout, venture and other structured investments. According to the SIC, the fund has 1.5% management fee and a 12-year term with a two-year extension.
It committed $75 million to Oak Hill Capital Partners II, a middle market buyout fund with a fund raising goal of $1.75 billion. The management fee of the fund begins at 1.75% and drops to 1.25% after its commitment period and the fund has a hurdle rate of 8%, according to the SIC.
The Council made a commitment of $50 million to Quadrangle Capital Partners II. The fund is a middle market buyout fund 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 Townsend Group is the SIC’s real estate advisor.
Before the diversification plan, New Jersey pensions were completely internally and actively managed and invested in stocks and bonds. 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 of 2000 to $60.2 billion by August of 2002. These large losses underscored the state’s need to diversify, according to New Jersey State Treasurer John McCormac. McCormac’s office 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 Investment Council needs the approval of the state legislature in order to make the proposed changes. Union activists concede that the plan will not cost any state workers their jobs, but that state investment workers do not have the private equity expertise required to run such a program. They also maintain that it is too risky to put money into risky assets and pay tens of millions of dollars to outside advisors. The lawsuit is pending in the Superior Court of New Jersey in Trenton.
Separately, New Jersey State Senator Peter Inverso and his colleague Assemblyman Bill Baroni, both Republicans from the state’s 14th legislative district, started 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.