New Jersey Bets On Its Own Businesses

Firm: Lehman Brothers
Fund: New Jersey Direct Investment Fund
Target: $105 million (still open to commitments)
Amount Raised: $105 million

New Jersey may have lost “The Sopranos” this summer, but it gained a new investment tool aimed at boosting businesses in The Garden State.

The state has committed $100 million to the New Jersey Direct Investment Fund, a $105 million fund of funds that it launched to satisfy the twin goals of achieving high returns for its pension fund and promoting economic growth, according to William Clark, director of the New Jersey Division of Investment. The investment came from the state’s $82 billion pension fund, which represents the retirement plans of more than 700,000 active and retired employees in seven public systems. Lehman Brothers is serving as general partner and kicked in $5 million of its own. Commitments from the fund are required to go toward companies with headquarters or significant operations in New Jersey, or to companies willing to move to the state or expand operations there.

NJDIF, as the fund is known, is earmarked for small to mid-cap buyouts, growth equity and venture capital funds, as well as direct investments in companies issuing securities outside of a public offering. The state seems determined to have its money go to companies intent on creating jobs. “They wouldn’t [invest in] a mature company that could potentially fire people,” said Christine Pastore, the state’s private equity portfolio manager.

To temper its risk exposure, NJDIF wants to make sure that its money represents no more than 25 percent of the total dollars in a given fund. The fund of funds has a four-year investment horizon, but will likely be deployed in two to three years.

In addition to any returns on its own stake, Lehman Brothers will earn a tiered carried interest on NJDIF, snagging 10 percent when fund returns clear the eight percent rate of return and 15 percent when they clear the 15 percent hurdle. At the moment, New Jersey is the only limited partner, but the fund is open to other investors.

State-focused funds are often criticized for their susceptibility to political pressure, a concern NJDIF’s designers tried to address by keeping its focus simple. “By structuring it this way, it aligns everybody’s interests toward the right thing, which is getting maximum returns,” Clark said. The program took roughly a year to plan and was born from discussions between the investment council and the state’s Economic Development Authority, which was looking to trumpet the low interest rates and tax incentives available for New Jersey-based companies. The investment division was already familiar with Lehman Brothers, having invested in the firm’s venture capital fund of funds in 2006.

Clark acknowledged that the results of other in-state economically targeted investment funds have been mixed but he’s confident New Jersey can make it work. He cited California Public Employees’ Retirement System, which in 2001 launched a similar program that took some time to find its footing. “In the last couple years they’ve restructured it and it’s doing much better,” he said.

New Jersey’s alternative investment portfolio is still ramping up. Trenton’s first foray into the asset class came in 2005, when it committed to such limited partners as Apollo Management, The Blackstone Group, Oak Hill Capital Partners, Quadrangle Group and Warburg Pincus. The initial goal was to have 13 percent of its $82 billion portfolio deployed in alternative investments, with 5 percent in private equity by 2012, a target that’s likely to be hit in 2010 given the investment pace.

The state now has $4.8 billion committed to private equity and $1.3 billion invested, with average annual investment commitments running between $1.8 billion and $2.5 billion. Going forward, the state plans to direct more money toward distressed operators. “Over the last year we’ve made a conscious effort to devote more attention and dollars to distressed and mezzanine, and I think that will continue,” with contributions to firms like MatlinPatterson Global Advisors, Clark said.