New Jersey eyes fee savings in separate accounts with BlackRock, Neuberger Berman and Asia Alts

New Jersey Division of Investment funneled up to $700 million into three separate accounts and recycled as much as $600 million in future distributions into them as well.

The accounts will be used to leverage the contacts and experience of three major firms to find and evaluate opportunities. Two of the vehicles, run by the pension’s existing managers, will make co-investments, while a third will be more broadly diversified.

The $75 billion pension committed $250 million to BlackRock. According to meeting documents, the vehicle will be geared towards co-investing in a variety of strategies, from buyouts to growth equity to PIPE (private investments in public equity) deals, with no individual investment exceeding $50 million. New Jersey’s capital will also potentially go into primary fund investments, the memo said.

Co-investments will be charged a 0.30 percent management fee on invested capital with a 7.5 percent carry, subject to a 1.5x net multiple on invested capital, but it will hike to 10 percent once the multiple increases to 1.8x. Primary fund investments will be charged 0.20 percent on invested capital with no carry.

This is the third such vehicle New Jersey has with BlackRock. The first one from 2007 has a 2 percent net internal rate of return and a 1.15x multiple of net total value to paid in capital, and the second, from 2008, has a 15.5 percent net IRR and 1.57x TVPI.

The pension will commit $350 million to Neuberger Berman, with $100 million of that recycled from future distributions from the firm.

This account will target minority positions in buyouts, growth equity, special situations and preferred securities. Individual co-investments will mostly be between $2 million and $20 million in size, but could go as high as $50 million.

The management fee for this vehicle will be 0.30 percent of committed capital with a carry between 7.5 percent and 10 percent, subject to hurdles. The initial hurdle is 1.5x multiple of invested capital.

This is the fourth separate account New Jersey has with Neuberger Berman, and the second one in two years. As of March 31 the first, from 2007, has an 11.8 percent net IRR and a 1.91x multiple. The next, from 2012, had a 34.5 percent net IRR and a 2.3x multiple. The last, from 2018, has a 5.4 percent net IRR and a 1.05x multiple, but was early in its life.

Finally, the division committed $100 million to a separate account with fund-of-funds Asia Alternatives. This will be buttressed by up to $500 million in additional recycled distributions over the next 10 years.

This vehicle will be broadly diversified by vintage year, geography, sub-strategy and deal type. It will be split between primary funds, co-investments and secondaries.

This commitment will be split into two pools, an overage pool and a pro-rata pool. The fund will not charge management fees or carry on the overage pool. The pro-rata pool will charge a 0.80 percent management fee with a step-down to 0.50 percent and a 5.85 percent carry. The hurdle rate is 8 percent.

New Jersey has at least three previous vehicles with Asia Alternatives. The first, from 2008, has a 22.4 percent net IRR and a 4.07x net TVPI. The next, from 2011, has a 12.3 percent net IRR and 1.77x net multiple, and the most recent, from 2016, has an 11.3 percent net IRR and a 1.2x multiple.

Co-investments can help LPs save on costly private equity fees. Private equity consultant Aksia TorreyCove said earlier in the meeting that New Jersey pays a lower level of fees relative to its committed capital compared to other public pensions in the consultant’s database, at just under 1 percent versus a 1.3 percent average.

Besides providing significant fee savings, the vehicles also provide an extra layer of due diligence as well as give the division more control over the pacing and risk exposures of the fund, staff said at the state investment council’s meeting Wednesday.

Earlier in the meeting, Division director Corey Amon said co-investments were an “important tool” for the pension.

Action Item: read New Jersey’s most recent financial statement here.