New Jersey hungry for GP ownership stakes

The New Jersey Division of Investment hopes to join the small club of large investors that have purchased ownership stakes in the management companies of private equity firms.

The $78 billion limited partner is in discussions with a handful of general partners about taking such stakes, said William Clark, director of the New Jersey Division of Investment, in a keynote address at Buyouts East, a conference hosted last month by PE Week affiliated publication Buyouts. “We’re hoping that over the next six to 12 months, we’ll be able to do a couple.”

Similar to the California Public Employees’ Retirement System, which in January paid $275 million for a 9.9% stake in buyout firm Silver Lake, and which also owns minority positions in Apollo Management and The Carlyle Group, New Jersey aims to use its ample balance sheet to nab itself a larger role than that of an average LP.

By owning a piece of a buyout firm, New Jersey would presumably realize a share of the management fees and carried interest profits that GPs reap. That’s in addition to any returns the state would earn from committing to the firm’s funds.

“If you look at the economics, we think owning the money management firm is a much better economic proposition than being an investor with the GP,” Clark says.

Clark also notes that an ownership stake would give New Jersey more access to the inner workings of a firm and allow the LP to cherry pick premium deals for co-investment opportunities. Clark casts it as a win-win move for both GPs and LPs alike.

“We can be a seller of liquidity. And to the extent our balance sheet can help a GP finance some of its positions, we think that makes us an attractive partner,” he says, though he acknowledges that some firms he’s spoken with simply are not interested in selling ownership stakes.

The state pension fund has invested in such firms as Apollo Management, Avenue Capital Group, The Blackstone Group, Madison Dearborn Partners, Silver Lake and TPG Inc.

Buying a stake in a GP’s management company is just one more way the state pension fund is looking to become a more sophisticated investor. Earlier this year, New Jersey held talks with other state pension funds and a sovereign wealth fund about teaming up on partnership negotiations to get better bargains from private equity firms. It is unclear if those discussions bore any fruit.

New Jersey is a relative newcomer to the asset class, having first invested in private equity in 2005. Early this year, the state got its first exposure to Asia by committing $100 million to NJ Asia Investors Fund I, managed by fund of funds investor Asia Alternatives Management. —Joshua Payne