New Jersey negotiates handsome terms on customized accounts

  • NJ pension system commits up to $550 mln to separate accounts
  • Commits up to $350 mln to Advent and Brookfield
  • Negotiates attractive economics on custom accounts

No wonder giant limited partners seek to build customized accounts with big private equity firms: The economics are fabulous. Smaller systems can only wish to get this kind of treatment by brand-name private equity.

The New Jersey Division of Investment recently demonstrated why it’s all about separate accounts.

The state’s $75.2 billion pension system committed up to $550 million to two custom accounts with TPG Capital and Blackstone Group, two firms well known for offering tailored investments vehicles to fit the needs of specific LPs.

New Jersey committed up to $300 million to TPG Capital custom vehicle Knight TAO, which opportunistically invests in credit opportunities that fall outside the scope of its regular credit funds. New Jersey’s commitment will focus on outside-the-scope opportunities, as well as co-invest with TPG’s middle-market loan originations platform and co-invest in special situations alongside TPG Opportunities Partners funds, according to pension documents.

Here’s the juicy part: New Jersey negotiated a 1 percent management fee on invested capital, a 15 percent carried interest rate and a 6 percent hurdle on its commitment to Knight TAO, the documents said. This is New Jersey’s third commitment to a TAO vehicle. The system first committed in 2012 and re-upped in 2014.

“The fund’s ability to migrate across the capital structure, asset classes and geographies allows it to pursue opportunities during all parts of the credit cycle and generate returns … [so it is] not dependent on a high corporate default rate environment,” New Jersey investment staff said in pension documents.

The system also committed up to $250 million to Blackstone Tactical Residential Opportunities, a custom account targeting investments in residential mortgage loans and mortgage servicing rights, pension documents said.

Large banks have “scaled back” from residential mortgage loan origination since the financial crisis, creating an opportunity to work with “underserved” borrowers, pension documents said.

The fund will target high-credit quality borrowers and seek an overall 8 to 12 percent internal rate of return. “The Division believes these products offer better risk-adjusted returns than comparable fixed income-oriented opportunities like legacy non-performing and re-performing loan portfolios and collateralized loan obligations equity,” investment staff said in the documents.

For Blackstone TRO, New Jersey negotiated a 1 percent management fee on invested capital, no carried interest and a 25 percent profits participation interest, the documents said. “To the extent other investors participate in the vehicle, the Division will receive a 25 percent profits participation interest on the management fees and incentive payments earned by Blackstone,” the documents said. “In the Division’s base case scenario, the profit interest translates into $8.5 million of cash flow per year.”

The system still commits to more traditional, commingled funds, of course. New Jersey committed $100 million to Advent International Global Private Equity Fund VIII, which is in the market targeting $12 billion. The system also committed $150 million to Brookfield Capital Partners IV, targeting $3.5 billion for middle market investments.

Brookfield is kicking in a $1 billion GP commitment to the fund, which is the same amount as the third middle-market fund, which closed on $1 billion in 2010. Fund IV also will share 100 percent of any transaction, monitoring, director and break-up fees to offset the management fee, Buyouts previously reported.

Advent, meanwhile, decided to drop a preferred return hurdle on its eighth flagship fund. Prior Advent funds included an 8 percent hurdle.

Action Item: See New Jersey’s monthly investment report here: