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New Jersey secures veto rights on Vista account

  • New Jersey approves $200 mln account, $300 mln for Vista funds
  • Vista charging no management fee, 10 pct carry on separate account
  • Staff projecting below market fees, carry on cumulative commitments

The New Jersey Division of Investment fought for the right to say no to Vista Equity Partners.

Staff negotiated for veto rights on co-investment opportunities Vista will present through the state’s new $200 million separate account, Portfolio Manager Jason MacDonald said at a March 23 State Investment Council meeting.

The council, which oversees the state’s $71.7 billion public pension, approved the separate account at its March 23 meeting. New Jersey also will move forward with a $200 million commitment to Vista’s sixth flagship fund and a $100 million allocation to Vista Foundation Fund III.

The commitments remain subject to final negotiations.

Previous commitments to Vista generated top quartile returns for New Jersey, MacDonald said at the meeting.

New Jersey started its relationship with Vista in July 2007 when it committed $100 million to Vista Equity Partners Fund III. Fund III, which closed on $1.3 billion, netted a 28.5 percent internal rate of return and 2.46x multiple through Sept. 30.

The firm’s first Foundation Fund, a $400 million 2009 vintage, netted a 43 percent IRR as of the same date, according to an investment memo.

Vista’s senior vice president of investor relations, Christine Pastore, led New Jersey’s private-equity team when it committed to Fund III in 2007. The firm could not be immediately reached for comment.

Vista set an $8 billion target and $10 billion hard cap for Fund VI, which will invest in enterprise-software companies. Vista Foundation Fund III will raise up to $2.5 billion to acquire small-cap companies in the same sector. New Jersey’s co-investment account will invest across both platforms.

New Jersey secured different sets of terms and fees for each of its new commitments, according to state investment memos. Assuming Vista fully invests the co-investment separate account, MacDonald expects New Jersey to pay a 1 percent management fee and 16 percent carried interest on the $500 million it committed to Vista, he said at the meeting.

“The investment committee probably blew through [the Vista funds] faster than a normal investment,” said investment council Chairman Tom Byrne at the meeting, referring to the speed with which the council approved the commitments. Another council member, Jeffrey Oram of Colliers International, endorsed the Vista commitments by asking, “Where can we find more of these?”

For the separate account, Vista will collect 10 percent of its investment profits over an 8 percent preferred return. The firm will not charge management fees on the account.

For Fund VI, Vista will charge New Jersey 1.5 percent on committed capital during the fund’s investment period. After the investment period, Vista will charge a 1.5 percent fee on the cost basis of unrealized Fund VI investments. The firm will collect 20 percent of Fund VI’s profits as carried interest.

On Foundation Fund III, Vista will charge a 2 percent management fee on committed capital through its investment period. Afterward, the management fee will equal 2 percent of contributions net of distributions, write-offs and write-downs.

Foundation Fund III will also collect 20 percent carried interest, but Vista’s share of the fund’s profits will rise to 25 percent if returns exceed 2.5x and 30 percent if it notches above 3x, according to an investment memo.

Vista will offset New Jersey’s management fee with 100 percent of all portfolio-related fees on Foundation Fund III and Equity Partners VI, according to investment memos.

New Jersey valued its private-equity portfolio at $7.3 billion as of Sept. 30, according to a TorreyCove Capital Partners report. The portfolio generated the pension a 10.9 percent net IRR since inception.

Action Item: For more information about New Jersey’s investment portfolio, visit www.nj.gov/treasury/doinvest/