Outgoing New Jersey SIC Chairman Tom Byrne defends PE in final meeting

Tom Byrne used his final meeting as chairman of the New Jersey State Investment Council to defend the state pension fund’s investments in high-cost, high-returning private equity funds targeted by Gov. Phil Murphy during last year’s gubernatorial campaign.

“I don’t think we can do better without imprudently increasing the risk of the fund,” Byrne said during the May 23 meeting. “That view did not carry the day when it became an issue in the last campaign.”

Byrne, who previously said he didn’t expect to continue as chairman after Murphy’s election, was not among the governor’s nominees for seats on the State Investment Council announced last month. The nominees are expected to be confirmed by the state senate in the coming weeks.

Murphy, a Goldman Sachs alum, took issue with the retirement system’s investments in PE funds during his gubernatorial run last year, arguing the steep fees PE firms charge aren’t worth the return.

“These people, unfortunately, aren’t working for free,” Byrne said after the meeting. “Fees are not completely understood and it’s easy to build political rhetoric around those fees, but we [invest in PE] because we think it’s important to diversify.”

New Jersey’s PE portfolio delivered a 15.75 percent annualized return over the previous five years, net of all fees, making it the top-performing asset class in the $76.8 billion state pension fund’s portfolio.

Those returns haven’t come cheap, however. The state’s alternative-investment program paid more than $392 million in fees and expenses to private equity, real estate and other alternative investment managers during the previous fiscal year, according to its annual report.

New Jersey this year briefly halted new commitments to private equity while Byrne and the Division of Investment waited for clarity on the Murphy administration’s investment policies.

They unfroze the program on Wednesday when the SIC approved a $300 million commitment to Vista Equity Partners’ seventh flagship fund, which is targeting $12 billion.

According to Byrne, the SIC hadn’t received negative feedback from the governor’s office about moving forward with the commitment. That said, the $300 million allocation remains contingent on the Division of Investment’s negotiations with Vista on final terms and conditions.

“We’ll see what happens from here,” he said.

Byrne and Murphy are both Democrats. Byrne was first appointed to the State Investment Council in 2010 by former Gov. Chris Christie, a Republican, and took over as chairman in 2014.

“Governor Murphy remains committed to reducing the cost of management of state’s pension fund assets. The Division of Investment continues to look for cost efficiencies in implementing State Investment Council’s investment plan for fiscal year 2018,” according to Press Secretary Dan Bryan. “Governor Murphy has expressed concern in the past about the costs associated with the investment program and he continues to believe this is an area that deserves focus and attention.”

Vista VII terms

Vista is among the top-performing managers in New Jersey’s portfolio, having distributed more than $570 million since the public pension began investing with the Robert Smith-led firm in 2007.

New Jersey projects its Vista holdings to return an additional $814 million to the state pension between 2018 and 2020, according to investment council documents.

At $300 million, New Jersey’s projected allocation to Fund VII would be its largest to a Vista fund.

Vista is offering New Jersey a 1.5 percent management fee during the fund’s investment period. The fee falls to 1.5 percent of invested capital thereafter.

The firm will take 20 percent of the fund’s proceeds as carried interest, assuming it generates at least 8 percent, and 100 percent of the fund’s expenses will offset New Jersey’s management fees.

Vista’s North American head of investor relations, Christine Pastore, previously led New Jersey’s PE program.

New Jersey held more than $7 billion of assets in private equity and venture capital, according to its most recent investment report.