Proposed Investment in Siguler Guff/NJ Developing Markets

Memorandum to: State Investment Council
From: Christopher McDonough, Acting Director
Subject: Proposed Investment in Siguler Guff/NJ Developing Markets, L.P.

The New Jersey Division of Investment (“Division”) is proposing an investment of $300 million in Siguler Guff/NJ Developing Markets, L.P. (“SG/NJDM”). This memorandum is presented to the State Investment Council (the “Council”) pursuant to N.J.A.C. 17:16-69.9.

The Division is recommending this investment based on the following factors:

Opportunity Set: The Division believes the developing market opportunity set is attractive based on the following themes:

  • An expanding middle class to fuel domestic consumption
  • Rapidly scaling businesses
  • Expansion of the financial services industry and the development of capital markets
  • Transition and professionalization of family-owned enterprises
  • Stronger long-term outlooks
  • Under penetration of private equity market

Increased Exposure to Developing Markets: The Division’s current exposure to the developing markets private equity is currently only $300 million and focused only on Asia. In January the Division communicated to the Council that developing markets would be a major focus in 2013. As a part of this initiative, the Division has determined that a partnership with Siguler Guff would be the best first step in building out its exposure to developing markets outside of Asia such as Latin America, Africa, Central and Eastern Europe, and Russia.

Experienced Manager/Local Expertise: Siguler Guff has invested over $2.1 billion across nearly 100 Emerging Market funds and co-investments. The investment team is comprised of 35 investment professionals dedicated to the developing markets with an average of 15 years of experience. The Division’s account will have a group of 15 people dedicated to the proposed mandate. Siguler Guff’s team is located throughout the world and has offices in Shanghai, Beijing, Mumbai, São Paulo and Moscow. The local presence provides a competitive advantage for deal sourcing, due diligence and monitoring; and also bridges the language and cultural gaps faced by firms without local offices and professionals on the ground.

Resources & Education: The Division’s relationship with Siguler Guff will provide for sharing of diligence materials, prospective and existing investment information, market reports and facilitate the transfer of knowledge to the Division.

Attractive Terms: The Division has negotiated a management fee of 50 basis points (.50%) and a 10% carry over an 8% preferred return. The terms provide adequate risk controls in the form of veto rights on investment opportunities, a specified process to continually maintain adequate exposure to opportunities over time, and a No Fault Termination provision.

A report of the Investment Policy Committee (“IPC”) summarizing the details of the proposed investment is attached.

Division Staff and its private equity consultant, Strategic Investment Solutions, undertook extensive due diligence on the proposed investment in accordance with the Division’s Alternative Investment Due Diligence Procedures.

As part of its due diligence process, staff determined that the fund has not engaged a third-party solicitor (a “placement agent”) in connection with New Jersey’s potential investment.

We will work with representatives of the Division of Law and outside counsel to review and negotiate specific terms of the legal documents to govern the investment. In addition, the proposed investment must comply with the Council’s regulation governing political contributions (N.J.A.C. 17:16-4).

Please note that the investment is authorized pursuant to Articles 69 and 90 of the Council’s regulations. SG/NJDM will be considered a private equity “buyout” investment, as defined under N.J.A.C. 17:16-90.1.

A formal written due diligence report for the proposed investment was sent to each member of the IPC and a meeting of the Committee was held on September 5, 2013. In addition to the formal written due diligence report, all other information obtained by the Division on the investment was made available to the IPC.

We look forward to discussing the proposed investment at the Council’s September 19, 2013 meeting.

Source: State of New Jersey State Investment Council