Proposed Investments in Sterling Capital Partners IV, L.P. Fund

Memorandum to: The State Investment Council
From: Timothy Walsh, Director
Subject: Proposed Investments in Sterling Capital Partners IV, L.P. Fund

The New Jersey Division of Investment (“Division”) is proposing an investment of $100 million in Sterling Capital Partners IV, L.P. Fund (“SCP IV” or the “Fund”). This memorandum is presented to the State Investment Council (the “Council”) pursuant to N.J.A.C. 17:16-69.9.

SCP IV will target 5-6 platform investments per year, in non-cyclical companies with a defensible competitive advantage, strong management & industry fundamentals and a recurring revenue model. Sterling will principally execute a buy and build strategy, investing $24-$200 million in equity over time per investment. The principal areas of focus will be Business Services, Healthcare and Education. The Fund is being led by five of Sterling’s managing directors who have worked together at Sterling since 1986.

The Fund’s objective will be to optimize a company’s overall capital structure. In many instances, this approach, which is based upon the prudent use of leverage, will yield a significantly higher return on equity than a company had previously been able to achieve. Sterling conducts proprietary research into attractive market opportunities and proactively targets businesses with compelling value propositions and differentiated product or service offerings. When potential investments are identified, the firm’s rigorous investment due diligence and team-based approach provide for a disciplined review, assessment, and investment process.

The Division Staff and its private equity consultant, Strategic Investment Solutions, undertook extensive due diligence on this proposed investment. We completed the same due diligence process as with all the other alternative investment opportunities presented to the Council.

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 each investment. In addition, each proposed investment must comply with the Council’s regulation governing political contributions (N.J.A.C. 17:16-4).

Please note that this investment is authorized pursuant to Articles 69 and 90 of the Council’s regulations. The Sterling Capital Partners IV, L.P. Fund will be considered a “buy-out” investment, as defined under N.J.A.C. 17:16-90.1.

Formal written due diligence reports for the proposed investment was sent to each member of the Investment Policy Committee and a meeting of the Committee was held on September 8, 2011. In addition to the formal written due diligence reports, all other information obtained by the Division on the investment was made available to the Investment Policy Committee.

We look forward to discussing the proposed investment at the Council’s October 13, 2011 meeting.

Source: State of New Jersey State Investment Council