Proposed Investment in BCA Cap I, L.P.

Memorandum to: State Investment Council
From: Christopher McDonough, Director
Subject: Proposed Investment in BCA Cap I, L.P.

The New Jersey Division of Investment (“Division”) is proposing an investment of up to $300 million in BCA Cap I L.P., managed by Blueprint Capital Advisors LLC (“BCA”). Pursuant to the State Investment Council (the “Council”) regulations, the investment cannot exceed 20% of the total assets managed by BCA. Given that BCA does not currently have any assets under management, the Division will require a contractual provision that protects against this limitation being exceeded. This memorandum is presented to the State Investment Council (the “Council”) pursuant to N.J.A.C. 17:16-69.9.

BCA was founded in 2015 to focus on sourcing and structuring bespoke relationships with managers in liquid/trading-oriented and opportunistic investment strategies, with the goal of providing differentiated exposures with a reduced fee structure.

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

  • Continuation of the initiative to build out the Fund Alignment and Incentive Reform Program (“FAIR”) program: The Division has created the FAIR program in an effort to reduce fees, enhance returns, and create better alignment of interests. The BCA mandate will target average management fees of 1% and incentive fees of 10% with a minimum hurdle of 3%.
  • Focus on opportunistic credit strategies is complementary to the Blackrock FAIR mandate as well as the Division’s current Global Diversified Credit (“GDC”) portfolio: While the Blackrock FAIR mandate will be focused solely on Risk Mitigation strategies, the BCA mandate will focus on GDC strategies as well as Risk Mitigation strategies. GDC strategies identified by BCA tend to be in niche segments of the market that the Division has difficulty accessing due to size or resource constraints.
  • Access to Managed Account Platform: When appropriate given the strategy and costs, investments will be structured via managed accounts, allowing BCA and the Division greater control over the account. BCA will also work with the Division to convert existing hedge fund investments to managed accounts when it makes sense from a cost perspective.
  • Favorable terms: The Division will pay BCA a blended management fee of 0.29% with no carry. In addition, the Division will receive 10% of BCA’s adjusted gross revenues in perpetuity.

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

Division Staff and its consultant, Cliffwater, 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. We have obtained a preliminary Disclosure Report of Political Contributions in accordance with the Council’s regulation governing political contributions (N.J.A.C. 17:16-4) and no political contributions have been disclosed. We will obtain an updated Disclosure Report at the time of closing.

Please note that the investment is authorized pursuant to Articles 23 and 69 of the Council’s regulations. Underlying investments in BCA Cap I L.P will be considered either global diversified credit investments, as defined under N.J.A.C. 17:16-23.1, or credit oriented hedge funds, equity oriented hedge funds, opportunistic hedge funds, or multi-strategy hedge funds, as defined under N.J.A.C. 17:16-100.1.

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 January 12, 2017. 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 January 25, 2017 meeting.

Source: State of New Jersey State Investment Council