Proposed Investment in Brookfield Capital Partners IV

Memorandum to: State Investment Council
From: Christopher McDonough, Director
Subject: Proposed Investment in Brookfield Capital Partners IV, L.P.

The New Jersey Division of Investment (“Division”) is proposing an investment of $150 million in Brookfield Capital Partners IV, L.P. (“BCP IV”). This memorandum is presented to the State Investment Council (the “Council”) pursuant to N.J.A.C. 17:16-69.9.

Brookfield Asset Management, Inc. (“Brookfield”) is establishing BCP IV to pursue value investments focused on opportunistic buyouts, platform opportunities and underperforming businesses in real assets related sectors where Brookfield can leverage its capabilities as a global alternative asset manager with over $225 billion in AUM across platforms (Property, Infrastructure, Private Equity, Sustainable Resources, and Advisory Services).

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

  • Strong Track Record*: BCP has made 25 investments ($2.5 billion invested) since December 2001, with a net return of 1.53x and a 20.3% Internal Rate of Return (“IRR”). Of the 25 deals, 12 have been realized ($716 million of invested capital) with a 44% IRR and a 3.19x Multiple on Invested Capital (“MOIC”). Funds I & II are both top-quartile from an IRR perspective, while from a MOIC perspective they are 2nd and 1st quartile, respectively. The third fund, still early in its life, has a net IRR of 11.2% and MOIC of 1.15x with a Distribution to Paid-in (“DPI”) of 0.48x. In addition, using the Morningstar US Real Asset Index, the Brookfield funds have consistently outperformed their public market benchmark since inception.
  • Broad Platform and Impressive Operational Capability: The depth and breadth of Brookfield’s platform allows for unrivaled sourcing, and the ability to draw from a huge pool of experienced professionals across many different sectors, most importantly from an operational point of view.
  • Attractive Real Asset Exposure: Given the Division’s underweight to the asset class and its exposure to primarily oil & gas related assets, staff believes that investing in BCP IV will help it gain needed diversification in its current portfolio. The Fund’s flexible mandate allows it to invest in a variety of real asset related sectors such as energy, metals & mining and forest products, as well as building products, construction & engineering, packaging & specialty paper, industrials and manufacturing, and financial and real estate services. Importantly, Brookfield seeks to avoid commodity price risk through a focus on structuring investments with downside protection. As evidence of this, investments in the Energy and Metals and Mining sectors have held up reasonably well during the commodities downturn.
  • Differentiated and disciplined strategy: Brookfield’s flexible mandate, operational capabilities and investing experience, along with its ability to leverage the larger Brookfield platform, allows the Fund an advantage throughout the life of an investment. As owners of operating companies, they can lean on different divisions within the larger Brookfield organization, and use their knowledge to help them rationalize businesses to make them more profitable and cost effective, giving them the ability to be better prepared to weather economic storms. This allows them to buy orphaned businesses within conglomerates or poorly managed businesses and turn them around when others may not have the capability or not feel compelled to invest the time and effort needed to see the business succeed.

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

Division Staff and its private equity consultant, TorreyCove Capital Partners, 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 used third-party solicitors (“placement agents”) in the fundraising of the fund but no placement agent was engaged or paid 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 69 and 71 of the Council’s regulations. Brookfield Capital Partners IV, L.P. will be considered a real asset investment, as defined under N.J.A.C. 17:16-71.1.

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 November 10, 2015. 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 November 18, 2015 meeting.

Source: State of New Jersey State Investment Council

* Brookfield’s first two funds were Canadian dollar denominated while investments were made in both Canadian and U.S. Dollars. For consistency, the Division’s private equity consultant, TorreyCove, has converted all cash flows to U.S. Dollars and calculated the following returns based on the U.S. Dollar equivalent. Daily exchange rates were used to convert the cash flows. Data excludes toehold investments.