Proposed Investment in Cerberus/NJ Loan Fund, L.P.

Memorandum to: State Investment Council
From: Timothy Walsh, Director
Subject: Proposed Investment in Cerberus/NJ Loan Fund, L.P.

The New Jersey Division of Investment (“Division”) is proposing an investment of $300 million in Cerberus/NJ Loan Fund, L.P. This memorandum is presented to the State Investment Council (the “Council”) pursuant to N.J.A.C. 17:16-63.9.

The Division is recommending the investment for a number of reasons:

  • Attractive Market Opportunity/Diversification: A significant supply/demand imbalance of loans being originated to middle-market businesses has created an attractive investment opportunity with potential gross returns in the 9% to 15% range. We expect this investment to be characterized as a fixed income investment (Common Pension Fund B) and will be funded by the reduction of liquid securities yielding approximately 3%.
  • Impressive Track Record: Cerberus’ 16 year track record, with average net returns of 8-12%, compares favorably to other direct lenders and indices. The manager’s loan loss rate is 1.2% of the past 14 years.
  • Lender Stability: Lender stability is an important issue for middle market companies as they look to establish financing relationships. Cerberus has one of the longer tenures as a direct middle market lender which provides a sourcing advantage against other funds.
  • Attractive Terms: By structuring the investment as a separately managed account, the Division has greater control over the invested assets and more attractive terms.

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

Division Staff and its 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 23 and 63 of the Council’s regulations. The Cerberus/NJ Loan Fund, L.P. will be considered a bank loan fund investment, as defined under N.J.A.C. 17:16-23.1.

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 22, 2011. 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 December 8, 2011 meeting.

Source: State of New Jersey State Investment Council