Proposed Investment in GSO Credit – A Partners, L.P.

Memorandum to: State Investment Council
From: Timothy Walsh, Director
Subject: Proposed Investment in GSO Credit – A Partners, L.P.

The New Jersey Division of Investment (“Division”) is proposing a $150 million follow-on investment to the original $250 million investment in GSO Credit – A Partners, L.P. (“GSO Credit-A Partners” or the “Fund”). 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:

  • Attractive risk-adjusted returns: Since inception, the Fund’s strategy has been to invest in the “best ideas” generated across GSO’s platform, primarily comprised of opportunistic long and short investments in both public and private non- investment grade corporate credit. Since March 28, 2012 the Fund has generated a Net Internal Rate of Return (“IRR”) of 33.77%, which has resulted in about $80 million of net profits.
  • Market Opportunity: The proposed additional $150 million commitment will continue to be flexible and utilized for best ideas across GSO, as well as investing side-by-side with GSO Community Development Capital Group Fund, L.P (“GSO CDCG”). GSO CDCG has been created to provide acquisition and development capital to public and private residential homebuilders. GSO, across its platform, has already committed over $500 million to land-banking arrangements over the past nine (9) months, in which the Division has taken part in through GSO Credit-A Partners, L.P. (about $20 million) and is currently tracking to a 15% unlevered Net Internal Rate of Return (“IRR”). Please keep in mind, that if the land-banking opportunity does not materialize or is no longer attractive, the Division’s additional commitment will be invested in more attractive opportunities given this flexible mandate.
  • Favorable environment: The Division has an opportunity to take advantage of the current market dislocation in providing capital to residential homebuilders, at an attractive point in the residential real estate cycle. Favorable supply/demand dynamics currently exist, with banks slow to re-enter the business and homebuilders in need of financing to build inventory as the residential real estate market recovers.
  • Strong early mover advantage/Experienced management team: GSO has committed over $500 million in land-banking arrangements and has several investments in the Fund’s pipeline. Steven Benson will lead the origination and due diligence effort for GSO CDCG. Mr. Benson led $3.5 billion of land-banking transactions for Acacia Capital from 2001-2006. Acacia was the largest provider of land-banking financing to US homebuilders. Well regarded in the industry, Mr. Benson has worked with large homebuilders, including Pulte Homes, MDC, Coleman Homes and Realen Homes.
  • Terms & Structure: The Division has proposed an investment of additional capital through our separate account to take part in the residential housing opportunity in addition to our current mandate based on the following:
    • Continued flexibility: by adding to our existing structure, the Division will continue to allocate to the best ideas across the firm (for example – land-banking opportunities)
    • Fee structure: The Division will pay a management fee of 85 basis points per annum and a 13% incentive fee with a 5% preferred return on the newly committed capital. This is a discounted fee structure compared to the dedicated commingled Fund (GSO CDCG) fees.
    • It is likely that of the proposed $150 million commitment, the Division would only add $50 million of new capital, with the remaining $100 million being re-allocated from low-yielding investment grade real estate fixed income securities in CT High Grade Partners II LLC.

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

Division Staff and its hedge fund consultant, R.V. Kuhns and Associates, Inc, 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 100 of the Council’s regulations. The GSO Credit – A Partners, L.P. will be considered a credit-oriented hedge fund investment, 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 June 26, 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 July 11, 2013 meeting.

Source: State of New Jersey State Investment Council