Proposed Investment in Hellman & Friedman Capital Partners VIII, L.P.

Memorandum to: State Investment Council
From: Christopher McDonough, Director
Subject: Proposed Investment in Hellman & Friedman Capital Partners VIII, L.P.

The New Jersey Division of Investment (“Division”) is proposing an investment of $100 million in Hellman & Friedman Capital Partners VIII, L.P. (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 and consistent track record: Since 1995, all Hellman & Friedman (“H&F” or the “Firm”) funds rank top quartile on a Net Distributions to Paid-In (“DPI”) and Net Total Value Paid-In basis, with the exception of the most recent fund, which has an average portfolio company holding period of only 1.3 years as of March 31, 2014. H&F’s 65 realized or publicly-traded investments have generated a gross Internal Rate of Return of 31% and a 2.9x gross multiple of money as of March 31, 2014. Over the past ten years, H&F’s funds have outperformed the S&P 500 by approximately 19% from March 2004 to March 2014 on a public market equivalent basis. Meanwhile, the Firm has maintained a low loss ratio of approximately 2% over the past 15 years.
  • Disciplined deployment and realization of capital: H&F’s realizations have meaningfully exceeded its investments for more than the last eight years. Since 2006, the Firm has realized $11 billion more than the $14.4 billion invested, and all of its funds since 1995 are ranked in the top quartile on a net DPI basis. Across its most recent funds, the Firm has exited investments through a variety of channels, including public markets, strategic buyers, financial sponsors and management buy-outs.
  • Stable and experienced investment team: With an average tenure of over 10 years, the Firm’s 18 Managing Directors have worked and invested successfully together through several economic and private equity market cycles. Approximately 85% of the profits generated and capital deployed over the past 10 years have been led by current Managing Directors. The Firm’s unique ownership structure, where the carried interest and ownership of H&F have been passed down internally from generation to generation, has enabled three successful leadership transactions at the Firm.
  • Alignment of interest: Firm professionals have a significant personal investment in H&F funds, with approximately $1.25 billion invested across Funds VI, VII and VIII. Fund VIII’s GP commitment will be a minimum of $450 million.
  • Portfolio fit: The Division is currently underweight its FY 2015 target to the private equity asset class and views the Fund as an appropriate addition to the overall private equity portfolio and the large buyout segment due to the Firm’s impressive track record and low loss ratio since its inception in the mid-80s.

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

Division Staff and its private equity 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. 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 90 of the Council’s regulations. The Fund will be considered a private equity buy-out investment, as defined under N.J.A.C. 17:16-90.1.

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 September 9, 2014. 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 September 16, 2014 meeting.

Source: State of New Jersey State Investment Council