Proposed Investment in HitecVision VII, L.P.

Memorandum to: State Investment Council
From: Christopher McDonough, Acting Director
Subject: Proposed Investment in HitecVision VII, L.P.

The New Jersey Division of Investment (“Division”) is proposing an investment of up to $100 million in HitecVision VII, L.P. 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:

  • Strong & Consistent Performance: The HitecVision Funds (five in total) are top quartile on an Internal Rate of Return (“IRR”) basis. Hitec’s first four funds are also top quartile on a Total Value to Paid-In Capital (“TVPI”) basis, however; Fund VI is second quartile due to its early life. The Division believes that this Fund will also be a top quartile performer as the portfolio matures. HitecVision has earned a 4.4x Multiple on Invested Capital (“MOIC”) on realized transactions and a 2.3x MOIC in the aggregate since 2002. In addition, the firm generated a 5.6x MOIC on their pre-institutional track record from 1985-2001. In 2013, HitecVision successfully exited their investment in eight companies, with seven of those generating more than a 3x MOIC. Finally, the firm has a 0% loss ratio in their track record.
  • Experience in the Energy Sector: HitecVision’s exclusive focus has been on the oil & gas sector for over 25 years. The knowledge and industry contacts developed over that period of time represent a significant competitive advantage over its peers. Moreover, 16 of 20 partners have over 20 years of operational and transaction experience, with some team members coming from market leaders such as Shell, Statoil and Schlumberger. HitecVision’s reputation is also important in regards to exiting transactions. The firm views itself as a feeder to the oil and gas industry and a significant number of companies in their portfolio have been purchased by strategic acquirers due to the high-quality management teams and business practices which the firm fosters and grows throughout their ownership.
  • Disciplined Investment Process: HitecVision’s disciplined internal processes have been refined over years of successful investing and operating. The unique partner-led process adopts a structured, milestone-driven approach, providing a consistent and repeatable value creation approach. HitecVision develops a comprehensive and detailed value creation plan for each investment, updated quarterly during the holding period of each investment. This disciplined process has resulted in 55% and 36% of value creation being generated through revenue increases and margin increases, respectively, while only 19% of value creation can be attributed to multiple increases.
  • Attractive Market Opportunity: HitecVision will continue its strategy of acting as a “feeder” to the oil and gas industry by analyzing industry dynamics in order to identify opportunities in the market and establish platforms and companies that the firm can develop and position to be desirable acquisition opportunities for industry players. The Norwegian Continental Shelf (“NCS”) is an example of where the firm has been successful and where it will continue to be active. The NCS is expected to continue to require high capital investment well into the future, with industry players forecasting that the NCS’ market size will be $60 billion in 2015, an increase of approximately 94% compared to 2010. Furthermore, HitecVision believes that the NCS will remain an attractive environment for middle-market oil and gas investments and the fund is well positioned, both geographically and through its expertise and focus on the entire oil and gas value chain, to effectively address this compelling market opportunity.

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 engaged a third-party solicitor (“placement agent”) in the fundraising of the fund, but the placement agent was not used to solicit 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 71 of the Council’s regulations. The HitecVision VII, L.P. Fund 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 March 11, 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 March 19, 2014 meeting.

Source: State of New Jersey State Investment Council