Proposed Investment in JLL Partners Fund VIII

Memorandum to: State Investment Council
From: Corey Amon, Acting Director
Subject: Proposed Investment in JLL Partners Fund VIII, L.P.

The New Jersey Division of Investment (“Division”) is proposing an investment of up to $200 million in JLL Partners Fund VIII, L.P. (the “Fund”). This memorandum is presented to the State Investment Council (“Council”) pursuant to N.J.A.C. 17:16-69.9.

Committing to JLL Partners Fund VIII, L.P. is consistent with the Division’s focus on core, high conviction managers and the Division’s objective to increase its exposure to small/middle market buyout strategies that are expected to realize higher risk-adjusted returns. JLL’s strategy favors companies with lower average purchase multiples and debt levels, as well as businesses with the ability to grow revenues and earnings through both organic growth and acquisitions. This strategy to build a larger and more efficient company is expected to result in higher valuations and exit multiples.

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

  • Strong investment performance: JLL’s most recent funds, Funds V, VI and VII, have generated strong returns. Since 2005, JLL has no realized losses in the funds’ portfolios and maintains a modest 5.8% unrealized loss ratio. The Division has also co-invested alongside JLL in other investments generating attractive returns.
  • Experienced and stable team: The team’s long tenure of operating together, deep sector focus, and consistency of strategy enables it to find attractive opportunities that fit its value-oriented, transformational-growth investment philosophy, regardless of economic cycles. The current management group has been working together since 2006 and is responsible for deployment of capital in Funds V, VI and VII. The investment team is aligned with its Fund VIII LPs and will invest 5% of the aggregate commitments to the Fund.
  • Multifaceted approach to value creation: JLL focuses on talent and organizational design throughout its businesses and establishes thoughtful incentive structures using performance-based metrics. JLL has a detailed vision for transformation at the time of investment and seeks add-on acquisitions that broaden portfolio companies’ capabilities, diversify product offerings, expand the customer base, and create industry leaders in their respective sectors. JLL has developed a proprietary “playbook” that it employs across the portfolio for acquisitions in order to realize internal synergies. JLL’s operating partners maintain a close, partnership-based approach with portfolio company management teams. JLL has bolstered its deal execution capabilities, through the build-out of its in-house debt capital markets team.
  • Investing across cycles: JLL has been able to execute on its strategy and deploy capital across cycles by investing in businesses at attractive valuations and capitalizing the businesses with reasonable levels of leverage. JLL focuses on prospective investments that are less correlated with broader macroeconomic fluctuations and also focuses on identifying opportunities in sectors with long-term growth trends in order to build in more resilience during periods of market dislocation.
  • Environmental, Social, and Governance (“ESG”): JLL has employed a third party ESG consultant that assists in ESG diligence for all new platform investments. The consultant focuses on a number of key risk areas, including, but not limited to: data privacy and security, anti-bribery and corruption, general ethics and compliance, healthcare ethics, labor conditions, diversity, and environmental, health and safety matters. The ESG process has proven to be accretive from an investment perspective thus far.

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 utilized Lazard Frères & Co. LLC and Lazard & Co., Limited, as third-party solicitors (“placement agents”) in fundraising, but no placement agents were engaged in connection with New Jersey’s potential investment. Staff has determined that the placement agents and their representatives met the registration, licensing and experience requirements set forth in the Division’s Placement Agent Policy (“Policy”). Pursuant to the Policy, the Fund has disclosed the contract between the Fund and the placement agents, specifying the scope of services to be performed by the placement agents and the fee arrangement between the placement agents, the general partner, and any other third party.

Staff 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. A preliminary Disclosure Report of Political Contributions in accordance with the Council’s regulation governing political contributions (N.J.A.C. 17:16-4) was obtained, and no political contributions have been disclosed. An updated Disclosure Report will be obtained at the time of closing.

The investment is authorized pursuant to Articles 69 and 90 of the Council’s regulations. JLL Partners Fund VIII, L.P. is considered a private equity buyout 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 IPC was held on October 17, 2018. In addition to the formal written due diligence report, all other information obtained by the Division regarding the investment was made available to the IPC.

We look forward to discussing the proposed investment at the Council’s October 25, 2018 meeting.

Source: State of New Jersey State Investment Council