Proposed Investment in KSL Capital Partners IV, L.P.

Memorandum to: State Investment Council
From: Christopher McDonough, Director
Subject: Proposed Investment in KSL Capital Partners IV, L.P.

The New Jersey Division of Investment (“Division”) is proposing an investment of up to $100 million in KSL Capital Partners IV, 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:

  • Attractive Returns: From 2005 through September 30, 2014, KSL Capital Partners (“KSL”) has invested over $2.3 billion of equity in 22 primary investments, 11 of which have been fully realized. During this period, KSL distributed $2.4 billion to its investors and has approximately $1.8 billion in remaining unrealized value. KSL II, a 2006 vintage fund, has generated top quartile returns on all metrics.
  • Disciplined Investment History: KSL has demonstrated the ability to successfully invest through various economic cycles. Despite having reviewed over 150 opportunities in 2007, concerned by the unsustainability of prevailing leverage levels and transactions pricing, KSL made no new investments for nearly 15 months prior to the global financial crisis. KSL’s in-depth understanding of travel and leisure businesses, and ability to rotate between sectors and parts of the capital structure should allow them to avoid over-heated segments of the market.
  • Experienced Team: KSL is one of the few firms focused exclusively on investing in real estate as well as related travel and leisure businesses. Their deep industry knowledge is a competitive advantage in sourcing, analyzing and operating assets. Moreover, the senior team brings significant operational and investing experience in the industry and has worked together extensively in a number of capacities. Extensive operational experience is demonstrated by the aggregate 49% increase to date in adjusted EBITDA of realized investments in Fund II and III during their ownership.
  • Market Opportunity: Travel and tourism is a significant component of the U.S. economy, accounting for over $856 billion of direct economic output in 2013. KSL generally targets the mass affluent leisure consumer, which includes approximately 26 million U.S. households earning more than $100,000 in annual income. This subset of consumers has shown a relatively stable desire to travel and recreate, and during the global financial crisis, resort leisure demand remained fairly resilient as evidenced by only a 3% decline in occupied room nights from peak to trough.

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

Division Staff and its real estate 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 used third-party solicitors (“placement agents”) in the fundraising of the fund but no placement agent was engaged or paid 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 71 of the Council’s regulations. The KSL Capital Partners IV, L.P. will be considered a non-core real estate 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 17, 2015. 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 25, 2015 meeting.

Source: State of New Jersey State Investment Council