Proposed Investment in Lazard Rathmore Fund, L.P.

Memorandum to: State Investment Council
From: Timothy Walsh, Director
Subject: Proposed Investment in Lazard Rathmore Fund, L.P.

The New Jersey Division of Investment (“Division”) is proposing an investment of up to $150 million in Lazard Rathmore Fund, L.P. (“Lazard Rathmore”). 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:

  • Complimentary to Existing Portfolio: The proposed commitment to Lazard Rathmore continues the Division’s focus on balancing the credit-oriented hedge fund portfolio by diversifying into more market neutral strategies to compliment the current over-weight distressed exposure.
  • Strategy Expertise: Lazard Rathmore’s unique expertise in the convertible arbitrage space gives the Division access to a top manager in a sub-asset class to which the Division currently has no exposure.
  • Highly Liquid & Diversified Portfolio: The Lazard Rathmore team is extremely focused on maintaining a highly liquid portfolio and currently has no exposure to Level III assets, and the manager has estimated that 82.5% of the fund can be liquidated within four weeks, even under stressed market conditions. The portfolio is also diversified across 135 individual positions and is generally fully hedged for equity and corporate credit risks.
  • Access to Lazard Asset Management Platform: Lazard Rathmore is supported by approximately 90 research analysts at Lazard Asset Management. Lazard’s team of research analysts is a key differentiating factor for the Lazard Rathmore Fund. Other convertible arbitrage funds of similar size could not afford to support a large team of research analysts with such a wide range of sector and geographic expertise.

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

Division Staff and its hedge fund consultant, Cliffwater LLC, 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 Lazard Rathmore Fund, 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 May 16, 2012. 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 May 24, 2012 meeting.

Source: State of New Jersey State Investment Council