Proposed Investment in NJ/HitecVision Co-Investment Vehicle

Memorandum to: State Investment Council
From: Christopher McDonough, Director
Subject: Proposed Investment in NJ/HitecVision Co-Investment Vehicle

The New Jersey Division of Investment (“Division”) is proposing an investment of up to $150 million in a co-investment vehicle managed by HitecVision. The vehicle will invest in potential co-investment opportunities identified by HitecVision, including, as an initial investment, Offshore Merchant Partners Asset Yield, L.P. (“OMP AY”) 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:

  • Experienced Team: The co-investment vehicle will more fully enable the Division to take advantage of HitecVision’s unique skillset within the upstream oil & gas sector, which is illustrated by their consistent top-quartile returns and 4.6x multiple of invested capital on realized deals since 1994. The Division is familiar with HitecVision’s team and strategy as it recently invested $100 million in HitecVision VII, L.P. in April 2014, and was initially introduced to the firm through a legacy separate account which invested in HitecVision V, L.P. Offshore Merchant Partners (“OMP”) was established in 2013 as a portfolio company of HitecVision VI, L.P. and has a team of 8 investment professionals with deep credit expertise and both global investment and operational experience in the oil and gas industry.
  • Off-market terms: The Staff has negotiated attractive terms that are at a significant discount to the typical market terms. The Division will pay management fees of 1% on invested capital and a 12.5% carry over a 5% preferred return with no catch up with respect to the co-investment vehicle’s investment in OMP AY. On the capital available for additional co-investment opportunities, excluding OMP AY, the Division will retain a veto right over every opportunity and will pay no management fee or carry.
  • Portfolio fit: The Staff believes that this strategy, with its strong current, stable income, will complement the private real asset portfolio, which is currently composed of mostly higher risk/return equity-oriented strategies. The private real asset portfolio is currently underweight its fiscal 2015 target by approximately $400 million.
  • Opportunity set: OMP AY is a specialty finance company that will provide junior financing to offshore oil and gas assets and target gross returns of 12.5%, with a high annual cash yield of 10.5-11.5%. Due to recent regulation in the financial industry post-2008, traditional bank lending continues to scale back its exposure to offshore assets, leaving an estimated financing requirement of $15 – 20 billion annually from new sources of capital. Given the dearth of available capital, privately negotiated, structured, long term financing solutions can provide 300 to 500 bps of excess return versus comparable offshore high yield bonds. In order to mitigate risk, OMP AY will only focus on modern and standardized assets which have good alternative use potential and an active second-hand market and are operated by reliable and experienced offshore operators backed by medium- to long-term charters with Oil Majors.

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

Division Staff and its real asset 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 71 of the Council’s regulations. The NJ/HitecVision co-investment vehicle 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 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