Memorandum to: State Investment Council
From: Corey Amon, Acting Director
Subject: Proposed Investment in Owl Rock Technology Finance Corp
The New Jersey Division of Investment (“Division”) is proposing an investment of up to $100 million in Owl Rock Technology Finance Corp. This memorandum is presented to the State Investment Council (“Council”) pursuant to N.J.A.C. 17:16-69.9.
Owl Rock Technology Finance Corp. (“Company”) is seeking to capitalize on middle-market direct lending opportunities created by bank disintermediation. The Company will originate, structure, and manage debt and equity-related investments in the technology sector. The Company plans to invest in a broad range of established and high-growth technology companies that are capitalizing on the large and growing demand for technology products and services. It would lend to companies that (i) use technology extensively to improve their business processes, applications and opportunities; (ii) seek to grow through technological developments and innovations; or (iii) operate in technology-related industries or sectors such as information technology, application or infrastructure software, financial services, data and analytics, security, cloud computing, communications, life sciences, healthcare, media, consumer electronics, semi-conductor, internet commerce and advertising, environmental, aerospace, and defense. Investments will be focused primarily on debt or income producing securities including senior secured or unsecured loans, subordinated loans and mezzanine debt. Equity-linked securities would include convertible debt, convertible preferred equity, growth equity or warrants.
The Division is recommending this investment based on the following factors:
Performance: Owl Rock’s first fund, Owl Rock Capital Corporation, raised $5.5 billion of equity and made its first investment in June 2016. While the fund is of recent vintage and still deploying capital, it is generating strong returns and is marked to generate an overall 11.1% IRR and 1.1x MOIC.
Experienced Investment Team and long-standing relationship with Owl Rock principals: Senior management and the talented team they built are positioned to excel at this strategy. Owl Rock has capitalized on opportunities created by government regulations on traditional lenders and built a best-in-class direct lending platform.
Differentiated Investment Strategy: The Company’s anticipated large size and singular focus on the technology-related sector differentiates itself from competitors. The Company would have “first mover” advantage and have scale to pursue the most attractive investments. Given the experience and relationships of Owl Rock’s founders, senior management, and technology team it is anticipated that most investments will be directly originated. Owl Rock has a strong culture of risk management and downside protection.
Compelling Market Opportunity: Technology firms are gaining increasingly higher prominence in the overall economy. Digitalization of the US economy is poised to continue, with the potential to increase 40% over the next 5-10 years. Approximately 20% of all private equity investments from the period 2012-2017 were in the technology sector. The technology and software debt opportunity is large and growing. In 2017, debt issuance was $121 billion compared with $42 billion in 2010.
Favorable Structure & Seed Economics: Seed economics offer the Division an equity share in Owl Rock’s technology lending business. A potential Company IPO offers the possibility of a liquidity option following a regulatory lock-up period.
Multiple Return Streams: Credit investments are anticipated to support attractive, recurring distributions. Equity-linked investments offer potential for capital appreciation. Potential Company IPO offers possibility for additional upside.
Environmental, Social, and Governance (“ESG”): As part of its due diligence process, staff conducted an analysis of Owl Rock’s overall ESG process. As a lender, Owl Rock does not typically make investments that have control positions, which would otherwise give it the ability to drive ESG or sustainability practices at the portfolio company-level. However, Owl Rock has been incorporating ESG considerations, including environmental impact, labor relations, community impact, and cybersecurity, into its overall risk management process and underwriting of companies and credits. Owl Rock is currently developing a comprehensive ESG framework and has invited the Division to be involved in formalizing its ESG policy.
Attached is a report summarizing the details of the proposed investment that was provided to the Investment Policy Committee (“IPC”).
Division Staff and its 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 has used an affiliate as a third-party solicitor (“placement agent”) in the fundraising of the fund. The placement agent was not paid in connection with the Division’s potential investment.
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 was obtained in accordance with the Council’s regulation governing political contributions (N.J.A.C. 17:16-4) and no political contributions have been disclosed. An updated Disclosure Report will be obtained at the time of closing.
Note that the investment is authorized pursuant to Articles 23 and 69 of the Council’s regulations. Owl Rock Technology Finance Corp is considered a global diversified credit investment, as defined under N.J.A.C. 17:16-23.1.
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 September 17, 2018. 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 September 27, 2018 meeting.
Source: State of New Jersey State Investment Council