Proposed Investment in Starboard Value and Opportunity Fund LP and Starboard Leaders Fund LP

Memorandum to: State Investment Council
From: Christopher McDonough, Acting Director
Subject: Proposed Investment in Starboard Value and Opportunity Fund LP and Starboard Leaders Fund LP

The New Jersey Division of Investment (“Division”) is proposing an investment of $75 million in Starboard Value and Opportunity Fund LP (“the Value Fund”) and up to $125 million allocated to co-investments through the Starboard Leaders Fund LP (the “Leaders Fund”). 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:

  • Successful track record of active shareholder engagements: From March 2004 through August 2013, Starboard has generated a Net Annualized Return since inception of 11.28% in the Value Fund. This places Starboard in the top quartile on a 3-year and since inception basis not only in the HFRI Event Driven Index, but also within the HFRI Universe. Unlike many of their peers in the activist space, Starboard typically utilizes portfolio hedges, leading to a less volatile return profile. Since 2004, the Value Fund has had 65 13D Filings, nominated corporate directors in 38 portfolio companies, negotiated settlements in 28 portfolio companies, and has had successful proxy contests ending in a shareholder vote in 13 of their portfolio companies. These actions resulted in 111 Directors being either added or replaced on 38 Boards.
  • Attractive terms: The Division negotiated a discounted management fee of 1.50% for the Value Fund, from the standard fee of 2%. The Leaders Fund has a management fee of 1% on invested capital and a 15% incentive fee.
  • Source of Diversification: Of Starboard’s current 15 “lead” investments, the Division only has exposure to 4 of the names through its domestic equities portfolio, with less than $9 million in exposure to each. In addition, the Pension Fund has less than 3% of its domestic equity portfolio invested in companies with market caps less than $1 billion. An investment in Starboard also provides diversification to the hedge fund portfolio, as Starboard will focus exclusively on the activist U.S. small cap space.
  • Attractive environment for Shareholder Engagement: A number of factors make the current market attractive for shareholder engagement strategies. These include record corporate cash balances, reasonably attractive valuations and historically low interest rates for corporate borrowers, and significant unused private equity capital.

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 Starboard Value and Opportunity Fund LP and the Starboard Leaders Fund LP will be considered an equity oriented hedge fund investments, 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 November 8, 2013. 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 November 21, 2013 meeting.

Source: State of New Jersey State Investment Council