Memorandum to: State Investment Council
From: Christopher McDonough, Director
Subject: Proposed Investment in Stonepeak Infrastructure Fund III, LP
The New Jersey Division of Investment (“Division”) is proposing an investment of up to $125 million in Stonepeak Infrastructure Fund III LP (“Fund”). This memorandum is presented to the State Investment Council (the “Council”) pursuant to N.J.A.C. 17:16-69.9.
The Fund will continue the successful track record of Stonepeak Infrastructure Partners (“Stonepeak”) on two prior funds focusing on infrastructure assets in the U.S. and Canada lower- to-upper middle market. These assets tend to have high barriers to entry, stable and predictable cash flows, low operational risk, and strong underlying growth characteristics which shield them from macro factors.
The Division is recommending this investment based on the following factors:
- North American and Diversified Orientation: Stonepeak exclusively focuses on North America infrastructure which avoids currency and country risks. The Fund has the flexibility to invest across multiple sectors and the team has a track record of capitalizing on cyclical and secular industry trends.
- Experienced and Long-tenured Team: The co-founders Michael Dorrell and Trent Vichie are infrastructure veterans with deep operational experience. They have worked together for 16 years and have successfully built infrastructure platforms. At Stonepeak, they have assembled a team of senior professionals with whom they have worked previously and who have complementary experience. Turnover is low vs. other organizations.
- Disciplined Approach: The team is disciplined in assessing value, price and risk. The team has a reputation for walking away from transactions that exceed their parameters. Additionally, downside protection is central to their investment structuring. Transactions are structured with multiple covenants and counterparty operating contracts, which significantly reduce downside risk.
- Competitive Advantage through Early Entrance: The co-founders Mr. Dorrell and Mr. Vichie worked together at Macquarie Bank in Australia when the infrastructure sector was in its infancy. They relocated to New York in 2001 and 2000 respectively to help establish a US infrastructure platform for Macquarie. The team has deep relationships across the North American infrastructure industry. Stonepeak has a track record of originating investments off-market through their relationships (73% of prior funds). As a result, they often get early access to deals, and an opportunity to engage and execute without significant market competition.
- Strong and Consistent returns with Conservative Leverage Usage: Stonepeak Infrastructure Fund LP was marked at net returns of 14.3% Internal Rate of Return (“IRR”) and 1.41x with 41% net debt to total capitalization as of March 31, 2017. Stonepeak Infrastructure Fund II marked at net 31.2% IRR and 1.23x with 25% net debt to total capitalization as of March 31, 2017.
- Alignment of Interest and Attractive Fee structure: Stonepeak is offering a 15% carry (vs. 20%) for first close investors, which they are extending to the Division with certainty of closing. They are also offering a discounted management fee of 1.375% (vs. 1.5%) based on the aggregate commitments from TorreyCove clients. Stonepeak management is committing 1% of the aggregate fund commitments and their carry is widely distributed among the entire team.
A report of the Investment Policy Committee (“IPC”) summarizing the details of the proposed investment is attached.
Division staff and its real asset consultant, TorreyCove Capital Partners, undertook extensive due diligence on the proposed investment in accordance with the Division’s Alternative Investment Due Diligence Procedures.
The fund utilized Campbell Lutyens & Co. Ltd (the “placement agent”) as third-party solicitor in connection with the potential investment. Staff has determined that the placement agent and its representatives met the registration, licensing and experience requirements set forth in the Division’s Placement Agent Policy (the “Policy”). Pursuant to the Policy, Stonepeak has disclosed the contract between the Fund and the placement agent, specifying the scope of services to be performed by the placement agent and the fee arrangement between the placement agent, the general partner and any other third party.
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. Stonepeak Infrastructure Fund III LP 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 September 20, 2017. 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 October 4, 2017 meeting.
Source: State of New Jersey State Investment Council