Proposed Investment in TCV VIII, L.P. Fund

Memorandum to: State Investment Council
From: Christopher McDonough, Acting Director
Subject: Proposed Investment in TCV VIII, L.P. Fund

The New Jersey Division of Investment (“Division”) is proposing an investment of $100 million in TCV VIII, L.P. Fund (the “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:

  • Performance: Technology Crossover Ventures (“TCV’) has delivered strong and consistent returns over a number of technology, economic and market cycles. As of 09/30/2013, their most recent fund, TCV VII (a 2008 vintage fund), has delivered top-quartile returns with a Net Total Value to Paid-In (“TVPI”) of 1.53x and a Net Internal Rate of Return (“IRR”) of 19.9%. On an aggregate basis as of June 30, 2013, TCV’s seven funds have delivered a Net TVPI of 1.60x and a Net IRR of 16%. The firm’s impressive historical performance validates its ability to outperform and return capital to investors irrespective of market environments.
  • Experienced Team with Deep Sector Knowledge: TCV has been investing in the technology growth equity space for over 18 years, with a team of over 40 investment professionals that has been collectively involved in hundreds of transactions. These professionals, equipped with an extensive industry network built upon long-standing relationships, are then tasked with owning the firm’s designated sectors and subsectors to effectuate the firm’s strategy. By being purely focused on the technology space and committing all of the firm’s resources into understanding the intricacies of each sector and subsector, it allows for the team to properly identify, add value and navigate the constantly changing landscape of the industry while investing in the next generation of leading technology companies.
  • Focused Investment Strategy: TCV’s strategy rests upon a singular focus of investing in the technology sector through growth equity investing. Given the complexity and rapid change in the technology market, TCV believes that deep domain expertise is essential to identify the next generation of premier technology companies, and can do so by providing growth equity, which allows the firm to participate in significant growth with a lower risk profile and more near-term opportunities for liquidity than earlier stage investments. TCV’s Partners execute this strategy by evaluating the technology landscape on an ongoing basis to select the sectors that they believe provide the greatest opportunity set and alignment with TCV’s investment strategy and experience. Over time, certain sectors have provided stronger investment opportunities and TCV has responded by shifting resources to better address those sectors. TCV currently focuses on the following sectors within the broad technology industry: internet, software, financial technology, infrastructure and services. Inclusive to these broad sectors, there are many subsectors of each which are explicitly identified and targeted.
  • Market Opportunity: Information technology is a key contributor to the global economy and is a growth driver across many industries. U.S. internet penetration has doubled to 80% of the population, and global information technology spending is forecasted to reach over $3.8 trillion in 2014. Technology is now deeply embedded in everyday life, and has become transformational for both businesses and consumers alike. Businesses worldwide are leveraging new technology to improve operating efficiency and attract more customers, and the advent of mobile and social technologies is allowing a new generation of companies to emerge in leadership positions.
  • Complementary to Existing Portfolio: The Division currently has minimal exposure to venture capital and growth equity due to a lack of access to quality managers in meaningful size. Therefore, the addition of TCV allows the Division to increase its exposure to a space where it has been lacking while investing with a successful, highly respected manager in its space.

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

Division Staff and its private equity 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 used third-party solicitors (“placement agents”) in the fundraising of the fund but no placement agent was engaged or paid 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 90 of the Council’s regulations. The TCV VIII, L.P. Fund will be considered a private equity venture capital investment, as defined under N.J.A.C. 17:16-90.1.

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 January 14, 2014. 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 February 3, 2014 meeting.

Source: State of New Jersey State Investment Council