Proposed Investment in TSG 8

Memorandum to: State Investment Council
From: Corey Amon, Acting Director
Subject: Proposed Investment in TSG 8, L.P.

The New Jersey Division of Investment (“Division”) is proposing an investment of up to $150 million in TSG 8, L.P. (“Fund”). This memorandum is presented to the State Investment Council (“Council”) pursuant to N.J.A.C. 17:16-69.9.

TSG Consumer Partners (“TSG” or “Firm”) is one of the largest and oldest private equity firms focused on growth capital investments in middle-market companies in the branded consumer products sector, and has a long track record of significant outperformance that has been consistently top-quartile.

The Division is recommending this investment based on the following factors:

  • Proven Track Record: Since inception, TSG has invested over $3.7 billion into 75 consumer companies, which have generated a net 1.86x Multiple On Invested Capital (“MOIC”) and a net 36.6% Internal Rate of Return (“IRR”) as of June 30, 2018. Of the 75 investments, 56 have been realized. The past five TSG funds (vintage years 2002 to 2017) have generated an aggregate net IRR of 28.5% and net MOIC of 1.86x. TSG invested $287.3 million into six companies between 2007 and 2009, growing revenue at a 12.2% average growth rate, demonstrating the ability to perform through recessionary environments. TSG 5 (2007 vintage) has generated a 16.9% net IRR and a 1.9x net MOIC.
  • Experienced Investment Team: The three Managing Directors have an average tenure of 22 years working at TSG. The 21 person investment team is diverse and comprised of veteran consumer industry specialists with offices in San Francisco and New York. The diversity of the investment team is particularly important given the myriad of factors that drive household spending decisions in the U.S. consumer sector. In addition to the investment team, TSG is supported by a deep bench of operating partners and senior advisors who have specific sector expertise.
  • Value Creation and Repeatable Exit Strategies: TSG adds value in many ways including advising portfolio companies on operational, marketing and financial issues, using relationships and networks to expand distribution across channels, assisting companies to create robust digital strategies, launching new products, identifying add-on acquisitions, and recruiting and incentivizing senior management to drive revenue and profit growth. In addition, TSG creates value by its unique approach to digital strategy that differentiates the firm from its peers in the consumer-focused category of private equity firms. Digital technology has permeated the path to purchase, as today’s consumers use websites, social media, and mobile apps to research products, compare prices, make purchases, and provide feedback to peers and directly to consumer companies.
  • Prior to investing, TSG determines the likely timing and methodology for achieving liquidity in its portfolio companies which generally occurs four to seven years after its initial investment. TSG is not reliant upon the condition of the IPO market. TSG’s exit strategies across TSG 4, TSG 5 and TSG 6 led to 65% of their portfolio companies being sold to strategic buyers and 32% to sponsors. Historically, strategic buyers in consumer industries have been highly acquisitive and often willing to pay a premium based, in part, upon their ability to leverage their infrastructure to further develop and expand acquired businesses.
  • Environmental, Social, and Governance (“ESG”): TSG has a formal ESG policy in place that seeks to identify both investment value creation opportunities and risks. TSG utilizes its industry expertise and time-tested resources to conduct a rigorous evaluation of each potential portfolio company and assesses the broader impact on the environment and society. When analyzing a potential investment and throughout each company’s holding period, TSG takes into account environmental, public health, safety, and social issues. The firm engages with relevant stakeholders directly or through company representatives, utilizes governance structures that provide appropriate levels of oversight, complies with applicable national, state, and local labor laws, and supports the payment of competitive wages and benefits to employees while respecting their rights to unionize and engage in collective bargaining.

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

Division staff and its private equity 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 not engaged a third-party solicitor (a “placement agent”) in connection with New Jersey’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. In accordance with the Council’s regulation governing political contributions (N.J.A.C. 17:16-4), a preliminary Disclosure Report of Political Contributions was obtained 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 69 and 90 of the Council’s regulations. TSG 8, L.P. is considered a private equity buyout 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 November 20, 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 November 29, 2018 meeting.

Source: State of New Jersey State Investment Council