Proposed Investment in Warburg Pincus China, L.P.

Memorandum to: State Investment Council
From: Christopher McDonough, Director
Subject: Proposed Investment in Warburg Pincus China, L.P.

The New Jersey Division of Investment (“Division”) is proposing an investment of up to $100 million in Warburg Pincus China, L.P. (the “Fund”). This memorandum is presented to the State Investment Council (the “Council”) pursuant to N.J.A.C. 17:16-69.9.

The Fund is a $2 billion companion fund that is expected to invest 50/50 alongside Warburg Pincus Global in growth equity investments within China and 50/25/25 alongside Warburg Pincus Global and the Firm’s companion Energy fund in China opportunities in the energy sector, employing a thesis-driven investing approach across sectors that Warburg Pincus (the “Firm”) believes have the potential to grow 15-25% annually, particularly in areas that will benefit from economic and structural transformations, such as: (i) healthcare, (ii) logistics, (iii) e-commerce, (iv) technology, (v) consumer and retail (vi) and businesses focused on environmental improvements and protections. Warburg Pincus maintains the flexibility to invest across the spectrum from early-stage and start-up companies to later-stage companies, but in general expects to deploy approximately 65% to 75% of capital commitments in growth capital transactions and the remaining balance in later-stage growth/buyout transactions.

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

  • Strong performance over a large number of investments: Since 2005, Warburg Pincus China has invested $6 billion in 67 Chinese investments and generated an estimated Net Internal Rate of Return (“IRR”) of 17% and a net 1.8x multiple of investment capital (“MOIC”). On its realized and partially realized investments, Warburg Pincus China has realized $6.1 billion and generated an estimated net IRR of 18% and net MOIC of 2.2x. Finally, the Firm’s China investments have a loss ratio of only 4.6% during this time frame, which is low relative to the strategy and geography.
  • Long history of investing in China: Warburg Pincus China has successfully invested though several economic, credit, and political cycles in China over the past 22 years. In addition, the China team is deep, consisting of 35 investment professionals, and 18 additional professionals focused on portfolio company operational support, asset management and research.
  • Large investment opportunity: China has developed into the second largest economy in the world and is undergoing a significant economic transition. The resulting key trends include a move to a consumption-driven economy, growth of technology-enabled businesses, rising healthcare expenditures as China’s society ages, rapid urbanization and the implementation of financial reforms.
  • Attractive risk-adjusted returns: Since this is a companion fund with Warburg Pincus Private Equity XII, L.P. (“Warburg Pincus Global” or “WPG”), each potential China investment opportunity must compete against potential investment opportunities within the broader WPG fund’s global mandate.

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.

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 90 of the Council’s regulations. Warburg Pincus China, L.P. 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 September 14, 2016. 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 28, 2016 meeting.

Source: State of New Jersey State Investment Council