Proposed Investment in Warburg Pincus Private Equity XI

Memorandum to: State Investment Council
From: Timothy Walsh, Director
Subject: Proposed Investment in Warburg Pincus Private Equity XI, LP.

The New Jersey Division of Investment (“Division”) is proposing an investment of $300 million in Warburg Pincus Private Equity XI, LP. 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 due to the following fund/manager characteristics:

  • Top Performer and Core Relationship: NJDOI views Warburg Pincus as a core relationship to its private equity portfolio and is currently invested in Warburg Pincus Fund VIII ($25.75 million), IX ($200 million) and X ($400 million). The family of funds has generated consistent returns across various investment stages, sectors and cycles, and is ranked as a top quartile performer among its peers.
  • Experienced, Deeply Staffed, Global Organization: Founded in 1967, Warburg Pincus is one of the pioneering firms in private equity and one of the few remaining firms that has effectively dealt with management transition from one generation of leaders to the next. With a total staff of approximately 419, including 66 partners and 180 investment professionals across nine offices globally, the firm is led by a 17-member Executive Management Group. Warburg Pincus was also one of the first firms to emphasize global investing early in its history, and was one of the first U.S. firms to begin investing in Europe (1983) and then in India and China (via the Hong Kong office that opened in 1994).
  • Classic Growth-Oriented Investment Strategy: Consistent with prior Warburg Pincus funds, WP XI’s strategy is to largely invest in growing companies. Across the range of investments, the aim is to build lasting businesses with increasing operating earnings in growing industries – and to generate returns without significant reliance on financial engineering. In the current market cycle, which has largely relied on leverage to scale not only investment capacity but also significantly to fund realizations via debt recapitalizations, Warburg Pincus’ analysis illustrates that less than 5% of the firm’s distributions over the last ten years were funded via leveraged recapitalizations.
  • Differentiated Portfolio Strategy: Also consistent with prior funds, WP XI will seek to execute its growth oriented strategy across investment stage (venture capital startups, later stage growth capital, and leveraged buyouts), sectors (Technology Media Telecommunications, Consumer and Industrial, Financial Services, Life Sciences, Natural Resources, Real Estate and Other), and regions (U.S., Europe, and Asia). This unique portfolio diversification provides NJDOI broad, scalable exposure to investments globally.

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 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 90 of the Council’s regulations. The Warburg Pincus Private Equity XI, LP. Fund will be 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 March 14, 2012. 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 March 22, 2012 meeting.

Source: State of New Jersey State Investment Council