Proposed Investments in Blackstone Real Estate Partners VII

Memorandum to: State Investment Council
From: Timothy Walsh, Director
Subject: Proposed Investments in Blackstone Real Estate Partners VII

The New Jersey Division of Investment is proposing an investment of $300 million in Blackstone Real Estate Partners VII. This memorandum is presented to the New Jersey State Investment Council (the “SIC”) pursuant to N.J.A.C. 17:16-69.9.

Blackstone Real Estate Partners VII (“BREP VII”) is a global opportunistic real estate fund sponsored by The Blackstone Group (“Blackstone”) that is currently targeting approximately $10 billion of capital commitments. BREP VII will seek to invest in distressed portfolios or assets where either the capital structure is broken, the real estate is undermanaged or the current owner is a motivated seller. Specifically, Blackstone will pursue the following themes: purchase debt in order to gain control of assets, equity investment in restructuring/recapitalization, disposition of assets by motivated seller, bankruptcy situations, and a public-to-private transaction.

The Fund offers investors unique access to global deal flow of all sizes, and will invest across sectors and geographies focusing on the United States with no more than 33.3% to be invested outside of the U.S. and Canada. Blackstone creates value from their ability to appropriately allocate capital by strategy and source deal flow that is otherwise not available to specialty operators due to size and complexity.

Investors committing $300 million or more to the fund will receive a management fee reduction of 25 bps to 1.25%. Also, investors participating in the first close of the fund will receive a management fee waiver for 4 months, which equates to a savings of approximately $1.25 million based on a $300 million investment.

Blackstone has been one of the most active private equity real estate investors globally over the last 20 years and has consistently performed above their peer average in every vintage year. Since 1991, Blackstone has raised more than $20 billion of capital for Blackstone Real Estate Partners I-VI (collectively “BREP Funds”), and most recently BREP VI (2007 vintage) was an $11 billion fund.

The Division of Investment (“Division”) Staff and its real estate consultant, The Townsend Group, undertook extensive due diligence on the proposed investment. We completed the same due diligence process as with all the other alternative investment opportunities presented to the Council.

As part of its due diligence process, staff determined that the fund is in the process of engaging Park Hill Real Estate Group LLP (the “placement agent”) as third-party solicitor for Blackstone Real Estate Partners VII L.P. Park Hill has not been involved in soliciting investment management business from the State of New Jersey or a State official on behalf of the fund.

Formal written due diligence reports for the proposed investments were sent to each member of the Investment Policy Committee and a meeting of the Committee was held on July 12, 2011. In addition to the formal written due diligence reports, all other information obtained by the Division on the investment was made available to the Investment Policy Committee.

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 each investment. In addition, each proposed investment must comply with the State Investment Council’s (the “Council”) regulation governing political contributions (N.J.A.C. 17:16-4).

Please note that this investment is authorized pursuant to Articles 69 and 71 of the Council’s regulations. The Blackstone Real Estate Partners VII will be considered a non-core real estate investment, as defined under N.J.A.C. 17:16-71.1.

We look forward to discussing the proposed investment at the SIC’s July 21, 2011 meeting.

Source: State of New Jersey State Investment Council