Proposed Investment in TPG Opportunities Partners III

Memorandum to: State Investment Council
From: Christopher McDonough, Acting Director
Subject: Proposed Investment in TPG Opportunities Partners III, L.P. and an additional investment in a related separate account

The New Jersey Division of Investment (“Division”) is proposing an investment of $100 million in TPG Opportunities Partners III, L.P. (The “Fund” or “TOP”) and an additional investment of up to $200 million into a separate account that will combine two existing Division mandates, Knight/TPG NPL-Residential, L.P. and Knight/TPG NPL-Commercial, L.P., into one entity and broaden the strategy. The Pension Fund previously committed $100 million to each of the Knight separate accounts in March 2012. 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:

  • Experienced management team: TPG Special Situations Partners (“TSSP”) is the dedicated $10 billion credit and special situations platform of TPG led by Alan Waxman, who ran Goldman Sachs’ Americas Special Situations Group, an on-balance sheet, proprietary investing platform with approximately $8 billion of capital under management. Moreover, the 74 person team is headed by a cohesive and experienced Partner group. The 7 TSSP Partners all worked together at Goldman before founding TSSP and have over 100 years of combined investing experience.
  • Performance: Both of the TOP predecessor funds and NPL vehicles have produced Net Internal Rates of Return greater than 20%.
  • Attractive Opportunity Set: The separate account’s flexible mandate allows the fund to capitalize on liquid and illiquid credit dislocations through economic cycles. In addition to the team’s focus on corporate distressed situations, they will also target idiosyncratic investments such as distressed asset sales from commercial banks, medical royalties, re-performing real estate loans and mortgage servicing rights.
  • Differentiated sourcing capabilities: The team has consistently demonstrated a competitive edge in sourcing transactions at materially off-market terms by employing an “on the ground” and direct sourcing model. The platform has nine sourcing and servicing platforms across three continents which gives it access to hard to reach asset classes.

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).

The TPG Opportunities Partners III, L.P. investment and the additional separate account investment are authorized pursuant to Articles 63 and 23 of the Council’s regulations and will be considered global diversified credit investments as defined under N.J.A.C. 17:16-23.1. As a result of the consolidation of the mandates, the Knight/TPG NPL-Residential, L.P. investment, currently classified as a private equity debt related investment, will be reclassified as a global diversified credit investment.

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