New Jersey cues sell-off for GSO add-on

The New Jersey Division of Investment approved a partial sale of liquid assets to fund a $150m add-on to its GSO account.

The New Jersey Division of Investment reshuffled its portfolio to accommodate a $150 million add-on commitment to its existing mandate with The Blackstone Group's GSO Capital Partners last Thursday. Approximately $100 million of the add-on commitment will be funded by the sale of liquid assets held by an existing partnership.

The additional $150 million will be used to invest alongside GSO’s Community Development Capital Group Fund, which will provide acquisition and development capital to public and private homebuilders, according to documents. The firm had already dedicated approximately $500 million to land banking arrangements over the last nine months, approximately $20 million of which New Jersey had committed through its GSO account.

“The Division has an opportunity to take advantage of the current market dislocation in providing capital to residential homebuilders, at an attractive point in the residential real estate cycle,” according to a memorandum detailing the investment. “Favorable supply / demand dynamics currently exist, with banks slow to re-enter the business and homebuilders in need of financing to build inventory as the residential real estate market recovers.”

Division of Investment director Timothy Walsh approved of the investment despite his initial reservations: “To paraphrase our consultant; I wanted to hate every single part of it, but I couldn’t find a single thing wrong with it”.

The Division of Investment will pay a 0.85 percent annual management fee with a 5 percent preferred return. GSO will earn a 13 percent carry on earnings generated by the commitment.

New Jersey plans to finance a portion of its new commitment to GSO by modifying the terms of an existing commitment to Capital Trust’s High Grade Partners II, a $500 million 2008 limited partnership comprised of the Division and General Motors Pension Trust.

The Division and Capital Trust acquired General Motors’ interest in the fund in the second quarter of 2012. Later that year, Blackstone acquired Capital Trust’s investment management business – now known as Blackstone Mortgage Trust.  

Of CTHG II’s $696 million market value, approximately $329 million is tied up in low-returning REIT and CMBS assets. New Jersey’s modification to their commitment would allow the fund to sell those assets and redeploy them across various strategies.

Approximately $100 million would go towards the add-on commitment. An additional $100 million would be reinvested in CTHG II for the investment in Europe’s real estate mezzanine loan market.

“I think it’s a great opportunity for us. The risk-reward overseas is 2-3x the US.” Walsh said. “It’s still amazing to me, in the US, how dislocated the European banking system is.”

Another $100 million generated by the sale would go towards a CTHG II strategy dedicated to below investment grade CMBS. New Jersey would pay a 0.75 percent asset management fee with a 4 percent IRR hurdle and 10 percent carry on those investments.

“The existing portfolio positions and investments going forward that conform to the original mandate will continue to be administered at the current 0.40 percent asset management fee,” according to New Jersey documents. “CTHG II cannot begin to invest in any of the new strategies without the Division’s approval.”

The $74 billion New Jersey Division of Investment had a 1 percent allocation to debt-related private equity as of 30 June, according to meeting materials. The Division also has a 2.9 percent allocation to credit-oriented hedge funds.