The $79 billion New Jersey Division of Investment (DOI) is in the process of creating an up to $300 million new separate account with GoldenTree, according to a memo from the division to the New Jersey State Investment Council (SIC), which met on 22 July to review several investment proposals. “The GoldenTree separate account will focus on distressed and stressed assets within the corporate and structured product markets, targeting mid- to high-teen net returns,” said the memo, which was recently posted to the New Jersey Treasury’s website.
The vehicle will mainly target investments in the US, UK, Western Europe and Canada. New Jersey plans to invest up to $200 million pro-rata alongside the GoldenTree Distressed Fund 2014, a successor to the GoldenTree Distressed Fund 2010. An additional $100 million will be reserved for overage and additional distressed opportunities.
The memo, from director of investments Chris McDonough to SIC, which oversees the DOI’s activities, outlined a favorable investment environment for distressed opportunities in the near future. “The environment for stressed and distressed investing could be viewed as increasingly favorable, highlighted by more risky and aggressive debt issuance, including: increased leverage levels, growth in CCC issuers and an increase in the amount of debt raised for acquisitions and dividends,” said the memo.
Some factors are paving the way for future distressed opportunities as well. These are “driven by the vulnerability of security prices to increases in interest rates, as well as deteriorating credit quality”, McDonough wrote. “GoldenTree’s strategy of focusing on distressed and stressed situations across large-cap and middle-market opportunities is a good addition to the division’s existing investments in debt-related private equity, as many of the funds are seasoned and largely in run-off mode,” the documents said.
GoldenTree currently manages $3.7 billion in distressed assets. The firm has $23 billion in assets under management overall. Its 2010 vintage distressed fund posted 18.26 percent net IRR.
Another reason that the New Jersey investment staff cited for making the GoldenTree investment was the firm’s tenure in Europe. GoldenTree established its London office in 2005 and now has 11 investment professionals there and $6.2 billion invested in European assets. “The performance of European assets within the 2010 distressed fund has been particularly strong, with a gross IRR of 27.62 percent on realized investments and 33.4 percent IRR on unrealized investments,” the memo said.
By investing via a separate account format, New Jersey has also negotiated tailored terms and fees with the firm. GoldenTree will charge a 75 basis point management fee on invested capital and a 17 percent carried interest on an 8 percent annualized hurdle rate. In exchange for the fee breaks, New Jersey has agreed to a three-year lock-up on its existing investment in the GoldenTree Credit Opportunities Fund.
Earlier this summer, the Garden State pension fund also plowed more money into a broad credit mandate with Och-Ziff Capital Management, negotiating tailored fees and terms with the New York-headquartered alternative investment firm.