The New Jersey Division of Investment (DOI) has agreed to invest up to $200 million to a real estate separate account with Och-Ziff Capital Management, as the $69.42 billion pension plan seeks to significantly increase its exposure to the asset class.
The new account, OZNJ – Real Estate, will be considered a non-core real estate investment and is part of an increased investment by the state in an existing separate account and four new separate accounts managed by Och-Ziff. In addition to the real estate account, New Jersey has committed up to $200 million in additional capital to the existing bank loan fund OZSC, as well as $200 million to $500 million in a new bank loan fund, OZSC II; up to $400 million in a hedge fund account, OZNJ – Credit Strategies; and up to $150 million in a real assets account, OZNJ – Real Assets. The capital allocated to the accounts, however, will not exceed $600 million.
The new investments – funded through a $100 million redemption from an existing hedge fund investment in OZ Domestic Partners II and a new $500 million commitment – is intended to address a significant under-allocation to high-yield and real assets. “The pension is under its targeted exposure to high-yield, real estate and real assets in the fiscal year 2013 investment plan,” Timothy Walsh, the DOI’s director, wrote in a memo to the State Investment Council (SIC). “The proposed commitment would help the pension get closer to the target allocation in each of these areas.”
According to the investment plan, which was approved at the SIC’s May 24 meeting, New Jersey had a 4.4 percent allocation to real estate as of 30 April 2012. For fiscal year 2013, which began on 1 July, the plan increased the pension fund’s allocation target from 5 percent in fiscal year 2012 to 5.5 percent, with a long-term target of 7.1 percent.
With the separate accounts, New Jersey “will retain significant input into separate account transactions” and reserve the right to veto private investments, suspend the investment period and adjust the amounts of capital committed to investment opportunities, according to the pension fund documents. “The significant level of influence provides the pension with the ongoing ability to better manage its portfolio risk exposures, to regulate the pace of investments, to respond to changing market opportunities and to ensure that it continues to receive the highest level of attention on an ongoing basis,” Walsh wrote in his memo.
Meanwhile, New Jersey also has agreed to invest $80 million in Real Estate Capital Asia Partners (RECAP) III and up to $40 million in related co-investment vehicles, as part of the pension’s efforts to increase investments in Asian real estate.
“Given that New Jersey’s portfolio is significantly underexposed to Asian real estate, an investment in RECAP III would provide the pension with exposure to a high-quality manager that continues to take advantage of Asian real estate market dislocation,” Walsh wrote in a memo on the investment. He noted that RECAP I, a 2005 vintage fund, and RECAP II, a 2008 vintage fund, were top-quartile performers among Asian and opportunistic funds of those vintage years. In fact, RECAP II was the top-performing fund of all 2008 vintage opportunity funds, based on a projected gross internal rate of return of 30.4 percent and a 1.7x multiple on invested equity.
SC Management, the Hong Kong- and Singapore-based private equity real estate firm that sponsors the RECAP fund series, is targeting $530 million in commitments for RECAP III, which launched in August 2011, according to pension documents. The vehicle will focus on acquiring, developing and operating real estate assets that are undervalued, undermanaged or in distressed situations in Asian markets that include China, Indonesia, Japan, Singapore, South Korea, Thailand and Vietnam.
In February, PERE reported that RECAP III had raised $185 million in equity and invested $59 million in two transactions. Park Hill Real Estate Group is the placement agent, while law firm Paul Hastings is advising SC Management on the fund.