The New Jersey State Investment Council has agreed to commit up to $150 million to Sycamore Partners Fund III, which is seeking $4.5 billion.
Despite a strong case for the commitment, the State Investment Council’s board questioned the move during its meeting in Trenton on Wednesday. Board member Charles Dolan mentioned recent failures in the retail sector and wondered aloud whether they were “trying to catch a falling knife”, given the severely challenging current retail climate.
However, valuations in retail can be more attractive than in other industries. Across its first two funds, the average capital weighted purchase price is 5.1X EBITDA, while valuations for recent transactions were between 5x and 7x EBITDA, according to documents prepared for New Jersey.
The strong performance of Sycamore’s first two funds also mitigates the risk. Sycamore Partners Fund I, which closed on $1 billion in 2011 had a net internal rate of return of 42.9 percent as of 30 June, according to the documents. Sycamore Partners Fund II, which closed on $2.5 billion in 2014 and is now 60 percent invested, realised its first two deals, which generated a 43 percent gross IRR.
The new fund, a private equity vehicle managed by New York-based Sycamore Partners, will focus on making control-oriented investments within the consumer and retail sectors of North American mid-market businesses.
Terms for the fund include a 2 percent management fee, a 20 percent carried interest and an 8 percent hurdle rate. The GP intends to commit at least $100 million to the vehicle.
As with their previous funds, Sycamore will look to acquire underperforming businesses under varying levels of distress, seizing upon opportunities to add value to undermanaged consumer retail businesses by bringing stability to their operations and turning them profitable.
In July, Sycamore invested in Staples in a $6.9 billion take-private transaction.
Stefan Kaluzny founded the New York-based firm in 2011 after leaving Golden Gate Capital.
New Jersey also committed $135 million to Aether NJ Custom Fund, a separate managed account with Aether Investment Partners, focusing on metals, mining, agriculture and timberland.
On the heels of spending the day deliberating on both a retail and a real assets fund that partially buckets to traditional commodities, Chris McDonough, director at the division of investment, decried it as “contrarian investment day”.