The New Mexico Educational Retirement Board has recommended its investment committee commit $40 million to Z Capital Special Situations Fund II, according to statements from the pension system. The commitment is subject to negotiation of final terms and conditions.
Z Capital Partners declined to comment.
Z Capital’ second fund, a 2012 vintage, is targeting $500 million according to Private Equity International’s Research and Analytics division. The fund’s hard-cap is $750 million, according to the statements.
Fund II has a re-up rate of more than 90 percent, according to marketing documents seen by PEI. The fund’s management fees are 2 percent with a carried interest of 20 percent, the marketing documents revealed.
As the GP, Z Capital will have a 2.5 percent cash commitment to the fund, which New Mexico Educational said “dramatises Z Capital Partners’ strong commitment”, the statement disclosed.
The retirement system also views Z Capital’s focus on a distressed-for-control strategy in the lower mid-market as a strength. “Due to the current high availability of leverage and low to modest economic growth, the staff believes there will be an attractive deal flow for this opportunity,” the statement reads.
New Mexico did cite one concern in committing to the fund—its size. Z Capital’s second fund is nearly twice as large as its prior fund which raised $300 million in 2009.
“If they start approaching over $700 million, we’re reserved about that, so that’s definitely a concern for us,” a spokesperson from New Mexico Educational told PEI.
Fund I had invested close to $297 million as of June. The majority of the investments have been made in the hotels, motels and gaming industry, according to marketing documents.
Fund I had a gross multiple of 1.5x and a gross investment return rate of 44 percent as of 30 June, New Mexico statements disclosed. This fund is targeting a multiple of 2.5x and a 35 percent gross IRR, according to the marketing documents.
Fund II has already deployed $85 million in five investments over the past six months, the marketing documents disclosed. Four of the five investments are control positions comprising more than 90 percent of capital deployed. The investments have been made in industries including gaming, non-durable consumer products and food and beverage, according to the marketing documents.
James Zenni founded Z Capital in 2006, after serving as president and co-founder of Black Diamond Capital Management. Z Capital currently has 21 investment professionals and seven operating partners who work on companies experiencing forms of distress such as over-leveraged balance sheets and under performance from non-core asset holdings, according to New Mexico Educational.
New Mexico has about $10.1 billion in assets under management and allocates 6.6 percent to private equity, according to PEI data. Z Capital isn’t New Mexico’s first commitment to a distressed manager. Since inception, the group of distressed funds has returned an annual net IRR of 12.6 percent and a net investment multiple of 1.28. Most recently, the retirement system committed $40 million to Marlin Fund IV, according to the statements.