NJ: ‘Strategic relationships’ are the future of private equity

A 1% management fee on invested capital was one of several choice economic terms that New Jersey's alternatives chief Christine Pastore helped build into customised funds managed by Blackstone.

“Strategic relationships” between large US public pensions and multi-strategy private equity managers are the way of the future, allowing under-resourced institutions the ability to be nimble when opportunities arise, according to Christine Pastore, the head of alternatives for New Jersey’s $68 billion state pension system.

Pastore was one of the main architects behind the state pension system’s historic $1.8 billion partnership with The Blackstone Group, which includes $1.5 billion in separate account commitments to be used for investments across various strategies, including real assets and credit.

The commitment represents the first time Blackstone has formed a partnership with a limited partner that spans all four asset classes in which the firm invests, including credit, real assets, real estate and private equity, according to a person with knowledge of the arrangement.

“We wanted to partner with a top-tier firm with a large number of experienced professionals sourcing global investment opportunities in multiple asset classes,” Pastore told Private Equity International in a recent, exclusive interview. “This provides New Jersey a platform and deep team with a good track record to use as an extension of staff.”

Innovative arrangement

Under the arrangement, which was announced last week, New Jersey’s pension system will commit $300 million to three traditional funds – $50 million to Blackstone’s sixth fund, which has collected more than $16 billion; $150 million to Blackstone Energy Partners, which is targeting $3 billion; and $100 million to GSO Special Situations Credit Hedge Fund.

This provides New Jersey a platform and deep team with a good track record to use as an extension of staff.

Christine Pastore

The balance of the total commitment amount will go to what the pension system is calling four separate accounts: GSO Energy will get $250 million with a hard-cap of $500 million; GSO Credit Opportunities Fund will receive up to $250 million; and two “tactical opportunities” funds dedicated to real assets and private equity will get up to $1 billion in total committed funds.

New Jersey will get attractive fee structures on the “tactical opportunities” funds, paying a 1 percent management fee only on invested capital, rather than committed capital, according to pension documents. The tactical funds will pay Blackstone 15 percent in carried interest. The state will also have governance rights and greater flexibility than an LP investing in a typical dedicated fund. 

In the separate accounts, “we only pay a management fee when we do a deal,” Pastore said. All in, the state estimates that it will save $120 million in fees in the separate accounts over the life of the agreement, compared to investing in traditional funds. New Jersey will have the same terms as every other limited partner in the traditional Blackstone funds to which it committed under the partnership.

Real assets played a big role in the separate accounts because the pension system is underweighted to the asset class – according to pension records, the system has an actual allocation of about 2.4 percent to real assets and commodities and a target of 4 percent.

“We need more exposure in real assets and energy,” she said.

The separate account vehicles are “dedicated to a jointly developed and pioneering investment package that seeks to invest in opportunities created by current global dislocations that are not covered by our existing products”, Blackstone said in a statement.

Looking for a partner

The pension system had been talking about building a close relationship with a firm over the past year, and in July it

You can't afford not to consider these types of arrangements, if you have the capital and the leverage to do so. This appears to be the future of alternative investing. 

Christine Pastore

became clear that Blackstone would be the firm. The system already had committed extensive capital, and Blackstone had the ability to invest across asset classes.

Pastore approached Blackstone with the idea and started planning in July. “I went to them and said, ‘There should be a way for New Jersey to economically benefit from all these commitments. How do we work together so New Jersey can benefit from your platform to get value for transactions outside the mandates’?”

Thus was born the idea of the separate accounts, which the firm and the pension negotiated over the past few months.

Coincidentally, as Pastore worked with Blackstone on forging separate accounts, Kohlberg Kravis Roberts and Apollo Global Management were also forming “strategic relationships” with the Teachers Retirement System of Texas. Under that deal, KKR and Apollo will manage up to $3 billion each from the pension system to invest across asset classes.

For large, public institutions in the US, strategic relationships may be the most economical way to approach investing in multiple alternative asset classes, Pastore said.

“The Canadian [pensions] have a great model — they can go direct, they can be opportunistic, they might have 100 people in private equity – but NJ is unlikely to be able to grow its staff to that scale,” Pastore said. “You can’t afford not to consider these types of arrangements, if you have the capital and the leverage to do so. This appears to be the future of alternative investing.”