New Jersey’s pension system is planning a $300 million separate account with GoldenTree Asset Management to invest in stressed and distressed credit as the $79 billion plan seeks better terms from money managers.
The pension also intends to invest as much as $200 million in hedge funds run by Laurion Capital Management and up to $250 million in a fund managed by Stone Milliner Asset Management, according to materials from the State Investment Council meeting Wednesday in Trenton. The $450 million investments would be funded by some of the $1.15 billion in redemptions the pension has made from firms including BlueCrest Capital and Regiment Capital Advisors, according to materials from the meeting.
New Jersey has been creating and adding to separate accounts with alternative investment managers, including Blackstone Group LP and Och-Ziff Capital Management Group LLC, to cut fees. The GoldenTree Distressed Separate Account would focus on issuers in North America, Western Europe and the U.K., New Jersey Division of Investment director Chris McDonough told the council in a memo.
“The environment for stressed and distressed investing could be viewed as increasingly favorable, highlighted by more risky and aggressive debt issuance,” McDonough wrote. The trends include “increased leverage levels, growth in CCC issuers, and an increase in the amount of debt raised for acquisitions and dividends.”
Signs of stress in the junk bond market have been growing in recent months after the three strongest years on record for issuance and annual returns of 15 percent since the start of 2009. High-yield debt lost 0.4 percent this month after declining 1.5 percent in June, with company bonds tied to commodities getting punished.
The redemptions from BlueCrest and Regiment came after “disappointing” performance, McDonough told the investment council earlier this year.
BlueCrest was down 3.5 percent this year through April, after losses in January caused by the Swiss franc’s surge. The firm was facing $2.7 billion of withdrawals from the $4.9 billion BlueCrest Capital International fund in the second quarter, a person with knowledge of the matter said in May.
Regiment, a Boston-based firm started by former junk-bond investors from Harvard University’s endowment, is closing its credit fund after losing money last year.
GoldenTree, which has $23 billion under management and offices in New York, London and Singapore, will target mid-to-high-teen net returns for the separate account.
The GoldenTree separate account offers attractive terms, according to McDonough, including a management fee of 75 basis points, or 0.75 percent, on invested capital, and 17 percent carried interest on profits subject to an annualized performance hurdle of 8 percent returns.
A planned $200 million investment in American Industrial Partners Capital Fund VI, a private equity fund focusing on mid-size companies, and a potential $50 million commitment to Excellere Capital Fund III, a lower mid-market private equity fund, were also discussed at Wednesday’s meeting.