New Jersey makes largest-ever real estate commitment and moves forward with secondaries

The $72.8 billion pension plan has approved an investment to Blackstone's new Asia-focused vehicle. It also announced an update to its real estate secondary offering.

The New Jersey Division of Investment (NJ DOI) has agreed to commit $500 million to The Blackstone Group’s new Asia-focused real estate fund, Blackstone Real Estate Partners (BREP) Asia. The real estate fund commitment, the largest in the pension plan’s history, will account for approximately 14 percent of BREP Asia’s $3.5 billion target.

“We’ve negotiated very attractive fee terms, largely because of our size, our relationship and the fact that we’re going to be one of the largest investors in the first close,” said Timothy Walsh, NJ DOI’s director, in an interview with sister publication Private Equity International.

Limited partners in BREP Asia typically must pay a 1.5 percent annual asset management fee, and there is an 80:20 catch-up over the preferred return of 8 percent. For investors committing $200 million or more, the fee is reduced to 1.25 percent.

New Jersey, however, has negotiated a fee of approximately 76 basis points on committed capital during the investment period, consisting of a fee waiver for the first eight months of the fund’s life and a one percent asset management fee thereafter. In addition, the GP will be subject to a reduced catch-up rate of 65 percent over the 8 percent preferred return. PERE understands that the terms are among the most favorable that Blackstone has ever offered an LP.

Separately, at the board meeting yesterday, Walsh said New Jersey is moving forward with the sale of $1 billion of real estate fund interests on the secondary market and expects the transaction to be close to being finalized in May. “We’ve had a lot of interest…a lot more interest than I thought we’d get, to be honest,” he added.

Approximately 25 firms have expressed interest in the secondary offering, with half of the parties signing non-disclosure agreements. The state currently is reviewing bids and conducting due diligence, but is not close to making a decision on a buyer or buyers at the present time, Walsh said. The sale is expected to include 25 to 30 fund interests. PERE first reported that New Jersey was exploring a possible real estate secondaries sale in January.

At its annual meeting in January, NJ DOI announced that international diversification for its entire portfolio was a priority for 2013 and 2014. In a memorandum to the State Investment Council, Walsh noted that the attractive investment opportunity in Asia, given the constrained credit markets, limited opportunistic capital and positive long-term growth prospects in the region. “The Division believes that BREP Asia will be able to capitalize upon these dislocations and will take advantage of distress in developed Asia and growth and capital market dislocation in emerging Asia,” he wrote.  New Jersey currently has allocated just 7.5 percent of its real estate portfolio to Asia.

BREP Asia primarily will focus on investments in mainland China, India, Australia and Japan and, to a lesser extent, Singapore, Hong Kong, South Korea, Vietnam and Thailand. Gross returns are expected to be 20 percent, with a 2x gross multiple on invested equity, the report stated.

Although BREP Asia is Blackstone’s first Asia-focused real estate vehicle, the firm has had a presence in the Asia-Pacific region since 2006 and has built a team of 48 investment and asset management professionals across six regional offices. “After investing or committing more than $1.5 billion in the Asia region through their global BREP VI and BREP VII funds, it is Blackstone’s belief that the pipeline of additional investment opportunities in Asia likely will exceed the geographic limitations of its global fund,” an investment policy committee report stated.

To date, NJDOI has invested approximately $3 billion with Blackstone. That includes $1.5 billion in a “strategic partnership” consisting of separately managed accounts spanning several asset classes including real estate, private equity and credit, as well as a $300 million commitment to BREP VII.