Hedge fund's risky ties to Revel casino shine light on N.J.'s investing habits
Published: Sunday, September 09, 2012
By Jarrett Renshaw/Statehouse Bureau
Revel Resort in Atlantic City on Saturday, July 14, 2012
TRENTON — Gov. Chris Christie isn’t the only one betting on Revel.
A hedge fund that manages $200 million in New Jersey public pension money also has a financial stake in Revel, Atlantic City’s newest and sleekest casino hotel, a Star-Ledger review of records from the state Division of Gaming Enforcement and Treasury Department shows. It’s a gamble that has put a share of public workers’ retirement income at risk if the struggling resort fails.
Industry analysts say the prospect of Revel failing is not far-fetched. Last month, the $2.4 billion resort that opened in April was forced to seek $100 million from lenders amid disappointing gambling profits and complaints from vendors and builders that it was not paying its bills.
Andy Pratt, a spokesman for the Treasury Department, said the investment in Revel posed little threat to retirees and the $69.9 billion pension fund. He said the $200 million from the hedge fund represents less than 1 percent of the state’s total investment portfolio, and that the funds were sufficiently positioned to absorb any Revel loss.
The exposure to retirees from Revel is nearly impossible to determine from public records because hedge funds are not required to divulge their investments, and the state signed non-disclosure agreements with the firms.
"Even in a worst-case scenario, the risk exposure is minuscule," Pratt said.
But while the risk to retirees is minimal, the investment underscores how New Jersey and other states are increasingly reliant on alternative investments like hedge funds and private equity vehicles as an antidote to rising pension costs and shrinking investment returns.
The state’s investments in Revel — some of which came a few months after Christie pledged $260 million in tax incentives to restart the idled hotel project — helps pull back the curtain on the relationship between the casino and a group of hedge funds that will play a crucial role in how the resort navigates the choppy financial waters.
Canyon Capital Advisors, a California-based firm, is among a group of funds that stepped in and helped rescue the half-completed Revel when Morgan Stanley walked away from its $1.3 billion investment in 2010.
New Jersey began investing in Canyon Capital in 2007 with a $75 million commitment. In July 2011, the state Investment Council approved putting an additional $100 million in Canyon Capital, about five months after the hedge fund made its bet on Revel, and in the same month the state approved an incentive package to jump-start the project.
Pratt rejected any suggestion that the timing of the investment was significant. He said the council was unaware of the hedge-fund involvement in Revel, and added that the decision was based on Canyon’s track record, which included a 31 percent return on the state’s 2007 investment.
HIGH STAKES
Gaming Enforcement records show nine hedge funds, including Canyon Capital, have provided $304 million in financing for Revel in exchange for a hefty 12 percent rate of return and the power to assume up to 90 percent ownership of the casino after three years. Records from the state agency show the group was also given two seats on the casino’s five-member board.
The investment caught the attention of the local casino workers’ union, UNITE HERE Local 54, which has fought Revel, a non-union shop.
"At the time of this deal, we couldn’t understand why any rational investor who relied strictly on financial considerations would put money into Revel," Bob McDevitt, the union president. "Now, as Revel’s revenue numbers disappoint month after month and more interest payments come due, will there be pressure for another bailout?"
The state Attorney General’s Office made it more difficult for the public to learn the identities of the hedge funds by granting a Revel request that they be exempt from public scrutiny on the ground that the funds didn’t hold enough of the casino’s debt. The Star-Ledger learned the identities of the hedge funds through filings with Gaming Enforcement, however.
POLITICAL TIES
Without the exemption, the hedge funds would be barred from making political contributions in the state. A review of campaign finance records shows that some individuals involved in the hedge funds have contributed to Christie and other politicians — though before the firms invested in Revel.
Gaming Enforcement documents and campaign finance records show John Sette Jr., the son of John Sette, the Morris County Republican Party chairman, works at Anchorage Capital Group, one hedge fund that has invested in Revel.
The younger Sette donated $3,650 to the 2009 primary and general election campaigns of Christie, who got his start in politics in Morris County and still lives there. Sette did not return e-mails or telephone calls asking what role, if any, he played in the Revel investment.
Larry Buchalter is a managing partner of Chatham Asset Management, a New Jersey hedge fund and also Revel investor, according to Gaming Enforcement. Campaign finance records indicate his wife, Robin Buchalter, contributed $2,000 to Christie and $2,000 to the Senate Republican Committee in 2009.
According to two officials at the Economic Development Authority who requested anonymity because of the sensitivity of their positions, the hedge funds refused to invest in the project until the state agreed to provide the $261 million tax incentive for improvements to the surrounding neighborhood.
A recent report by the Willshire Trust Universe Comparison Service shows more than half of the nation’s largest public pension plans — with more than $1 billion in assets — have at least 15 percent of their money in alternative investments like hedge funds and private equity funds, the highest ever and up 9.2 percent from June 2011.
New Jersey’s $69.9 billion pension fund saw a return of 2.3 percent in the fiscal year that ended in June, far less than the 8 percent the state anticipated. The state plans to increase its alternative investments to 30 percent of its portfolio from nearly 23 percent. In the first five months of 2012, it increased its alternative investments by nearly $4 billion.
"No investment portfolio of $69 billion can meet acceptable standards for risk reduction without expanding beyond stocks and bonds," Pratt said.
http://www.nj.com/news/index.ssf/2012/09/hedge_funds_risky_ties_to_reve.html
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