December 10, 2009 BOARD MATTER NO. D-4

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1 December 10, 2009 BOARD MATTER NO. D-4 ACTION: AUTHORITY: ALTERNATIVE: Investment Contract Provisions Real Estate WestRiver Real Estate Finance Fund, managed by managed by WestRiver Capital W.S (c)(i) Approve or Disapprove Material Terms of Contract ANALYSIS: The State Loan and Investment Board increased the real estate allocation of the state portfolio at the April 9, 2009 board meeting. At the recommendation of RV Kuhns, real estate increased from 5 percent to 7.5 percent of the permanent funds. The increase will be in "value-added" real estate strategies. The State Treasurer has worked with RV Kuhns's Chicago-based real estate team to vet investment opportunities. Current real estate managers in the state portfolio are "core" real estate managers UBS and ING, who focus on well-leased, high quality, income producing institutional properties. Non-core or "value-added" real estate refers to investments in properties requiring rehabilitation, redevelopment, or repositioning for alternative uses or upgrade, which result in a value-added return potential. The state portfolio uses two mangers in this space: Heitman and TA Realty. The WestRiver Real Estate Finance Fund investment is on the debt side of real estate. The fund purchases and originates real estate debt in first mortgages (senior debt in a capital structure), B-notes (subordinate debt between senior debt and mezzanine) and mezzanine loans (also subordinate debt.) The strategy is on the conservative end of the value-added real estate spectrum. The Treasurer and staff initially met with WestRiver on June 16, 2009, in Cheyenne. The Treasurer's Office and RV Kuhns have completed extensive due diligence on this investment opportunity and agree that the WestRiver investment is a good compliment to the state's current equity based real estate portfolio. The first attached memo summarizes the material terms of the WestRiver Real Estate Finance Fund documents. The second attached memo from RV Kuhns contains a review of value-added real estate in general and the WestRiver fund specifically as a favorable investment opportunity. The State Treasurer must obtain the approval of the SLIB prior to the investment of funds in alternative assets [W.S (c)], including Board approval of the material terms of the instruments governing the investment [W.S (c)(i)]. The Treasurer seeks such SLIB approval at this time for the WestRiver investment. DIRECTOR'S RECOMMENDATION: The State Treasurer recommends that the Board approve the major contract provisions for WestRiver Real Estate Finance Fund, managed by managed by WestRiver Capital. BOARD ACTION:

2 MEMORANDUM To: Wyoming State Loan and Investment Board From: R.V. Kuhns & Associates, Inc. Subject: WestRiver Value-Added Real Estate Recommendation Date: December 10, 2009 In April of 2009 the Wyoming State Loan and Investment Board ( SLIB ) approved changes to the investment policy to effectively bolster the expected risk-adjusted returns of the State s investment portfolios. In general, allocations to the traditional asset classes, including domestic and international equity, were reduced and investments in alternative asset classes such as value-added real estate and absolute return strategies were increased. The motivating factors that drove this decision were two fold. First, the turmoil in the capital markets exposed weaknesses in portfolio diversification and second the fear permeating through alternative investment classes has created opportunities for investors with a longer time horizon and access to liquidity. With the help of R.V. Kuhns & Associates, Inc. ( RVK ) the Wyoming State Treasurer s Office ( Treasurer s Office ) has identified an opportunity in debt-oriented, value-added real estate with favorable investment potential. The following summarizes the potential investment and its overall role in the approved asset allocation. Value Added Real Estate (Debt) Within the real estate asset class, RVK has recommended, and SLIB has approved, diversifying away from the current heavily-core real estate exposure to a more balanced approach, incorporating more value-added real estate investments. The SLIB also approved an increase in the real estate asset class from 5% to 7.5% across several of the investment pools. Core real estate will have an allocation of 4%, with value-added real estate receiving the remaining 3.5%. This new asset allocation will increase the Treasurer s Office overall real estate allocation from approximately 3% to approximately 4.5% across all investment pools. Currently, we believe the best risk-adjusted opportunities exist in debt-oriented real estate strategies. Earlier this year, RVK presented the WestRiver Real Estate Finance Fund, L.P. to the Treasurer s Office for potential investment. We have conducted extensive due diligence on this opportunity and negotiated very favorable terms for investment, saving the Treasurer s Office over $7 million in management, incentive, as well as other miscellaneous fees over the life of the fund vis-à-vis the terms charged by funds with similar investment strategies. This investment will serve to further balance out the Treasurer s Office value-added real estate portfolio. The WestRiver Real Estate Finance Fund, L.P. is more conservatively focused than the Treasurer s Office s incumbent investments in value-added real estate. WestRiver The Fund is a joint venture between Westmont Group and River Stone LLC. Westmont Group is an institutional investment manager with 300+ employees and offices in New York, Houston, Miami, Toronto, London, and Tokyo. In addition to its dedicated fund business, Westmont manages InnVest, the largest publicly traded Canadian hospitality REIT. RiverStone was formed by Alex Zabik, a portfolio R.V. Kuhns & Associates, Inc.

3 manager with 25 years of experience in real estate structured finance, most recently with BlackRock Carbon Capital Funds Alex Zabik will serve as a portfolio manager for the Fund, assisted by Greg Breskin, Director of Acquisitions and Underwriting. Alex and Greg together are one of the most experienced structured finance teams in the industry, and RVK believes their underwriting process for various debt instruments in second to none. The Fund s strategy will consist of (1) acquisition of existing structured debt instruments (i.e., senior mortgages, B-notes, mezzanine loans, etc.), (2) new origination of senior mortgages, subordinate and mezzanine financing, and (3) restructuring and recapitalization of existing (often over-leveraged) assets. While WestRiver will not seek to own the real estate through lending (e.g., loan-to-own strategy), in each of the cases, they will seek to strategically invest across the capital structure to retain foreclosure and control rights. The underwriting will focus on thorough evaluation of the quality of the real estate collateral and sponsorship. Finally, while the potential investments WestRiver evaluates have elements of distress embedded within them, it is important to note that the distress in these investments exists due to an inefficient and often over-leveraged structure and not the quality of the real estate collateral. WestRiver will contribute 5% (up to $10 million) of the fund s equity. The co-investment represents a significant portion of the sponsor s liquid net worth, particularly for RiverStone. Investment with the WestRiver Fund would provide opportunity for the Treasurer s Office to attain stable current income yield and attractive total returns through exposure to senior mortgage, B-note, and mezzanine loan acquisitions and originations managed by seasoned team of debt investors. Also, consistent with RVK philosophy, WestRiver will provide significant transparency on each of its investments. Fund Characteristics & Key Terms: - Type of Fund: Distressed first mortgage, B-note, and mezzanine whole loan acquisitions Value Added Real Estate - Investment Structure: Acquisition of existing structured debt; new origination of senior mortgages, subordinated and mezzanine financing; as well as restructuring and recapitalization of existing debt on over-leveraged assets. - Leverage: Most investments are intended to be unlevered potentially up to 50%. - Target IRR: 14% - 18% - Fund Size: $200 Million - Manager Co-Investment: 5%, up to $10 Million - Management Fee: 125 bps committed capital during investment period 125 basis points after. - Investment Period: The fund has a 3-year commitment period during which time capital can be called. After this, the manager has an option of extending the 2

4 - Final Closing: 4 th Quarter of 2010 Summary commitment period by 1 year. The intended fund life is approximately 8 years. RVK has focused significant attention on the selection of an investment strategy within debt-oriented value-added real estate that both complements the current real estate portfolio composition and provides the current income component consistent with the Treasurer s Office overall investment objectives. Along with due diligence on the investment in WestRiver, RVK participated in fee negotiations in order to assure the State would receive the most advantageous fee schedule. RVK believes a $75 million investment in WestRiver Real Estate Finance, L.P. would be complementary to the existing investments in the real estate portfolio. 3

5 WESTRIVER CAPITAL, L.P. SUMMARY OF MATERIAL TERMS OF DOCUMENTS Fund: General Partner: Manager: Sponsor: Fund Objective and Strategy: WestRiver Capital, L.P., a Delaware limited partnership WestRiver Capital GP, LLC, a Delaware limited liability company WestRiver Capital Management, LLC, a Delaware limited liability company WestRiver, LLC, a Delaware limited liability company To profit from investment opportunities that Manager believes have emerged as a result of the current marketplace through commercial real estate mortgages. The Fund s anticipated investments generally may be grouped into three classes: (i) acquisition of existing structured debt instruments; (ii) new origination of senior mortgages, subordinate and mezzanine financing; and (iii) restructuring and recapitalization of existing assets. Subscription Amount: $75,000,000 Fees: Management Fee 1.25% annually on committed capital during the Investment Period and 1.25% annually on invested capital upon expiration of the Investment Period. Performance Fee After the State receives distributions that equal a Cash on Cash Multiple of 1.34 times the original invested capital amount, then 50% of distributions are paid to WestRiver until the State s Cash on Cash Multiple equals 1.50 times. Thereafter, the State receives 80% of distributions and WestRiver receives 20% of distributions. Only investments that meet or exceed an internal rate of return of 9% are included in the calculation of the Cash on Cash Multiple. Investment Guidelines: The investments are subject to the following restrictions: (i) not more than 25% of capital commitments may be invested in any single investment and (ii) not more than 30% of capital commitments may be invested in construction financing. The State will be a member of the WestRiver Advisory Committee, allowing the State to review conflict of interest and other issues presented to large limited partners. Documents: Amended and Restated Limited Partnership Agreement ( Agreement ), Subscription and Commitment Agreement, Private Placement Memorandum and Side Letter.

6 WESTRIVER CAPITAL, L.P. Page 2 ISSUE Liquidity; Redemption Rights COMMENTS This is a closed-end fund which means the State does not have the right to redeem its interest in the Fund until the end of the term. The expiration of the Fund s term is expected to be approximately the first quarter of 2018 and the General Partner has the right to extend the term for up to two successive oneyear periods. Investment Period The limited partners have the ability to suspend or terminate the investment period of the Fund in certain circumstances, including if the key man provision is triggered or if the general partner is terminated. The investment period is for three years commencing on the initial closing for the Fund. The General Partner has the right to extend the investment period for one one-year period. Leverage Right to Recall Distributions Transfer of Interest Disclosure, Transparency & Reporting Conflicts of Interest Default; Lien The Fund is limited to a leverage ratio of 2:1 of debt to equity, calculated on a portfolio-wide basis. The General Partner shall have the right to recall any distributions previously made to cover a limited partner s share of indemnification obligations that arose prior to the time of such distribution; provided, however, this obligation is limited to the lesser of 20% of our capital commitment or the amount of distributions we have actually received. Any distributions made to a limited partner in error must be paid back to the Fund. The State is not allowed to transfer its interest in the Fund without the Manager s consent, but the Manager has agreed that such consent is subject to commercially reasonable discretion and that the Manager will not unreasonably withhold its consent to any such transfer. Limited partners will have access to the books and records of the Fund. The Fund shall provide a report no less than quarterly with an unaudited statement of the balance sheet and income statement for the Fund, a statement of the State s capital account with the Fund and a status report of the Fund s investments and activities. In addition, the Fund will provide an annual report with audited financial statements for the Fund. Finally, the General Partner has agreed to language acknowledging that all obligations of the State are subject to the Wyoming Public Records Act. The General Partner must obtain the approval of the Fund s Advisory Committee prior to entering into a transaction where the Fund acquires an investment from, or transfers an investment to, the Sponsor, the Manager or any of their affiliates. The Sponsor, the General Partner, the Manager and any of their affiliates can provide property management services to the Fund under certain terms provided in the Agreement but such an arrangement does not require Advisory Committee approval; provided however, agreements with related parties to provide professional services will require the Advisory Committee s approval. If any limited partner were to default in its commitment to the Fund, the General Partner could take any number of actions to the extent permitted by law. One such action includes redeeming up to 75% of our interest in the Fund at a price equal to $1.00. If such a remedy were pursued after the State s default, the State would lose a significant amount of its original investment in the Fund, along with the associated earnings. In addition, the Fund holds a lien against the State s interest in the Fund to secure the payment of any amounts it

7 WESTRIVER CAPITAL, L.P. Page 3 Most Favored Nations Status Indemnification Sovereign Immunity Replacement of General Partner; Key Man Provision Co-Investment may owe the Fund. At the State s request, the Manager has agreed to include a most favored nations provision which states that no investor in the Fund investing a comparable amount of money in the Fund shall receive more favorable terms than the State. The Manager has agreed that any indemnifications in the documents to be made by the limited partners of the Fund shall be waived with respect to the State. The Fund itself (not the limited partners individually) is required to indemnify the Advisory Committee members, the Sponsor, the General Partner and the Manager from and against all losses, claims, damages or liabilities arising out of or in connection with the Agreement or the business of the Fund, except such (if any) as they shall incur or sustain by or through their own gross negligence, willful misconduct or bad faith. The Manager has agreed to the State s standard sovereign immunity provision. The limited partners are able to replace the General Partner without cause, with a 75% vote of the limited partners. There is a key man provision, which allows for halting of the investment period in case key personnel leave the organization. In such a case, either the investment period will terminate or the limited partners can approve the replacement of the key personnel. Since this is a closed-end fund, the State cannot redeem out of the Fund if the key man provision is violated. The Manager is investing 5% of the capital committed to the Fund, not to exceed $10,000,000. Therefore, the Manager s interest in the Fund s success should be aligned with the State s and its investment provides a strong incentive for the Manager to insure that the Fund performs well.