MINUTES INVESTMENT COMMITTEE March 11, 2014 BOARD ROOM 348 WEST HOSPITALITY LANE, FIRST FLOOR SAN BERNARDINO, CA

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1 MINUTES INVESTMENT COMMITTEE March 11, 2014 BOARD ROOM 348 WEST HOSPITALITY LANE, FIRST FLOOR SAN BERNARDINO, CA Trustees Present: LOUIS FIORINO, Committee Chairman GLENN DUNCAN, Committee Member NEAL WANER, Committee Member Others Present: MICHAEL CALABRESE, Chief Counsel DONALD PIERCE, Chief Investment Officer JAMES PERRY, Sr. Investment Officer EMELY GARCIA, Recorder Not Present: LARRY WALKER, Committee Member 1. Call meeting to order. Committee Chairman Fiorino called the meeting to order at 2:05 p.m. 2. Approve minutes of Investment Committee of February 18, Waner moved, Duncan seconded, to Approve minutes of the Investment Committee of February 18, Motion Passed. 3. Presentation by NEPC and Staff of the Tennenbaum Capital Partners Master Custodial Account Agreement. Allan Martin of NEPC and Pierce, staff, presented. 4. Presentation by Tennenbaum Capital Partners of their Master Custody Agreement. Lee Landrum and Howard Levkowitz of Tennenbaum Capital Partners presented. 5. Action: Approve the creation of a Master Custodial Account with Tennenbaum Capital Partners and five year commitment pacing at $30 million per year.

2 Investment Committee Minutes March 11, 2014 Page 2 Duncan moved, Waner seconded, to Approve the creation of a Master Custodial Account with Tennenbaum Capital... Motion Passed. 6. Action: Approve the proposed changes to the 2014 On-site Due Diligence Schedule. Duncan moved, Waner seconded, to Approve the proposed changes to the 2014 On-site Due Diligence Schedule with revisions to include: Motion Passed. Reschedule the April trip to San Francisco for July; and the trip to New York be scheduled for October 14-17, The Committed also requested that staff rescheduled the October Investment Committee meeting for October 21, Presentation by NEPC on the Real Estate Consultancy Transition. This item was pulled at the request of the Committee. PUBLIC COMMENT No Public Comment was provided. ADJOURN The meeting adjourned at 2:57 p.m. Respectfully submitted, LOUIS FIORINO, Chairman LARRY WALKER, Acting Secretary DATED

3 MINUTES INVESTMENT COMMITTEE February 18, 2014 BOARD ROOM 348 WEST HOSPITALITY LANE, FIRST FLOOR SAN BERNARDINO, CA Trustees Present: LOUIS FIORINO, Committee Chairman GLENN DUNCAN, Committee Member LARRY WALKER, Committee Member (Managing Trustee) NEAL WANER, Committee Member DAWN STAFFORD, Alternate Committee Member Others Present: MICHAEL CALABRESE, Chief Counsel DONALD PIERCE, Chief Investment Officer AMIT THANKI, Investment Officer EMELY GARCIA, Recorder 1. Call meeting to order. Committee Chairman Fiorino called the meeting to order at 2:30 p.m. 2. Approve minutes of Investment Committee of December 17, Duncan moved, Waner seconded, to Approve minutes of Investment Committee meeting of December 17, Ayes: Duncan, Fiorino, Walker, Waner Motion Passed. 3. Presentation by NEPC and Staff of the Avenue-SB Opportunities Fund, L.P. Allan Martin of NEPC and Amit Thanki, staff, presented. 4. Presentation by Avenue Capital Group of the Avenue-SB Opportunities Fund, L.P. Richard Furst and Mark Lasry of Avenue Capital Group presented. 5. Action: Approve a $60 million initial investment to the Avenue-SB Opportunities Fund, L.P. Walker moved, Waner seconded, to Approve a $60 million initial investment to the Avenue-SB Opportunities Fund, L.P. Ayes: Duncan, Fiorino, Walker, Waner Motion Passed.

4 Investment Committee Minutes February 18, 2014 Page 2 Duncan left the meeting at 3:28 p.m. Committee Chairman Fiorino appointed Stafford as an Alternate Committee member in the absence of Duncan. 6. Action: Approve the termination of the Townsend real estate consulting contract and the expansion of the NEPC scope of work to include real estate investment consulting. Pierce reviewed. Waner moved, Stafford seconded, to Approve the termination of the Townsend real estate consulting contract and the expansion of the NEPC scope of work to include real estate investment consulting. Ayes: Fiorino, Stafford, Walker, Waner Absent: Duncan Motion Passed. 7. Presentation by NEPC on the 2014 Asset Allocation Assumptions. Allan Martin of NEPC presented. Waner left the meeting at 4:15 p.m. 8. Presentation on Single Family Residential Rental Market. Pierce presented. PUBLIC COMMENT No Public Comment was provided. ADJOURN The meeting adjourned at 4:40 p.m. Respectfully submitted, LOUIS FIORINO, Chairman LARRY WALKER, Acting Secretary DATED

5 REPORT/RECOMMENDATION TO THE INVESTMENT COMMITTEE OF SAN BERNARDINO COUNTY EMPLOYEES RETIREMENT ASSOCIATION March 11, 2014 FROM: SUBJECT: Donald Pierce, CFA Chief Investment Officer Tennenbaum Capital Partners Master Custodial Account Agreement RECOMMENDATION: Approve the creation of a Master Custodial Account with Tennenbaum Capital Partners and five year commitment pacing at $30 million per year. BACKGROUND INFORMATION: SBCERA has been investing with Tennenbaum since 2007 across a variety of strategies. One of the objectives in creating a Master Custodial Account (MCA) is to participate in the selection of assets with managers across the breadth of their capabilities. We want to do this at the manager level rather than through each fund investment. In other words, we want to elevate the relationship from a transactional fund raising effort to a comprehensive relationship. The benefit to the manager is the strong commitment from SBCERA to participate in those strategies if the assets meet the goals of our organization. In return, SBCERA receives both economic terms and legal terms that meet the needs of our plan. SBCERA anticipates the multi-product and multi-strategy investment approach with Tennenbaum to include both performing credit, and distressed debt. When an opportunity meets the needs of SBCERA, but is not likely to be invested in through a fund, individual transactions will be pursued. In addition, the account envisions participating in market opportunities that may arise in the future: for example Debtor-In-Possession (DIP) financing, warehousing loans, as well as industry/sector investments where Tennenbaum has significant investment experience. All investments must meet the overall investment needs of SBCERA. Unlike some of our previous MCA efforts, we are proposing for this MCA to apply only to go forward assets and strategies rather than roll existing assets into the structure. That consideration was done after further discussion with the manager, and evaluating the life cycle of our existing assets in the three strategies we currently have with Tennenbaum. The Tennenbaum MCA account would fall under the Private Equity plans for with anticipated capital commitments of $30 million per year. ADMINISTRATIVE BUDGET IMPACT: N/A ATTACHMENTS: NEPC Recommendation Memo on Tennenbaum Capital Partners Master Custody Agreement Tennenbaum Capital Partners Presentation on Master Custody Agreement PRESENTERS: Donald Pierce, Chief Investment Officer, CFA

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7 To: SBCERA Board From: Allan Martin, Siddique Haq and Anthony Ferrara Date: February 28, 2014 Subject: Tennenbaum Capital Partners Master Custody Agreement Recommendation NEPC supports staff s proposal to access the breadth of Tennenbaum s abilities across credit strategies through a flexible mandate. The Master Custody Agreement ( MCA ) will provide broad exposure to the Tennenbaum platform including existing strategies in performing middle market credit and special situations. The MCA will also have the flexibility to pursue new strategies developed by Tennenbaum as well as co-investment and direct investment opportunities. The MCA commitment may grow to $150 million over five years, bringing the total commitments with Tennenbaum Capital Partners to approximately $250 million. This investment will reside in the Private Debt allocation. Firm Tennenbaum Capital Partners (the Firm or Manager or TCP ) was founded in 1999 by Michael Tennenbaum, Mark Holdsworth, and Howard Levkowitz. The Firm is employee owned and operated with 27 investment professionals supported by approximately 43 support staff in administration, finance/accounting, marketing and operations. Tennenbaum is built around alternative credit investments and manages $4.6 billion of committed capital. Since inception, it has invested over $11 billion in 260 companies across 12 funds. The Firm also manages the Tennenbaum DIP Opportunity Fund ( DIP Fund ). The DIP Fund was initiated in 2009 to take advantage of the dislocation that occurred in the debtor-in-possession market during the global financial crisis. In 2012, the Firm launched a publicly traded business development company ( BDC ) by converting the assets of legacy fund Special Value Continuation Fund, LLC. The BDC is listed on NASDAQ under ticker TCPC and the moniker TCP Capital Corp. TCP has retired the Tennenbaum Multi-Strategy Fund, a hedge fund that focuses on convertible arbitrage, risk arbitrage, credit strategies, and deep value opportunities. 900 Veterans Blvd. Ste. 340 Redwood City, CA TEL: CAMBRIDGE ATLANTA CHARLOTTE CHICAGO DETROIT LAS VEGAS SAN FRANCISCO 1

8 Tennenbaum is currently in the process of raising separate accounts/fund of ones from large institutional investors to take advantage of the senior lending opportunity. The investment team has an attractive pipeline of deal flow in senior loans that has warranted additional institutional capital. Across the multiple vehicles TCP has invested, the team has developed a track record investing in 1 st lien leveraged loans involving more traditional lending situations as well as special situations. Similar to other Tennenbaum vehicles, the Firm will centrally manage the senior loan strategy. Tennenbaum organizes its investment strategy by industry and will allocate deals by appropriateness of vehicle mandates. Investment Thesis Tennenbaum s active strategies are opportunistic in nature and currently emphasize the dislocation in middle market lending. Companies in situations that are difficult to understand or do not fit an ordinary lender s traditional credit box still have difficulty obtaining financing. In some cases companies have lost historical banking relationships due to bank failures and consolidation. The middle market performing credit strategy has the ability to provide capital in these situations. It may also purchase debt in the secondary market if the pricing is at an attractive level. The special situations strategy focuses on companies in stressed or distressed situations Positives Organization: The investment professionals at TCP are highly experienced credit investors with a strong background in financial analysis, credit analysis, restructuring and U.S. bankruptcy and securities law. The Firm was founded in 1999 and has operated through multiple market cycles. Deal Sourcing: TCP s flexibility combined with its industry focused research teams allows the Firm to source and pursue opportunities that competitors may overlook or underappreciate. Direct Lending Performance: Tennenbaum s historical track record for direct loans is consistent with no permanent impairments of capital. Middle-Market Focus: Middle-market companies have less ability to access the capital markets, providing continued opportunities for lenders to charge premium pricing. Non-bank lenders have benefited from the strain on banks and other sources of capital fueled by the credit crisis. Fee Structure: The MCA uses a hard hurdle in the distribution waterfall. 2

9 Issues Allocation Risks: Given the open structure of the MCA, Tennenbaum would have the ability to seed new strategies with capital from SBCERA. The MCA also allocates capital alongside existing Tennenbaum vehicles for the same investments, potentially retaining a smaller portion than optimal. Opportunity Fund Performance: The prior two opportunities funds (special situations) have delivered net returns below expectations. As of September 30, 2013, Tennenbaum Opportunities Fund VI (2011) has a TVPI of 1.14x and an IRR of 10.7%. Tennenbaum Opportunities Fund V (2007) has a TVPI of 1.25x and an IRR of 4.8%. Fee Structure: The proposed fee structure is high relative to some of the underlying strategies that may be placed in the MCA such as direct lending. Investment Strategy Summary The Master Custody Agreement ( MCA ) allows investment flexibility across the Tennenbaum Capital Partners platform. This may include future commitments to funds or separate accounts within existing Tennenbaum strategies (middle market performing credit and special situations). The middle market strategy focuses on providing financing solutions to underserved companies and acquiring credits in the secondary market. The special situations group focuses on companies undergoing operational, financial or industry change that may require rescue financing. Special situations also include deep value opportunities where debt purchased on the secondary market is believed to be trading below its intrinsic value. Existing strategies will typically be limited to no more than 20% of the target Total Commitment Relationship between SBCERA and TCP of $250 million with allowance for no more than two funds or separate account investments up to 25% subject to the discretion of the SBCERA investment staff. The MCA will provide the flexibility to invest in new strategies that Tennenbaum develops to capitalize on market opportunities. Tennenbaum has historically focused on alternative credit strategies and it is expected that this emphasis will continue over the life of the portfolio. New strategies will typically be limited to no more than 20% of the target Total Commitment Relationship between SBCERA and TCP of $250 million with allowance for no more than two funds or separate account investments up to 25% subject to the discretion of the SBCERA investment staff. Finally, the MCA will allow co-investments or direct investment opportunities to be placed in the portfolio. Typically, these will be limited to no more than 5% of the target Total Commitment Relationship between SBCERA and TCP of $250 million with allowance for no more than two co-investments or direct investments up to 10% subject to the discretion of the SBCERA investment staff. 3

10 Team Mark Holdsworth Mr. Holdsworth is a co-founder and Managing Partner of Tennenbaum Capital Partners, LLC and a member of its Management Committee. Prior to founding TCP, Mr. Holdsworth was a Vice President with the Corporate Finance unit of US Bancorp Libra, a high-yield debt securities investment banking firm. Mr. Holdsworth formerly served as Chairman of RM Holdco, LLC, and currently serves as Chairman of WinCup, Inc., Vice Chairman of EP Management Corporation and as a Director of the Parsons Corporation, one of the largest engineering, design and construction companies in the world. He is a National Trustee of the Boys and Girls Club of America. He received his M.B.A. from the Harvard Business School and his B.S. (cum laude) in Engineering and Applied Science from the California Institute of Technology as well as his B.A. in Physics from Pomona College. David Hollander Mr. Hollander is a Managing Partner of Tennenbaum Capital Partners, LLC. Prior to joining TCP in 2002, Mr. Hollander was a Partner with O'Melveny & Myers where he specialized in leveraged finance, insolvency, and mergers and acquisitions, and represented debtors and creditors. Mr. Hollander has also represented boards of directors as Counsel and has served on numerous formal and informal creditor committees. He received his J.D. from Stanford Law School and his B.S. (summa cum laude) in Economics from The Wharton School of the University of Pennsylvania. Michael Leitner Mr. Leitner is a Managing Partner of Tennenbaum Capital Partners, LLC. Prior to joining TCP in 2005, Mr. Leitner served as Senior Vice President of Corporate Development for WilTel Communications and before that as President and Chief Executive Officer of GlobeNet Communications. Previously, he served as Vice President of Corporate Development at 360networks and Senior Director of Corporate Development with Microsoft Corporation. Earlier in his career, he served as a Vice President with the M&A group at Merrill Lynch. He currently serves on the Board of Integra Telecom and is a Board Observer to Primacom GmbH. Mr. Leitner is active in community events, serving on several non-profit boards and committees. He received his M.B.A. from the University of Michigan and his B.A. in Economics from the University of California at Los Angeles. Howard Levkowitz Mr. Levkowitz is a co-founder and Managing Partner of Tennenbaum Capital Partners, LLC and Chairman of its Management Committee. He is also Chairman and Chief Executive Officer of TCP Capital Corp. Prior to founding TCP, Mr. Levkowitz was an attorney with Dewey Ballantine LLP specializing in real estate and insolvencies. He is currently President of TCP s Opportunity Funds. He has served as 4

11 a Director of both public and private companies, including Justice Technology Corp., Party City Corp., and Doral Financial Corp., and also served on a number of formal and informal creditor committees. Mr. Levkowitz is also involved in a number of philanthropic activities, particularly in education, and serves as an executive board member for two private schools and an advisory board member of Israel Knowledge at Wharton. He received his J.D. from the University of Southern California and his B.S. in Economics (magna cum laude, concentration in Finance) from The Wharton School of the University of Pennsylvania as well as his B.A. in History (magna cum laude) from the University of Pennsylvania. Philip Tseng Mr. Tseng is a Managing Partner of Tennenbaum Capital Partners, LLC. Prior to joining TCP in 2004, Mr. Tseng was an Equity Research Analyst with Credit Suisse First Boston covering public technology and business services companies. Prior to that, he was a Senior Associate in Credit Suisse First Boston s Technology Investment Banking group. Mr. Tseng began his career as an Analyst with the Investment Banking group at Deutsche Banc Alex Brown. Mr. Tseng currently serves as a Director on the Board of First Advantage, Shopzilla Inc., and Anacomp, Inc., and also as a Director of the United States Tennis Association (USTA) Southern California section. He received his M.B.A. from the Harvard Business School and his B.A. (cum laude) in Economics from Harvard College. Rajneesh Vig Mr. Vig is a Managing Partner of Tennenbaum Capital Partners, LLC and a member of its Management Committee. He is also President and Chief Operating Officer of TCP Capital Corp. Prior to joining TCP in 2006, Mr. Vig was a Director with Deutsche Bank in its Principal Finance Group and prior to that, a Principal with Deutsche Bank s Debt Capital Markets group. He began his career with Arthur Andersen's Financial Markets/Capital Markets group. He is currently on the Board of Dialogic Inc. and on the Los Angeles Advisory Board of the Posse Foundation. He received his M.B.A. in Finance from New York University and his B.A. (summa cum laude) in Economics and Political Science from Connecticut College Lee Landrum Mr. Landrum is a Partner of Tennenbaum Capital Partners, LLC. Prior to joining TCP in 2010, Mr. Landrum was a Principal with The Carlyle Group and a member of their Global Market Strategies team. Before Carlyle, he served as a Managing Director with Babson Capital Management LLC where he focused on buyout and special situation fund investments as well as direct junior capital investments in middlemarket buyout transactions. Mr. Landrum was previously a Director with Wachovia Securities, Inc. He received his M.B.A. from Vanderbilt University and his B.A. from The University of Georgia. Lee Landrum will serve as the key contact for the MCA. 5

12 Investment Process Investment opportunities sourced through TCP s network are screened using quantitative and qualitative analysis of the securities in question and the underlying companies. The approach tends to place more emphasis on bottom-up research; however, macroeconomic factors are also taken into account. The investment team works with CEO/CFO-level executives to supplement knowledge on particular industries and places less reliance on third-party consultants. The analysis process includes a review of an issuer s business as well as an analysis of management, business strategy, industry trends, capital structure, financial results, and projections. The diligence process includes: An assessment of industry and macroeconomic trends Meetings with management and other industry executives Discovery of fundamental asset and enterprise value Review of: o Key assets o Core competencies o Competitive advantages o Historical and projected financial statements o Capitalization o Financial flexibility o Debt amortization requirements o Tax, environmental, legal, and regulatory issues o Credit documents The investment decision process is organized around an Investment Committee that meets on a weekly basis. Approval requires a majority vote, and no voting member has veto power. Following approval and investment, each position is monitored for financial performance and market developments. TCP holds meetings to focus on investment developments as needed. The team also reviews existing investments on a weekly basis. As part of the monitoring process, investment professionals review progress on portfolio company objectives, attend industry conferences and seminars, and meet with management teams. 6

13 Terms Management Fee: SBCERA will pay 1.5% per annum of the net asset value of the account Incentive Fee: 20% incentive fee to GP after hurdle Hurdle: 7.5% Clawback: Yes Expenses: Pro-rata share of usual & customary expenses 7

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15 REPORT/RECOMMENDATION TO THE INVESTMENT COMMITTEE OF SAN BERNARDINO COUNTY EMPLOYEES RETIREMENT ASSOCIATION March 11, 2014 FROM: SUBJECT: Eydie Cox Senior Investment Analyst 2014 Investment Manager Due Diligence Schedule Change RECOMMENDATION: Approve the proposed changes to the 2014 On-site Investment Due Diligence Schedule. BACKGROUND: SBCERA s Due Diligence Policy that was approved by the Board on March 4, 2010, requires onsite investment due diligence for all managers at least once every three years. These visits will typically occur every other year. On January 9, 2014, the Board approved the 2014 Investment Manager Due Diligence Schedule. At that time, staff provided approximate timeframes and locations for the upcoming due diligence visits. Upon review of the schedule, it is recommended that the dates for the April trip to San Francisco be changed from April 16-18, to April 23-25, 2014 and that an additional trip be added to provide greater coverage to the portfolio. The proposal is to add a fall New York trip to cover a number of managers that have not been reviewed recently and to keep in close touch with newer (and projected new) MCA managers. These on-site and remote due diligence visits have historically provided an excellent opportunity for trustees and staff to meet and dialogue with portfolio managers, analysts and compliance personnel to review operational due diligence, organizational issues, investment strategies and performance as well as market outlook and opportunities. SBCERA investment staff typically provides due diligence books regarding scheduled manager visits to participating trustees prior to trustee travel dates to assist them in preparing for these trips. The Plan s Due Diligence Policy language regarding on-site due diligence: On-site Investment Due Diligence is required for all managers, at least once every three years. Typically, managers will be visited for due diligence every other year. Managers that will not be visited at least once every three years must be approved for exception by the Board. For reasons relating to The Brown Act (Government Code ) governing meeting access for local public bodies, no more than four Board members may attend the same scheduled due diligence trip, regardless of the number of manager on-site reviews. A minimum of one staff member is required at each on-site meeting; consultant support is recommended but not required. 1

16 2014 Trustee Due Diligence Schedule (Updated) Manager Category Name City State Proposed Dates Inv. Officer Private Equity Non-Core Real Estate Domestic Equities Industry Ventures Fund Prudential Real Estate Investors State Street Global Advisors San Francisco CA April 23-25, 2014 James Perry Long/Short Equity Service Provider/Vendor Real Assets Consultant Clough Capital Partners, LP Foley & Lardner Hancock Timber Resource Group NEPC Boston MA June 18-20, 2014 Donald Pierce Global Debt Global Debt Real Assets Global Debt Global Debt Global Debt Gramercy GoldenTree Pinnacle Marathon Birch Grove MD Sass New York NY October 6-10, 2014 Donald Pierce ADMINISTRATIVE BUDGET IMPACT: N/A ATTACHMENTS: PRESENTERS: No Eydie Cox, Senior Investment Analyst 2