WHAT FINK MIGHT DO WITH BGI - FTSE

PRIVATE EQUITY: IMPROVING OUTLOOK
18
In the Markets
Christian Oberbeck, a founding partner of Saratoga Partners, a New York-based private equity
firm that manages $250m. Oberbeck says: “All of a sudden you stop getting liquidity flows
from prior investments …You have to tap into other investments in the rest of the portfolio to
fund the call.” Photograph kindly supplied by Saratoga Partners, August 2009.
Serial investors in private equity
have undrawn commitments to newer
funds while older ones throw off cash
as the sponsor liquidates successful
investments; in effect, returns from
older funds provide a significant
portion of the cash needed to finance
future commitments. The amount
invested at any one time may be no
more than 50%-60% of the nominal
exposure, so investors often sign up
for higher commitments to keep the
average amount invested close to their
goal. The market crash eliminated the
customary exit strategies for fund
sponsors. However, it decimated
merger activity, undermined the
economics of recapitalisations and
shut down initial public offerings
altogether. Investors who have no
cash coming in but still have to fund
capital calls are now struggling to
meet their obligations. “All of a
sudden you stop getting liquidity
flows from prior investments,” says
Christian Oberbeck, a founding
partner of Saratoga Partners, a New
York-based private equity firm that
manages $250m.“You have to tap into
other investments in the rest of the
portfolio to fund the call.”
Suppose a $1bn pension fund had
10% committed to private equity
before the crash; if the portfolio also
included $500m in equities whose
value tumbled 50%, it became a $750m
fund—and the $100m in private equity
represents 13.3%, way above target.
For high net worth individuals who
used leverage to fund their private
equity commitments, allocations got
even more out of whack.
Relations between private equity
firms and their investors could turn
ugly if limited partners do start to
default. In early March, CapGen, a
New York-based private equity shop,
filed a complaint in Delaware
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Relations between
private equity firms and
their investors could turn
ugly if limited partners do
start to default. In early
March, CapGen, a New
York-based private equity
shop, filed a complaint in
Delaware Chancery Court
against two of its limited
partners whom it claimed
had defaulted on capital
calls due on 31st
December, 2008.
Chancery Court against two of its
limited partners whom it claimed had
defaulted on capital calls due on 31st
December, 2008. CapGen’s funds had
$500m committed in total but the
alleged defaulters were bit players:
Chalice Fund was on the hook for
$3.5m and WK GG Investment for
$1m—and the missed call was for less
than 25% of those amounts.
Frank Morgan, president of Coller
Capital in the US, points out that
partnership documents typically
permit the general partner to call on
other limited partners to make up any
defaulted amount, but CapGen chose
to take legal action against two high
net worth individuals instead. “It was
a warning to other larger investors not
to try this,” he says, “I do not think a
lot of defaults have occurred.”
In a slow deal market, Morgan says
private equity firms haven’t been
making many capital calls except for
follow-on commitments to existing
investments anyway. At some point
that will change—probably sooner
rather than later. Private equity funds
have “use it or lose it” provisions that
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