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20-35_Roundup.qxd 4/6/09 5:39 PM Page 28LBO Watch“You can betwe will seemore of this,but it will beinteresting tosee who playsand whodoesn’t.”Buyout Bits fromConsidering the UnthinkableIn the spirit of compromise, a few GPs have madearrangements with their investors that could either signala new era of conciliation or, alternatively, may open thedoor for bitter disputesBy Ken MacFadyenPNC’s Makes Energy Add-OnPNC Mezzanine Capital has acquired heattreating services company Mannings USA.Terms of the transaction were not disclosed.Mannings, based in Dover, N.J., was foundedin 1989 by Peter Smith. The purchase is anadd-on to Bolttech, Inc., an industrial toolsand services provider that PNC acquired a$20 million stake in from the company’sfounder, Harry Knopp Sr. Bolttech is run byKnopp’s sons, Brian and Harry Jr., and chiefexecutive officer Anthony Santilli. Based inWest Newton, Pa., Bolttech focuses on the oilrefinery and power generation industries.It likely happened sooner than some might have expected,but London private equity firm Permirawent ahead and did the unthinkable. The firm, inearly December, gave its limited partners the option ofcutting back on their commitments to its latest vehicle,a concession that could see Permira’s fourth fundtrimmed from ¤11 billion to ¤9.5 billion. Only a fewweeks later, TPG Capital followed suit with a similar gesturethat could trim its fund by as much as $2 billion.The moves highlight the pressures facing both limitedpartners (liquidity) and general partners (strugglingto deploy outsized funds). While Permira’s LPslikely cheered the move, whether or not they were lookingto cut back on their stakes, the firm’s peers couldbe expected to bristle at the very idea of returning capital.And given that Permira and TPG let the cat outof the bag, limited partners everywhere could be emboldenedto seek similar concessions from their GPs.“They were smart to do it early,” John Sinnenberg,a managing partner and chairman at fund of fundsand mezzanine investor Key Principal Partners, says.“You can bet we will see more of this, but it will be interestingto see who plays and who doesn’t.”Audax Recapitalizes United RecoveryAudax Group has recapitalized United RecoverySystems, a debt collection agencyspecializing in bank card and credit cardcontingency collections. Terms of the transactionwere not disclosed. Kaulkin Ginsbergadvised URS on the transaction.Metalmark Acquires Schafer Corp.Metalmark Capital has made a majorityinvestment in Schafer Corp., a provider ofscientific, engineering, systems integration,programmatic support, and technical solutionsto government clientele. Financial termsSinnenberg adds that a lot will depend on howmuch leverage PE firms have over their LPs, whichcould reflect a fund’s particular terms, the remaininglength of the commitment period or, predictably, afund’s performance.Of course, a growing concern on both sides of thedebate is the prospect of investor defaults. VC firm FinancialTechnology Ventures, for instance, started litigationrecently after a bankrupt Washington Mutualfailed to come up with a $700,000 capital call. Thiskind of dilemma has yet to turn into a full-blown trend,but the prospect of such an impasse may keep both GPsand LPs up at night.In fact, Permira’s concession reflects this dynamic,as its largest investor, the publicly held SVG Capital,has seen its share price plummet in recent months,putting into question its ability to meet draw downrequests from the fund.Permira’s solution was to reach out to all 180 investorsin Fund IV, which is roughly 50% invested,giving its limiteds the opportunity to reduce their originalcommitments by as much as 40 percent. The firmcapped the total reduction at ¤1.5 billion in an effortwere not disclosed. Houlihan Lokey Howard& Zukin and Posternak Blankstein & Lundserved as financial and legal adviser toSchafer Corporation. Kirkland & Ellis servedas legal adviser to Metalmark Capital.Sorenson Partners With JetSet SportsSorenson Capital has acquired a minorityinterest in Jet Set Sports, a provider of corporatehospitality services and packages forthe summer and winter Olympic Games.Terms of Sorenson Capital’s investment inJet Set Sports were not disclosed.28 MERGERS & ACQUISITIONS February 2009
20-35_Roundup.qxd 4/6/09 5:39 PM Page 29LBO Watchto avoid penalizing those who remain fully committed.The offer, to be expected, did arrive with somecaveats, as limited partners seeking to scale back wouldbe accountable for management fees on the full ¤11billion that was originally committed. Moreover, theirfuture distributions from the fund would be cut by 25percent. One component to Permira’s offer that didn’tget much attention incentivizes its existing LPs to fill inany holes by suspending the management fee on any newcommitments that replace withdrawn obligations.No consensus yet exists that would suggest Permira’sarrangement will be duplicated by other funds lookingto reach out to a distressed investor base. One limitedpartner, an investor in Permira’s fund, calls the firm’sefforts a “unique” situation that arose solely because itslargest shareholder faced a liquidity crunch. “Absentthat, nothing happens here,” he speculates, adding thatPermira’s pact with its LPs isn’t something that he seesbeing replicated.“This isn’t like the hedge fund world, where everyonehas the ability to decide that they don’t want tobe in this,” the source adds. “They’re bound by contracts,so I don’t see GPs being put in a position wherethey have to beg for their investors to stick around.”The fact that TPG quickly followed suit, however,would seem to underscore that while Permira’s situationwas unique, most PE firms are dealing with theirown set of distinct circumstances. The Wall Street Journal,which first reported on TPG’s concessions to itslimited partners, quoted a letter to investors in whichthe firm cited the “significant stress” facing the limiteds.The motives were similar, although TPG’s compromisediffered slightly. The firm trimmed its managementfee by 10% and promised it would not calldown any more than 30% of an LP’s total commitmentin 2009 without clearance first from the advisorycommittee. TPG is currently investing out of itssixth fund, which closed last year with $19.8 billion ofcapital under management.To date, it has only been the larger funds that havemade these kinds of concessions, although the pressuresfacing limiteds could force both LPs and GPsback to the negotiating table regardless of fund size.And even when an investor default is not a distinctpossibility, Ropes & Gray partner Larry Jordon Rowesays that nearly all PE funds contain investors “who’llstruggle to come up with the money.”Partners?It’s not rare to hear dissension between PE fundsand their limited partners. These disputes typically takethe form of grumblings that might find their way into panelistcomments at an industry event or in print via anonymousstatements made to reporters. During slow periods,limiteds will argue that GPs are merely sitting on capitalcollecting fat management fees, and during boomtimes, the arguments tend to materialize as reservationsabout rising management fees, strategy drift or outsizedfunds. The nature of these gripes shadows the pendulumthat sways back and forth with the general marketconditions. What’s different this time around, however,is that both GPs and LPs are in a position of need.“It’s become all the more apparent that the fortunesof general partners and limited partners are intertwinedmore closely than ever before,” says JonathanGutstein, a partner at secondaries firm Coller Capital.Of course, secondary sales represent one avenueilliquid limiteds might pursue. Absent that option,which might fetch 40 or 50 cents on the dollar, bothGPs and their limiteds will want to keep the lines ofcommunication open.To industry pros, that means that neither side canafford to push for the upper hand. While LPs are beholdento the terms they agreed to in the fund contract,Rowe notes that if the GP/LP partnerships deterioratebeyond repair, there is a “nuclear option” thatoften exists. “A number of funds have no-fault divorceclauses,” Rowe describes, noting that he has yet to eversee such a clause triggered or even attempted on behalfof disgruntled LPs.Generally, a no-fault divorce clause requires at least80% of a fund’s investors to reach an agreement, electingto terminate the fund, at which point the vehiclewould be dissolved and the existing investments placedin a liquidating trust. Rowe says that the standard for limitedsto execute an annulment is “very difficult to meet,”but he speculates that the possibility for such a revoltshould coax GPs to “live up to the label [of partner].”For general partners and their investors, compromiseswon’t necessarily have to take the form of commitmentrollbacks. In some cases, PE funds may forge anagreement that eliminates management fees if GPs areexempted from having to make clawback distributions.Rowe cites another possibility involving the exemptionof clawbacks, in which PE funds step up efforts to producedistributions, even if it means an exit comes at a loss.As part of the ongoing dialogue, LPs and GPs canexpect recalcitrance from the other side. The limitedsmay feel as if they were taken for a ride, whereas thepride of general partners will compel them to refer tosigned documents. Both sides, however, are takingnotes. And if GP/LP relationships are going to live beyondpresent funds, neither the sponsors nor their investorswill look to alienate the other side.“ A numberof funds haveno-faultdivorceclauses”February 2009 MERGERS & ACQUISITIONS 29
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