Private equity fund restructurings in some cases might be a get-out-of-jail-free card for the general partner and a big source of business for alternative investment secondary market players, but for the funds' limited partners, such as pension funds and other institutional investors, it can be a minefield.
As restructurings of older private equity funds are growing so, too, are questions about fairness and potential conflicts of interests. Limited partners are being asked to make quick decisions — often within 45 to 60 days — on deals for which they are receiving little information and have no access to any competing offers the general partner might have received, industry insiders say.
“Some of the deals we are seeing in the energy sector require new money to salvage the portfolio because either the bank loans are being pulled or portfolio companies have run out of money,” said David Fann, New York-based president and CEO of private equity consulting firm TorreyCove Capital Partners LLC.
“Usually the LPs are presented with one deal that the GP has selected. Usually LPs don't have the benefit of seeing multiple offers,” Mr. Fann said. “There are a lot of competent secondary firms out there willing to transact and LPs are presented with one solution without knowing if there could have been a better deal. The GP could have selected the deal that was best for the GP and not the LPs.”
Limited partners are starting to take issue with some of these restructurings.
The $303.3 billion California Public Employees' Retirement Association, Sacramento, in a June letter balked at a proposed restructuring — led by Pantheon Ventures LLP and Intermediate Capital Group PLC — of an underperforming energy fund, the $7.8 billion First Reserve Fund XI.
CalPERS objected to the recapitalization of the 2006 fund because of “inherent conflicts of interest” in selling a select group of the fund's assets — which included publicly traded securities — with reset carried interest terms for a fund in which “the original investors are not expected to receive a return on their investment,” the letter stated.
Real Desrochers, managing investment director, private equity, at CalPERS contended in the letter that investment manager First Reserve Corp. had plenty of money to run the firm and keep firm executives happy. Not only had First Reserve Fund XI already collected $500 million in fees, but also First Reserve was collecting fees on three subsequent funds. As part of the terms of the restructuring, First Reserve executives and the secondary buyers wanted to buy the limited partnership interests at the bottom of the cycle prices, before energy markets had rebounded this year, CalPERS letter stated.