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Kentucky Retirement Systems sued by fund-of-funds manager

Private equity firm Bay Hills Capital is suing Kentucky Retirement Systems, Frankfort, for allegedly attempting to replace the general partners of four funds of funds in which the pension fund is a limited partner with in-house staff, according to the complaint filed Monday in the Chancery Court of Delaware.

The funds of funds are Bay Hills Emerging Partners I, Bay Hills Emerging Partners II, Bay Hills Emerging Partners II-B and Bay Hills Emerging Partners III.

Bay Hills contends the retirement system is attempting “to wrest control of four highly profitable investment funds from a boutique investment firm, and to seize more than $20 million in value to which KRS is not entitled,” the complaint states.

Kentucky Retirement Systems administered about $12.3 billion in pension assets and $5.1 billion in health insurance assets as of Dec. 31. The systems have invested a total of $139.7 million in the four funds of funds and received $103 million in distributions from three of the funds. According to the complaint, the pension systems have invested $57 million in Emerging Partners III but have not yet received distributions.

The complaint alleges Kentucky has claimed a number of reasons for replacing San Francisco-based Bay Hills Capital, including a key person event when an important employee departed Bay Hills, giving Kentucky Retirement Systems the right to dissolve the partnership. However, the complaint contends Kentucky executives should have worked out the situation with Bay Hills.

Indeed, the complaint alleges that despite Bay Hills' “extensive and good-faith efforts to resolve the parties' disputes, KRS seems bent on seizing control of the funds.” Bay Hills alleges it was forced to sue because retirement system officials refused to withdraw its second removal notice, which is to become effective on April 9. (Kentucky Retirement Systems withdrew a previous removal notice – seeking to replace Bay Hills as general partner – in July 2017, according to the complaint.)

According to the complaint, Kentucky pension plans earned a net internal rate of return of 13.3% from Fund I, a net IRR of 28.5% from Fund II, a net IRR of 13.9% from Fund II-B and a net IRR of 12% from Fund III as of Sept. 30.

“The complaint speaks for itself,” said plaintiff lawyer James C. Rutten, a litigation partner in the Los Angeles office of law firm Munger, Tolles & Olson. “We look forward to our day in court.”

Lance Mansbridge, Bay Hills' founder and managing partner could not be reached for comment by deadline. David Eager, interim executive director of Kentucky Retirement Systems, had no comment.

Reporter Meaghan Kilroy contributed to this article.