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Rebellion and revival at PAI Partners

by David Carey | Published February 17, 2012 at 11:59 AM

The financial crisis gave rise to internecine feuds at firms hammered by it. Of these, few were as melodramatic, or played out as publicly, as the one that threatened to bring down PAI Partners SAS, France's second-largest PE investor after AXA Private Equity, in the second half of 2009.

PAI's CEO, Lionel Zinsou, who banded together with other partners to oust his predecessor, Dominique Mégret, and Mégret's designated successor, Bertrand Meunier, in June that year, has striven ever since to get PAI back on track and cement his investors' loyalty. A recent string of profitable exits has helped the cause.

Zinsou, 52, a lean, tall and bespectacled man with a graying brush cut, doesn't come across as a power-hungry, coup-plotting type. He's urbane and brainy, a product of the elite Ecole Normale Supérieure who joined PAI in May 2008 after working 11 years as a private equity banker at Rothschild.

In January, at PAI's offices down the street from the Louvre, he offered his perspective on the tumult of 2009.

What set it in motion, says Zinsou, was PAI's failing investment in German roof-tile maker Monier Group Services GmbH. A handful of PAI's deals were in bad shape, but Monier's woes provoked a fight between creditors and PAI that Zinsou calls "strange and fantastical": Monier's agent bank was none other than BNP Paribas SA, PAI's former parent and the firm's single largest limited partner. When PAI aggressively pushed for a restructuring that would impair the debt and protect the equity, BNP and other lenders struck back by seizing the business in July 2009. The move wiped out PAI's €256 million ($340 million) investment.

The damage from that incident transcended PAI's relations with its top patron, Zinsou says: "We had a legitimacy issue. We went from being a favorite of the French banking system to being perceived as arrogant and unwilling to compromise. We had to restore our image." Beyond that, Zinsou says, he and his allies in PAI resented Mégret and Meunier's highhanded style of running the place. They wanted more power so as "to renew the firm and make it a true partnership."

A month after the Monier debacle, Zinsou and two other partners marched into Mégret's office and demanded a greater say. Mégret angrily rebuffed them. Ten days after that, the partners voted in Zinsou as CEO, forcing out Mégret and Meunier. Although there were press reports that BNP was behind the move, Zinsou denies this.

Their removal sparked a new firestorm. Mégret told investors he'd been toppled in a "coup d'état." Some LPs took Mégret's side. Because the move triggered a "key man" clause in the LP agreement, PAI eventually agreed to reopen the agreement and allow LPs to renegotiate or yank their commitments to PAI's €5.4 billion fifth fund. Zinsou and PAI offered to downsize the fund by half, but some LPs pushed for a bigger cut.

In a vote on Dec. 3, LPs voted 82.5% in favor of PAI's plan. It had needed a margin of two-thirds to win. A bad loss would have thrown the firm's future into doubt and imperiled Zinsou's leadership. "It seems so far away now," muses Zinsou.

Indeed, a flurry of subsequent moves have put some distance between PAI and that turbulent time. Zinsou voices pride in turning PAI into a "real partnership": "We made everyone an equity partner, and we aligned the partners' carried interest, with no one enjoying more than 5%."

On the deal front, Zinsou says that he and his team "moved fast" to cash in on Europe's capital markets revival in 2010 and 2011. They delivered a more than 10-fold gain on a €75 million, nine-year-old investment in French yogurt maker Yoplait SAS, selling PAI's stake to General Mills Inc. They also registered big profits unloading French engineering group Spie SA for €2.1 billion to Clayton, Dubilier & Rice LLC and AXA Private Equity, and selling down its interest in food-ingredients maker Christian Hansen Holding A/S in the company's initial public offering. Spie and Christian Hansen yielded roughly 300% profits.

Furthermore, Zinsou's crew executed several investments in airport ground-handling firm Swissport International AG, Swiss duty-free firm Nuance Group AG, medical-testing company Cerba European Lab SAS and French equipment rental concern Kiloutou SA.

Says Zinsou: "I would say we made more acquisitions and exits in the 15 months when the market was open than any other continental European fund. In all, we returned €3.5 billion to out investors." Following the divestitures, PAI, as of June 30, 2011, showed a 38% annualized return for its third fund, raised in 2001, and an 11% yearly return on its fourth fund, from 2005, says an investor. The downsized 2007 fund was in positive territory.

How much credit LPs give Zinsou's group for the triumphs won't be fully known until later in 2012 and 2013, when PAI hits the market with a new fund and investors will have a chance to vote with their pocketbooks. The companies PAI sold were acquired before Zinsou's arrival, some in deals Mégret led.

One LP, speaking anonymously, awards Zinsou high grades for his work on "the care and feeding of investors." Zinsou offers his own assessment: "We are back in the financing markets and have strong relations with banks. And I think today we have better relations with our clients and LPs."

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