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— Private Equity —
Both TPG Capital of Fort Worth and Permira Advisers LLP of the U.K. recently tried to make nice with cash-strapped limited partners by making concessions on capital commitments. This prompted speculation that other large buyout funds might be prevailed upon to make similar accommodations. Going by historical precedent, however, chances are buyout folks will see no great reward for them by forgiving commitments already promised by LPs. Everyone pretty much understands that, historically, the bottom of a recession has been the best time to make investments. Absent leveraged financing, cash is king, they argue, so therefore the quality of mercy will be strained. If an LP is unable to make a capital call, a GP may seek a third-party buyer, or force a secondary market sale, or allow the LP to default with penalties. Depending on partnership agreements, the defaulting LP may be subject to as much as a 50% devaluation of the equity interest and banned from participating in any future earnings or future capital contributions.
TPG's giveback comes not so much as a blessing as a Band-Aid to investor anguish over the sorry state of investment portfolios decimated by plunging markets and asset write-downs. Many LPs are loath to sell secondaries at steep discounts to raise cash. In late December, TPG cut stressed-out LPs some slack by allowing them to reduce capital commitments to its latest fund -- which raised just under $20 billion earlier this year -- by as much as 10%, a source says. The firm also is cutting management fees, ranging from 1% to 1.5% of assets, by about a tenth and promised not to call for more than 30% of an LP's total pledge in 2009 without the advisory committee's approval. How LPs might react to the news could be gleaned from one LP's casual retort. To wit: No big deal. There was a time, in another downturn not long ago, when venture capitalists forgave as much as 40% of capital commitments to new funds. Like many successful buyout firms, TPG's storied track record derives from opportunistic plays in down markets, though its reputation was undeniably sullied by its ill-timed bet on distressed thrift Washington Mutual Inc. As a public relations gesture, it was no doubt welcomed by LPs, but the measly offer may be signaling TPG's expectations that investment opportunities will be plentiful in the near future. Indeed, more cynical observers suspect that TPG could well deploy its new fund faster than expected and would prefer to build a goodwill cushion so it can "reset its option" when it comes time to raise the next fund sooner rather than later. Permira, on the other hand, was hardly genteel in its benevolence. Last month, the firm offered LPs in its fourth fund the option of reducing its commitment at 60% of its original pledge or carry on paying until the fund is fully drawn down. The fund, an €11.1 billion ($14.06 billion) megafund raised in 2006, was approximately 52% called, as of early December. Permira's offer, most observers believed, was meant to help ease anchor investor SVG Capital plc's cash crunch. SVG, which has 80% of its investments in Permira funds, recently disclosed that it was short of cash to meet future capital calls. If noblesse oblige was the intent, the consequence was anything but. "It is almost as if SVG had defaulted on a capital call," one lawyer says. Under the terms, publicly traded SVG still needs to pay management fees on the original sum committed. As if that were not enough, the firm also faces a dilution of 25% on all distributions from its share of the fund's profits, and will obviously receive nothing from the remaining part of the fund even though it still pays the management fee. "Think of it this way: The deal world is dead and may be so for some time," one seasoned PE executive says ruefully. It's entirely possible, given the paucity of deal activity and lack of financing, that Permira will never even get to call the remaining commitments. If that's the case, he says, Permira, while letting LPs off the hook for money they're not likely to ever put up, effectively nets a gain from any additional management fees on money already invested and from the 25% dilution of SVG's share of profits. Beware of Greeks bearing gifts, indeed. Jonathan Braude contributed to this article. |
'Tis the season of private equity givebacks. Or is it? 
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