Fair value fracas

A dispute involving TH Lee Putnam further highlights the risks of using at-cost valuations for private equity portfolios.

The Florida-based Festus and Helen Stacy Foundation recently expressed its displeasure with New York-based TH Lee Putnam Ventures, accusing THLPV of overstating the value of the $1.1 billion fund's portfolio holdings.

According to a Dow Jones report, the Christian charity had committed $1 million to the Merrill Lynch-Lee Internet Trust, which then in turn invested in the THLPV fund that was launched in 2000. The private family foundation has accused THLPV of pumping up the value of the fund's portfolio to its investors and is going after Merrill Lynch for not passing along key information about the fund's performance.

THLPV's fund, originally named TH Lee Putnam Internet Partners, met a fate similar to many other venture funds established in 2000 to focus on Internet start-ups. According to the foundation's claim, of the 37 companies backed by the fund, 11 had been either shut down or written off. Meanwhile, performance reports from Merrill Lynch showed the remainder of the portfolio companies were represented as having kept most – nearly 92 percent – of their value.

After raising its concerns with Merrill Lynch in 2003, the foundation was told it would have to forfeit previously invested capital if it refused to honor its ongoing commitment to the THLPV fund. The Festus and Helen Stacy Foundation filed a claim with the National Association of Securities Dealers against Merrill Lynchin 2004, and an arbitration hearing is expected to be held this month.

The issue at the heart of the dispute over THLPV's portfolio valuations circles back to the private equity industry's ongoing discussion regarding valuations in the context of private equity and whether it is more appropriate to apply at-cost or fair value methods of valuing portfolio companies. While adopting an at-cost approach might seem reasonable and conservative when times are good and companies are growing, the same approach could present what seems like inflated valuations when companies have not done well.

Despite the administrative encumbrances associated with regularly reassessing portfolio company valuations, the use of fair value seems to be gaining momentum among GPs. The possibility of avoiding entanglements like the case of THLPV's portfolio could provide other GPs with greater incentives to take another look at fair value.

Germany ratchets up merger controls
German regulators have lately increased their focus on rules surrounding minority investments in companies with an eye to prevent anti-competitive practices, according to a recent client memo from law firm Debevoise & Plimpton. Germany's Federal Cartel Office has ?taken an increasingly expansive approach to counter circumvention strategies? related even to non-controlling minority investments. German merger controls apply to any acquisition of 25 percent or more of a company's shares or voting rights, and also to smaller minority positions where there is deemed to be ?competitively significant influence,? according to the memo. In particular, the energy and media industries have been singled out as warranting increased scrutiny from regulators. Factors considered by German regulators include the economic relationship between the company and the acquirer's strategic business interest in the participation. The memo advises clients to carefully consider any factors that may give an investment strategic characteristics, which would draw merger controls.

TDR Capital nabs COO from SJ Berwin
European corporate law firm SJ Berwin has lost private equity fund formation partner Blair Thompson, who is to join UK midmarket firm TDR Capital as chief operating officer. The move, said Thompson, was no reflection on SJ Berwin or its practice. ?It's simply a case of moving, it certainly wasn't an issue with SJ Berwin,? he said. ?It's more a case of seeing private equity clients for the past ten years and seeing if I can do what they've always done. It's a new challenge and one I'm looking forward to.? At TDR Capital, established in 2002 by founding partners Manjit Dale and Stephen Robertson, Thompson said he will be responsible for the firm's legal and compliance activities, as well as the overall operation of its back office. Thompson joined the corporate finance department of SJ Berwin in 1997, having previously worked at New Zealand law firm Buddle Findlay. He was made partner at SJ Berwin in 2002. While at the firm, Thompson specialized in structuring and raising pan-European private equity, venture capital and mezzanine funds.

EVCA reporting guidelines updated
The European Private Equity and Venture Capital Association is currently accepting comments on its EVCA Reporting Guidelines and will use the comments to update the guidelines, a draft of which was released in March 2005. The new version of the reporting guidelines will be released at the EVCASymposium in Monte-Carlo in June. The EVCA has already released the International Private Equity and Venture Capital Valuation Guidelines, which have been endorsed by more than 30 private equity associations around the world, including the Institutional Limited Partners Association, a trade group for large LPs. The EVCA's comment period for the reporting guidelines ends April 30. The guidelines suggest what types of information should be provided to investors in private equity reports, as well as set goals for transparency and consistency. A major impediment to investing in private equity funds among institutions has been the wide variety of reporting formats across funds, which creates a huge administrative burden.

Trelys names CFO
The Trelys Funds, a venture capital firm based in Columbia, South Carolina, has named Steve Hall as chief financial officer. Hall was formerly the chief executive officer of Colonial Companies, a subsidiary of Colonial Life and Accident Insurance Company, which was recently acquired by UNUM. He was formerly a captain in the US Air Force. Trelys was founded by Adrian Wilson and G Larry Wilson. The firm is one of the largest early stage venture capital investors in the South Carolina region.