The European arm of Harbert Management, a US alternative investment manager, is being sued in the UK courts by a joint venture partner for allegedly underpaying on a performance fee.
In court documents seen by pfm, UK-focused logistics firm Canmoor claims that the Alabama-based fund manager owes it roughly £3.95 million (€5.15 million; $5.97 million) for “incentive compensation”, significantly more than the £641,000 it said that Harbert paid.
The disagreement stemmed from when the two teamed-up on Harbert Europe’s £31.3 million acquisition of the London commercial property known as the BSI Property from The Carlyle Group back in 2010.
Canmoor claims that under the specific terms of its contractual agreement with Harbert the calculation for its performance fee is based on “cash flow including ultimate sale and calculated by reference to the amount of equity invested and internal rates of return (IRR)”. And so when Harbert divested the BSI Property for £56.5 million in March 2013 Canmoor expected to receive a performance fee of around £3 million.
Canmoor expected to receive this amount because the acquisition of the BSI Property saw Harbert write only a £12.9 million equity check, but also provide £23.8 million as interim short-term funding before finding third-party debt from Deutsche Postbank. Since debt has a lower cost of capital than the equity, the returns on the equity increase as the amount of borrowed money does. In essence, the more debt the higher the IRR and thus a better payout for Canmoor.
But, Harbert contests that under its Canmoor contract the performance fee is only £641,000 as the definition of “equity” should be construed as including interim finance “and should therefore take no account of the replacement loan funding”. Meaning that the interim funding, and subsequent Deutsche Postbank loan, counts as equity in the IRR calculation, lowering the return figure and accordingly Canmoor’s pay.
The case is with the UK’s High Court although no trial date has been set so far.
Harbert was unavailable for comment. Canmoor declined to comment.