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Litigation now ‘part of the PE business’

Lawsuits were rare a decade ago, but an expanding and pressurized market is making disputes more common, claims lawyer.

Increased competition and a reduction in relationship-based dealmaking has increased litigation in the private funds sector, according to one lawyer.

“There has been a continued increase in litigation involving portfolio companies. The single biggest driver is simple demographics: disputes follow capital,” said Timothy Mungovan, a partner at Proskauer, a global law firm.

He added that resources and investment opportunities are under pressure in the market.

“The growth of private equity has resulted in increased competition for investors, deals, returns and talent. The increased competition can drive down margins, which puts pressure on all aspects of the business, and the industry at large. This growth, and competition, also makes the business more institutional and less ‘clubby’ or relationship-driven,” he said.

This has resulted in private equity firms being involved in more disputes. Ten years ago, they were rarely involved in litigation. Today, litigation risk is part of the business, he added.

There are numerous recent examples of cases involving disputes with portfolio companies, the most recent of which was brought in July by Great Hill Equity Partners. The Boston-based private equity firm sued its portfolio company, Plimus, an e-commerce payments firm, alleging fraud and false enrichment against the company. It was triggered after two Plimus contracts ended following the acquisition, reducing the value of the company. Great Hill sued, arguing that the information was deliberately withheld.

There has also been a number of “unusual” cases brought by firms or associated entities. Benchmark Capital’s lawsuit against Travis Kalanick, the co-founder of portfolio company Uber, was described as “unprecedented” by one corporate lawyer, as the action jeopardizes the value of the investment.

The case of real estate investment manager USAA Real Estate Company being sued by an advisor for payment for services was described as a rarity, considering the potential reputational risk to both parties, as reported by pfm.