PAI may cut Fund V by up to €2.7bn

European buyout firm PAI Partners has offered investors the chance to halve their commitments to its €5.4 billion fifth fund, which has currently suspended investment due to key personnel changes.

In a letter to limited partners sent yesterday, Lionel Zinsou, the newly appointed chief executive officer, said the Paris-based firm was considering offering all investors the chance to reduce their undrawn commitments by up to 50 percent.

“The market perception, throughout the private equity industry, is that funds committed in 2007 have to be sensibly reduced in 2009,” he wrote.

The fund’s size and other terms are currently up for review following the surprise departure of Dominique Mégret, a 35-year veteran of the firm and chief executive since 2006. Mégret had been at the helm for the fundraising of Fund V, which was closed in May 2008.

Lionel Zinsou

He was replaced late last month by Zinsou, a former banker and adviser to PAI at investment bank Rothschild & Cie, in what sources close to the situation describe as an “acrimonious internal coup”.

The change triggered a key man clause in the limited partner agreement, which allows investors to review their commitments to the fund. Initially the PAI management team had tabled a reduction of around 20 percent of uncalled commitments, said one source close to the situation, but investors demanded more. PAI declined to comment on the process.

Zinsou’s letter to investors said that summarising the interests of various different parties, a reduction of between 20 percent and 40 percent was mooted as an “agreeable” range, but a larger reduction was being considered because “building a consensus requires to go beyond the majority needs and wishes”.

Should such a reduction of uncalled commitments go ahead, it would mean PAI joins the ranks of other large buyout firms, such as Permira, Candover and TPG, which have all granted LPs the opportunity to cut their unfunded commitments in the last 12 months.

A reduction of 50 percent, which will be offered to all of PAI Europe V’s 130 LPs, would lead to a dramatic reduction in PAI’s fee income and therefore raises the question of job cuts at the firm.

PAI will spend next month meeting with its LPs before invesotrs vote on the proposed changes.