Pension files complaint against Nexos Capital

The City of Pontiac General Employees Retirement System has about $2m of an uncalled commitment remaining with Nexos Capital Partners, which tried to raise $225m for its debut fund but only collected $14m.

A small-sized limited partner got so fed up with getting the run-around from one of its managers that the institution, called the City of Pontiac General Employees Retirement System, filed a complaint with the US Securities and Exchange Commission against the manager, called Nexos Capital Partners.

The situation is an example of the uncertainties that face LPs who commit capital to emerging managers without solid track records.

Information about the situation was gathered from the pension’s meeting minutes dating back to 2007, which provided a rough narrative of the pension’s slowly growing concern that something was not right with the fund manager it had entrusted with its money. The pension, the firm and the SEC did not return calls for comment. The pension’s investment advisor, Gray & Company, which recommended the Nexos commitment, also did not return calls for comment.

Early days

The City of Pontiac GERS committed $5 million to Nexos for its debut fund in 2007 on the recommendation of Laurence Gray, chief executive officer of Gray & Company. The debut fund was targeting $225 million for buyout or growth investments in companies owned or managed by Hispanics, according to minutes from the 21 February, 2007 General Employees Retirement regular meeting. That commitment was eventually reduced to $2.5 million for undisclosed reasons.

Nexos had an “anchor” investment from fund of funds Parish Capital of $10 million, the minutes said. Parish did not return a request for comment. The firm also had a commitment from the Chicago Teachers’ Retirement System, and had potential commitments from the likes of the California Public Employees’ Retirement System, the minutes said.

Ultimately, the firm was only able to raise $14 million, in part because the economy nosedived during the fundraising, Gray told the board at a 27 October, 2010 meeting. As of April, the firm had only one investment in its portfolio in a grocery chain called Super S Foods, the meeting minutes said. That business was acquired by supermarket chain Lowe’s in March for an undisclosed amount. It’s unclear if Nexos made any money on the deal.

Two Nexos founding principals, Eduardo Bohorquez and Joseph Vadapalas, were also named in an SEC filing for a $1.85 million equity fundraising in a company called C-Quest Capital last year. C-Quest Capital did not return a call for comment.

Missed meetings

Gray told the retirement board at several meetings that he tried and failed to have meetings with Nexos, and was even “stood up” by the firm when he was in New York. The pension had asked Nexos for updated financial reports, but only received a scant document that looked like it had been put together by a “high school student”, according to the minutes.

“Regardless of what has occurred, the system should still be able to receive financial documents,” Ellen Zimmerman, an accountant with the pension, said during the 27 April, 2011 meeting, according to minutes. “[The pension] has not even received basic communications.”

Heavy hitters

Gray recommended the commitment to Nexos based partly on the principals “incredible backgrounds”, he said during the 27 April, 2011 meeting. Nexos was founded in 2005 by Bohorquez, who previously worked as chief executive officer of WestSphere Capital, which focused on investments in the US and Latin America. Bohorquez also apparently works full-time as a principal at Inter-Atlantic Group, a private equity firm established in 1992, according to the firm’s web site. Calls to Inter-Atlantic were not returned.

Other principals at Nexos include Justo Frias, who was formerly the president and chief executive officer of Gigante USA, a subsidiary of Mexican retailer Grupo Gigante; John McIntire y Salazar, who retired in 2004 as a partner at Goldman Sachs, where he headed all the Latin American businesses, according to Nexos’ web site; and Joseph Vadapalas, the former chief investment officer of WestSphere Capital.

Nexos also has a board of advisors that includes Rudy Beserra, vice president of Latin affairs with the Coca-Cola Company, and Gil de Cardenas, president of Don Gilberto Foods.

Exploring options

The pension board has been exploring its options, including simply cancelling the remaining commitment, and has refused to pay any more management fees to Nexos. Gray, the investment advisor, told the board during the 27 October 2010 meeting it “can be hard to get money out of a private equity firm”, the minutes said. “Any equity would revert to the limited partners.”