Key concerns

Recent departures by the two most senior figures at French buyout firm PAI Partners may have represented an unprecedented upheaval for such a large firm – as well as triggering a “key-man clause” in its €5.4 billion fifth buyout vehicle – but such moves may become more of a trend in the industry as poor performance roils firm leadership structures.

In a move described by one limited partner as an “internal coup”, Dominique Mégret announced he would step down as chief executive immediately and relinquish his position as chairman in January 2010, while Bertrand Meunier, a member of the firm’s executive committee, will also leave the firm. Mégret said he would be leaving to spend more time with his family, while Meunier said he would be departing to pursue new personal challenges.

Mégret’s replacement joined the firm last year only two months after it closed Fund V, meaning the fund’s approximately 130 LPs will legally have the option of suspending investment from the fund or closing the fund altogether, given key personnel changes at the management company. However, a source close to PAI said it is too early to say whether matters such as fund size or fee arrangements will be renegotiated.

When asked about such potential key-man issues, new PAI CEO Lionel Zinsou told the Financial Times: “I have no doubt that we have a base of investors who are totally committed to PAI and prepared to accept the argument that we are improving management.”

Roger Singer, a partner in the fund formation practice of Clifford Chance, said that whether Mégret’s surprise retirement triggers any remedies, the fund’s investors have more power as a result. “Assuming PAI intends to raise another fund in the future, it will have an interest in maintaining its relationships with its investors and that gives the investors if they act together a decent amount of leverage to make particular demands.”

More importantly, while he says it has been relatively uncommon to have enough key people resign to cause a “key man” event in a larger fund, departures like Mégret’s may become more common in the future.

“I think that there is a significant risk that some number of teams will find lots of their people, key men or otherwise, leaving if the environment doesn’t turn around,” Singer said. “The reason that managers used to stay was because the carry that they had an interest in had a significant value, and the likelihood of raising future funds was high and there was a lot to give up by departing. What we are seeing now is that there are lots of people who are in positions where the financial incentives no longer work to keep them there.”

This could especially be true for less diversified firms if LPs are reluctant to work out deals to increase incentives for their deal teams. “If you are in a less diversified place, even if you are a successful buyout shop, and are basically managing funds two and three and both of them are underwater, then what are you sticking around for?” Singer says. “I think that is the scarier thing for LPs.”