Advantage Capital faces collapse

The FSA is set to bring Advantage Capital’s life to an end for failing to meet minimum capital requirements, according to UK newspaper, the Daily Telegraph.

The firm will reportedly have two months to secure emergency funding, should it fail to do so, it will be one of the first private equity firms to receive an action of this kind, according to a statement from London-based law firm Eversheds.

Advantage is currently in a legal battle with former cornerstone investor Robert Adair, who is chairman of Melrose Resources, an energy exploration and production business, as reported on PEM.

This past summer the UK’s high court ruled Adair was in breach of contract for having refused to oblige a capital call from private equity house Advantage Capital, and will face a later hearing to determine damages.

The firm is seeking compensation for lost fees and expected carried interest, an amount totalling in the “eight figure range”, according to a source familiar with the situation.

The default resulted in the fund becoming suspended, because Adair was responsible for more than 90 percent of the £40 million (€47 million; $62 million) committed to the fund.

Advantage Capital's decision to seek legal action against Adair is the first high profile example of a GP suing an LP, stated Mark Spinner, private equity specialist and partner at Eversheds, who added the firm had little choice considering the magnitude of the default.

“I am also of the view that the FSA will be looking very closely at the capital adequacy position of a number of other European private equity houses although it is unlikely that many will be in such dire straits,” Spinner added.

Advantage Capital is not alone in dealing with potential defaults from LPs, Spinner added, who then cited the recent collapse of Candover as an additional example of a fund which had to deal with a large defaulting investor.

In March 2009, Candover announced that its €1 billion commitment to Candover’s latest fund would have to be withdrawn. This fundraising effort was subsequently cancelled and the fund – which had a €5 billion target – was capped at just €100 million to service its one existing investment, as reported on sister outlet PEO.

At PEI’s 2009 CFO and COO Forum in New York, roughly two-thirds of the 200 private equity executives surveyed at the event admitted they were either unsure or anticipated increased LP defaults in the future.