News analysis: Quadrangle makes concessions

After a tumultuous two-year period during which Quadrangle lost its leader, and became embroiled in a major pension scandal, its future is cloudy, but one thing that is clear is the firm’s strong commitment to its limited partners.

This week, the firm publicly released a letter it sent to LPs outlining a restructuring in which principals will kick in more of their own capital to pay for the firm’s operations, supplementing the management fee. Also, the firm will shift Fund II’s distribution structure to a European-style “waterfall”, meaning GPs will not take any carry until they have returned 100 percent of invested capital.

The firm revealed that co-founder Joshua Steiner would transition to the role of senior advisor, leaving day-to-day management to Michael Huber, currently president and managing principal, and Peter Ezersky, a managing principal.

Andrew Frey and Ed Sippel, both of whom primarily focused on new investments, will leave the firm. To boost Quadrangle’s ability to support existing investments, the firm said Steven Felsher would join as senior advisor from Grey Global Worldwide Group. Thomas Kohut, formerly with Ernst & Young, was also hired as a principal.

All these moves don’t change the fact that the firm may never raise another fund. Quadrangle “tested the markets” for a third fund recently, according to one LP, and came away with less support than it needed to plan a Fund III.

The firm “absolutely” denies it is in wind-down mode and said it will explore various “creative” strategic options going forward. But one significant LP said the future is uncertain, and any future fundraising will depend on the outcomes of Quadrangle’s funds I and II.

Actually, the funds have performed fairly well this year. Funds I and II were up 2 percent and 7 percent in the third quarter, and 39 percent and 18 percent respectively year-to-date through Q3. Fund I collected $1.1 billion in 2000 and Fund II raised $2 billion in 2005.

Furthermore, while its future is uncertain, Quadrangle has worked hard to make sure its LPs have been on board with all the changes.

Indeed, other firms should take note, especially those that have decided not to raise any new funds. There are tales told by LPs these days of firms with no hope of raising a new fund that have simply “sat on” their current fund, collecting management fees and “riding it out” to the end of its life. As one LP told me, “everyone gets fat and happy milking the management fee”. Quadrangle is not taking that road.