Public black eye

Candover's suspension of investment from its 2008 buyout fund highlights the growing pains of publicly listed private equity firms.

The announcement that Candover has written down the value of its portfolio by 50 percent and will temporarily cease investing from its 2008 buyout fund is another sign of the precarious position of listed private equity in both the UK and US.

The firm in early March revealed in its annual results that Candover Investments, the London-listed vehicle that owns Candover and makes majority investments in its funds, is not in a position to make any further commitments to Candover 2008, after previously warning shareholders that its €1 billion commitment to the fund would have to be reduced “significantly”. It also effectively told its Asian and Central and Eastern Europe teams – which were both added in the last year – that they either must raise their own funds and become self-financing or face closure.

The announcement comes as several publicly listed North American firms such as American Capital, Onex and Allied Capital have all released dismal earnings statements, while KKR Financial – a listed affiliate of Kohlberg Kravis Roberts that invests in debt – reported a $1.1 billion loss for the full-year 2008. Meanwhile, since taking The Blackstone Group public amid much fanfare in 2007, co-founder Stephen Schwarzman revealed he took a 99 percent pay cut last year.

Across the pond the news isn't much better, with firms such as F&C Private Equity Trust and Pantheon International Participations trading at record discounts to net asset values. Such discounts are largely being driven by three factors: excessive leverage at either the management company or portfolio company level, scepticism over the real value of underlying assets and concerns about over-commitment strategies being stretched too far.

Many listed vehicles, including Permira investor SVG, have pursued over-commitment strategies, whereby the investor's ability to honour its capital calls is reliant on receiving ongoing distributions from existing commitments, which in the current market have slowed considerably. This has also been linked to the decline of Candover's Investment share price, which has lost more than 84 percent of its value since October.

Firms such as Candover are responding by holding talks with limited partners to revise their investment strategy, which could include a move to smaller deals. However, others in the industry question whether the public model is workable.

“Private equity is long term consistent but individual years are inconsistent, and those attributes don't work well for public markets,” one investor said.

However, despite such problems others in the industry have said they believe that more firms will go public in the future, in part to resolve succession issues, secure permanent capital and satisfy increasing investor demand for transparency in the wake of scandals such as the Madoff arrest. Conversus president Bob Long says for LPs, especially those who got into the industry in 2005, publicly listed private equity provides diversification and exposure to 2004 and earlier deals, in addition to transparency, monthly reporting and the convenience of a public stock.

Survey shows increased demand for fairness opinions
Driven by increased calls for transparency and accountability, a majority of senior corporate executives expect demand for – and scrutiny of – fairness opinions to increase in the US and Europe, according to a survey conducted in the fourth quarter of 2008 by financial advisory firm Duff & Phelps and research firm merger-market. Respondents answered questions on a variety of topics including the terms of retention of advisors, the situations requiring fairness opinions, and how boards of directors expect to benefit from fairness opinions. The global financial crisis has triggered calls for transparency and accountability, with firms having to defend their decisions more frequently. Accordingly, 68 percent of respondents believe boards of directors have become more concerned with potential shareholder lawsuits over the past five years. The majority of respondents believe fairness opinions can help protect the company and its directors against such shareholder suits. 72 percent of US respondents and 78 percent of European respondents obtain fairness opinions for M&A transactions in order to provide their boards with an independent analysis of the deal.

Rattner departure triggers key man issues at Quadrangle
The departure of Steve Rattner from Quadrangle Capital Partners has triggered a “key-man” clause under which limited partners in the firm's $1.8 billion second fund can terminate the fund's commitment period, which has less than two years left. The second fund is already 75 percent committed. Rattner's departure also triggered the key man clause in the firm's $1.08 billion first fund, which closed in 2001, but that fund's commitment period is over, according to a letter from Quadrangle to its limited partners. “You have entrusted us to invest your capital and manage portfolio investments on your behalf and we believe that completing [Quadrangle Capital Partners] II's commitment period in is in the best interest of our limited partners,” the firm said in the letter. Rattner is leaving the firm to join the administration of US President Barack Obama as an advisor to the Treasury Secretary Timothy Geithner and National Economic Council director Lawrence Summers on the auto industry. In a separate letter to LPs, Rattner encouraged investors to stick with the fund through the commitment period. “I am pleased to state unequivocally that my family will enthusiastically fulfill its capital commitment to QCP II and looks forward to participating in the continuing investments and portfolio value creation of the firm,” Rattner said in the letter.

KKR taps client and partner group head
Kohlberg Kravis Roberts has hired Suzanne Donohoe to its global capital and asset management group as managing director and global head of the client and partner group. Donohoe, who will be based in New York, was most recently the head of Goldman Sachs Asset Management International (GSAMI), based in London. There, Donohoe led GSAMI activities outside the United States with a specific focus on managing client facing professionals and activities across all product lines internationally. Prior to this, Donohoe led all of Goldman Sachs Asset Management's (GSAM) client businesses in North America. Donohoe will work closely with Scott Nuttall, who oversees KKR's global capital and asset management group.