Top Brass Marches Out

It might have been more of a push than simple resignations, but the top men at both PAI partners and Alchemy Partners have left their respective companies. These developments are becoming a bit of a trend: Wendel, Permira, Cinven, Candover, 3i and BC Partners have experienced board reshuffles and/or the departures of top people in recent months.

The common denominator is all of these firms are at the upper end of the buyout market, which has been somewhat a non-entity due to the lack of financing available. The dearth of deals in the pipeline, overleveraged portfolio companies (some under the strain of their debt, others unable to be sold at a profit given limited exit options), and a fall in valuations have all contributed to the tension boiling over.

In France, the most recent victims have been PAI's chief executive Dominique Megret, who handed in his resignation alongside right-hand man and executive committee member Bertrand Meunier. While Megret will remain as chairman of the investment house until his retirement next year, Lionel Zinsou, who joined from Rothschild in 2008, stepped into the lead role - a move some believed to resemble a coup.

The main concern for both Alchemy and PAI is the key-man clause, written into their respective funds, which was triggered by the departures. Both funds stopped investing while investors decided whether or not to accept the new management and settle the funds' fates. Jon Moulton, the former head of Alchemy, has suggested his LPs ask the fund be wound down. Meanwhile, PAI, who has the largest continental fund, is instead hoping to reduce the EUR5.4bn fund's size following the departure of Megret.

PAI squeeze out

The disagreements that led to Megret's departure may have stemmed from the firm's recent loss to creditors of the entire 65% equity stake in German roofing company Monier - a EUR250m dent in PAI's IV fund. Additionally, the company recently sold Italian espresso machine manufacturer Saeco to Phillips at a loss.

For PAI, triggering the key-man clause means allowing investors to renegotiate their participation with the potential to wind down the fund, should a majority of LPs agree, although sources close to the deal admit this is unlikely and that limited partners, including cornerstone investor BNP Paribas, favour a reduction.

In a move to reassure LPs, PAI has drafted in former chairman Amaury de Seze in as a part-time, non-executive chairman, two years after her retirement. In a letter to investors, Zinsou suggested returning 20-40% (or up to 50%) of the non-drawn commitments in PAI's EUR5.4bn fifth fund back to investors. With only EUR800m deployed so far - investments in Atos Origin and Xella - it could mean returning EUR2.3bn. One investor told France unquote" that the general expectation is that the fund will be reduced by 30-50%.

The fund was frozen for up to six months, although both GPs and LPs hope for a swift end to this suspension.

While PAI states any reduction will not affect their current investment strategy, the reduced firepower will certainly relegate them to the lower end of the large buyout market. The investment house will seemingly go forwards with a more pan-European approach in future, having named four new associates of diverse European nationality: Ricardo de Serdio (Spain), Raffaele Vitale (Italy), Mirko Meyer-Schonherrfrom (Germany), as well as Frederic Stevenin (France). What remains to be seen is on what terms Megret and Meunier leave their positions since they still hold a substantial share of PAI's equity.

How not to leave quietly

When nearing their retirement, most people - having had a long and successful career (let alone having founded and led their own investment firm) - would gracefully ensure the foundations for the succession were left intact before quietly slipping into the background.

Not so Jon Moulton, founder of Alchemy Partners, who after an altercation with the management, walked away in spectacular fashion. Following his departure, Moulton sent an open letter to the firm's investors in which he disclosed the root of the disagreements that caused him to leave. His exit was akin to slamming the door behind him so hard as to bring down the house.

In his letter, Moulton explained his decision to leave stemmed from a dispute in the firm's direction, complete with a scathing attack on his former colleagues. While Moulton believed the future is in turnarounds - a sector in which Alchemy made a strong name for itself - the other managers were looking to pursue opportunities in the financial services field. The letter, which suggests an unwinding, should presumably have the firm's LPs in a bit of a fret.

Rumours that the firm was on unstable ground had been circling for a couple of years as was talk that certain members of management were disenchanted with the set-up of decision-making and remuneration at the firm. So, such a move from the oft-outspoken (and at times overtly critical of the private equity industry) Moulton could, to some degree, have been anticipated - albeit not in such a flamboyant manner.

Alchemy will now be led by Dominic Slade, who has been a managing partner for two years. Moulton, meanwhile, might aim to start afresh in the turnaround sector he knows so well.

A sign of the times

Fund reduction and change in management seem to be the order of the day for large buyout firms. While portfolio management is a good downturn-proof, value-creating strategy, on the lower end of the buyout market, the highly leveraged portfolio companies, which are suffering at the top, are far more problematic for private equity houses.

With creditors and opportunistic investors happy to take majority stakes in return for writing off debt, buyout houses are finding themselves seriously diluted in some cases. Subsequent tensions within teams have flared up, leading to departures, while some of the heads have taken responsibility and resigned for the sake of their private equity house.

And if that were not all, LP-GP relations are further stressed by large funds that cannot be put to use, managed by discombobulated or unmotivated teams: an unworkable business model.

GPs are still expecting LPs to default on commitments, with some LPs planning to reduce their allocations to the discipline altogether. It is therefore essential for GPs to remain attractive to investors by demonstrating team cohesion, retaining talent and showing a degree flexibility and communication when it comes to issues such as fund reduction and performance.

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