Appease LPs

Quadrangle has chosen to pay for any and all costs that arise from investigations related to the New York State Common Retirement Fund kick-back scandal, in which the firm has some involvement, writes Christopher Witkowsky.

Perhaps through a combination of necessity and goodwill, Quadrangle Group has gone out of its way to appease its limited partners in the wake of a growing kick-back scandal in which the firm played a role.

Quadrangle’s LPs voted last week to preserve the remaining investment period of the firm’s $2 billion second fund, which still has about $500 million to spend. The LPs had the option to terminate the remaining investment period after the firm’s founder, Steve Rattner, left to join the administration of US President Barack Obama as an advisor on the US auto industry.

The firm’s LPs approved continuing the investment period by a “substantial majority”, according to a Quadrangle investor letter sent Sunday.

The vote came with a price, though. Quadrangle has made several concessions to its LPs, including one provision tied directly to the growing kick-back scandal involving the New York State Common Retirement Fund.

Quadrangle will pay any expenses arising from civil or criminal proceedings or investigations brought by any government authority against the firm or its affiliates “in connection with the retention of placement agents and finders for fundraising activities of the partnership”, the firm said in an investor letter sent 23 April.

The firm gave LPs the right to dissolve the investment period “upon receiving notice to do so from Limited Partners holding 60 percent of limited partner interests”. Also, the firm pledged to call LP advisory committee meetings “no less than quarterly to keep it apprised of any developments at the firm”. Quadrangle also said it will call an LP advisory committee meeting “if instructed to do so by a majority of the members of the … advisory committee”.

Quadrangle’s offer to pay for legal costs related to the kick-back scandal investigation comes at a time when the firm is being looked at by the New York State Attorney General Andrew Cuomo. Cuomo is investigating specifically whether Quadrangle intentionally “intentionally misled or deceived” the New York City pension city about payments made to a firm affiliated with Henry Morris. Cuomo has already indicted Morris in the scandal for allegedly collecting sham finder’s fees from investment firms for commitments from the state pension.

Another major US firm, Apollo Global Management, recently offered some concessions to LPs in one of its funds who were going to have to fund some of the expenses from a busted deal. After a $10.6 billion merger between chemical company Huntsman and Apollo affiliate Hexion collapsed, the firm owed Huntsman $1 billion.

Apollo funds IV and V were set to pay damages to Huntsman of $225 million, while Apollo fund VI and its co-investment vehicle affiliate AAA would purchase $250 million of Huntsman’s senior convertible notes to be repaid at maturity in cash or common stock at Huntman’s choice.

Apollo, in an unusual move, decided to pick up $200 million of damages alongside funds IV and V, which the firm is probably not obligated to do under fund documentation.

Both of these firms went to some lengths to appease nervous or disgruntled LPs who deserved some concessions. The time is right even for firms that aren’t dealing with any kind of crisis to reach out to LPs and find out what they want. Even the reaching out and communicating will be much appreciated by investors who don’t want to be kept in the dark.