This week Quadrangle Group, the New York-headquartered private equity firm that has been plagued by the scandal engulfing its founder Steven Rattner, stepped up for its limited partners, instituting some friendly terms that will help ensure they derive maximum value from the firm's two funds.
Quadrangle's moves, which shrewdly it has made public, are significant because it's unclear if the firm will ever raise another fund. Instead of simply sitting on investments from the two existing vehicles, the firm's leadership – which is also changing – will forgo some management fees, invest more of its own money into the business and focus intently on supporting existing portfolio companies.
This contrasts sharply with the (in)actions of some so-called “zombie funds”, or firms unlikely to raise future funds but still managing existing portfolios. Many LPs have repeatedly expressed fears that some of these firms would manage out a fund to the end of its life – including through fund life extensions – and continue collecting management fees on invested capital without actually working to enhance value of existing investments and return capital to LPs. As one investor put it, “everyone gets fat and happy milking the management fee” – which LPs are finding hard to stomach.
Quadrangle on the other hand has signalled strongly that it won't be sitting on its hands. To the contrary: Quadrangle intends to survive this crisis. If it can make money from its existing holdings, any decision about future fundraising will become that much easier. One large investor in the firm's funds told PEO this week it was appreciative of Quadrangle's efforts, not least because the reforms had been proposed and instituted by the firm on its own, rather than the result of LP pressure.
There is of course one other crucial difference between Quadrangle's trials and tribulations and the zombies: its problems have not stemmed from poor performance. This, too, gives it a better chance (and greater motivation) to persevere.
The increasingly brutal public battle between former chief Rattner and outgoing New York Attorney General Andrew Cuomo will continue to cast a shadow over Quadrangle for some time. This makes it even more edifying to see the firm determined to fight its way out of its problems and to honour the original covenant with its investors: to safeguard and enhance their capital.
It's an uphill battle, but if it all goes well the rewards could be significant. And in any event, it's a stance that makes the zombies look all the more despicable.