Non-fiduciary fallout

The power struggle between GPs and LPs has escalated to a fever pitch in a recent court action involving a Bank of America Merrill Lynch real estate fund, writes Jenna Gottlieb.

The power struggle between LPs and GPs just got really interesting.

Limited partners in Bank of America Merrill Lynch’s Asian Real Estate Opportunities Fund are likely to receive a large settlement from the bank as it seeks to avoid potential litigation.

PEM's sister site, PERENews.com, learned from sources familiar with the matter said that BoAML has agreed with the limited partners advisory committee of the fund to a settlement valued at approximately $650 million.

One source with knowledge of the matter told PERE this week that the limited partners of the fund sought compensation following various “non-fiduciary” actions.

Jenna
Gottlieb

And what are “non-fiduciary” actions? These are understood to have included an ill-timed foreign exchange trade and a poorly executed series of valuations of assets transferred from BoA ML’s balance sheet into the fund vehicle.

The LPs, which include the Abu Dhabi Investment Council, French insurance group AXA and General Electric Pension Trust, sought a settlement from the get-go.

“The limited partner advisory committee wanted to make very clear that they weren’t seeking a settlement for bad investing. They were seeking a settlement for poor fiduciary fund management. BoA just want to move on,” according to a source. “They want to walk away saying we tried to do the right thing.”

An interesting part of the agreement is the general partner responsibilities of the $2.65 billion Asian Real Estate Opportunities Fund are expected to transfer to The Blackstone Group, which in July was brought in by the bank to perform a sub-advisory function for the assets of the $2.65 billion fund.

The majority of the assets of the vehicle were previously held by Merrill Lynch’s balance sheet before being transferred. Against the backdrop of the global economic crisis, the transfer valuations of some of the assets, which included real estate in Korea, Japan, China and India across a number of sectors, has since been challenged by the limited partners.

The fund, alongside many other bank-sponsored private equity real estate funds of its vintage, is understood to have under-performed and is currently projecting losses.

Only time will tell if this case sets a significant precedent.