News: Buyside

Connecticut rocks the boat
The stakes continue to be raised by Connecticut's state pension plan in its ongoing battle with US buyout firm Forstmann Little & Co as it attempts to recover over $100m it had invested with the firm. In the latest development of an already remarkably public argument, State Treasurer Denise Nappier and Attorney General Richard Blumenthal announced in a conference call to the press that they had filed a suit against Forstmann Little in the state Superior Court. In the call Blumenthal said of the private equity group: ?They double-crossed us, pretending to be our partners and selling us out? We want to make them the poster child for shareholder fair dealing in the investment community.?

Connecticut allege that Forstmann Little has mismanaged the two funds the State had invested in (Forstmann's sixth and seventh funds) by investing heavily and successively in two now troubled telecom companies, XO Communications and McLeodUSA. Not only is Connecticut unhappy about the investments being made in the moribund telecom sector but also that the buyout firm elected to invest further capital in the firms despite making massive write offs ($1.5bn of the $1.9bn the firm had put into XO Communications has been written off). The suit also was prompted by the firm's allegedly inadequate communication with its LPs, although as yet no other investor in the Forstmann funds has stepped forward to join Connecticut in its claim.

Nappier is demanding the return of the capital the state invested in the Forstmann Little funds and the cancellation of total further commitments of $200m. Of the commitments that Connecticut had made to the two funds, $96m had been invested in XO Communications and $31m in McLeodUSA. McLeodUSA filed for Chapter 11 bankruptcy protection in January of this year, whilst XO is reported to have missed debt payments.

People familiar with both institutions feel that there are a variety of factors driving this dispute: a key one being that the State pension fund is extremely wary of seeming to have made flawed investments. Nappier was elected to be State Treasurer on a mandate to clean up its investing after her predecessor was jailed in 2001 for accepting bribes to invest a total of $527.5m of State pension money in five investment firms, including a $200m commitment to buyout firm, Triumph Capital. Nappier last year secured the return of $125.5m of this investment from Triumph. Another factor say sources is that Forstmann Little's investment approach is comparatively high risk: said one ?when you win, you win large with Ted (Forstmann) but you need to be ready for big losses too if it doesn't work out.? Whether high risk or not, the firm has posted returns of 32 percent a year since its formation in 1978.

Forstmann Little has remained relatively tight lipped about the battle. Now that Connecticut has gone to court, the buyout firm said that the suit was without merit and that it would fight the claim. In a subsequent statement it said: ?The State of Connecticut is a sophisticated institutional investor which was fully informed about the nature and scope of these investments and didn't question them at the time.?