Choking on a nut

A recent peanut recall in the US following an outbreak of salmonella has affected several private equity-backed companies and highlighted the importance of factoring risk in potential investments.

Emigrant Capital-backed Forward Foods declared bankruptcy in February after it was unable to sustain losses related to the recall of more than 1,800 peanut products linked to the deaths of nine people and illness among hundreds of others. Emigrant purchased the company in 2006 for $12.8 million, along with $10 million in debt, and has invested another $6.2 million in it since then.

Other private equity companies hurt by the recall include North Capital Partners, whose portfolio firm Atkins Nutritionals recalled four of its products, and Leonard Green & Partners and The Yucaipa Companies whose Whole Foods Market had to recall more than 70 products from different stores.

The peanut drama underlines that the number of potential risk factors exposing a company to litigation has grown over the years. Stephen Culhane, a partner at international law firm Link-laters, says when seeking to protect a firm against litigation and mitigate exposure to investors it is better to be safe than sorry, as the money spent insuring yourself is worth the potential costs in court.

“When people are writing risk factors for an offering memo you try to come up with everything you possibly can, and risk factors tend to get a lot longer with the passage of time as people think of additional risks or encounter circumstances or events that they previously had not considered,” Culhane says. “Ten years ago you rarely saw terrorism risk factors, but after 9/11 they appeared everywhere, and most haven't gone away.”

Culhane says a typical inventory of risk factors can run anywhere from 5 to 20 pages depending on a fund's investment programme and other factors, with new disclosures evolving to reflect previously unplanned events.

“I had a private equity fund once that bought an agricultural portfolio company and their next fund included a weather risk factor after one portfolio company was affected by hurricanes and another by drought,” he said. “I don't think the managers were really expecting bad weather to have a material impact on their returns.”

The recent bankruptcy of TPG portfolio company Aleris International, a producer of aluminum products, has wiped out the $830 million of equity the Texas-based mega-firm used to acquire the company in 2006. TPG acquired Aleris for a purchase price of $1.7 billion plus the assumption of $1.6 billion of debt.

The Blackstone Group aims to raise between $3 billion and $5 billion for its debut infrastructure fund, which would make it one of the larger infrastructure funds in the market. Blackstone Infrastructure Partners has not yet begun fundraising but is expected to use Blackstone affiliate Park Hill as its placement agent.

Dallas-based private equity firm Lone Star Funds is raising two separate funds, with both targeting a $10 billion close. One will be a real estate vehicle focusing on investment in distressed commercial assets, while the other will take advantage of distressed residential mortgages and defaulting corporate bonds and loans.

Kohlberg Kravis Roberts has hired infrastructure veteran Lewis Eisenberg to the position of senior advisor to work with the firm's infrastructure group. Eisenberg has experience in the private sector as co-founder of investment management company Granite Capital International Group, while he has also served as chairman of the Board of Commissioners of the Port Authority of New York and New Jersey.

Steve Rattner, a co-founder of media-focused private equity firm Quadrangle Group, is leaving the firm to join the US Department of Treasury as an adviser on the automotive sector. His departure has triggered a “keyman” clause under which limited partners in the firm's $1.8 billion second fund can vote to terminate the fund's commitment period, which has less than two years left.

BNP Paribas Investment Partners (BNP PIP) has taken a minority stake in Washington-based private equity firm Northern Lights Ventures and is also investing in its Northern Lights Capital Partners fund. Under the terms of the deal, BNP PIP and Northern Lights will work together to invest in institutional investment firms primarily in the US but also in Asia and Europe.

US private equity firm Hellman & Friedman held a first close on $6 billion for its seventh buyout fund, which has a target of $10 billion. The fund has been in the market for more than four months, with investors so far including the San Francisco Employees' Retirement System and the New York State Teacher's Retirement System.

The US Securities and Exchange Commission (SEC) has sued a former New York pension chief investment officer as well as a political consultant with allegedly running a scheme to collect sham “finder's fees” from private equity firms looking for commitments from the pension. David Loglisci, the former deputy comptroller and chief investment officer of the $153 billion New York State Common Retirement Fund, and Henry Morris, previously a top political adviser to former New York State comptroller Alan Hevesi, have been charged with running the alleged fraud scheme by the SEC.

GS Capital Partners has asked investors in its $20 billion sixth buyout fund to approve a shift in strategy, allowing the firm to invest half of the remaining $9 billion in distressed investments and securities. Goldman needs the approval of a majority of investors in the fund other than capital invested by the firm itself, which totals about $9 billion, according to a spokeswoman. The fund, which closed in April 2007, has roughly $9 billion of uninvested capital, of which about $4.5 billion will be used for distressed investments. About $1.5 billion of the fund would go to firms Goldman already owns and $3 billion would go to fresh deals.

James Forbes, a 14-year veteran of Merrill Lynch, has been chosen to head up Bank of America Merrill Lynch's Global Principal Investment business that houses the combined companies' private equity and real estate arms. A Bank of America spokesman confirmed the appointment, as first revealed in an internal memo reported by the Wall Street Journal, but would not discuss details. Forbes formerly headed the firm's global healthcare investment banking business. He will move to New York from Hong Kong, where he has worked as head of corporate and investment banking for Bank of America Merrill Lynch, the Wall Street Journal report said.