In a world where it’s increasingly competitive for private equity firms to hit their fundraising targets in a timely manner, it’s no surprise that GPs are turning to placement agents to help them get across the line. But even when fundraising goals are met, tensions can still arise.
One notable recent example was the legal dispute between Catalyst Capital Group, led by Newton Glassman, and placement agent Sixpoint Partners, which finally reached a resolution in July after more than two years.
Catalyst, a Toronto-based distressed investor, hired Sixpoint in November 2010, after parting ways with its original placement agent Credit Suisse (who declined to comment). Sixpoint was apparently asked to raise about $400 million toward the $1 billion target.
On the face of it, all went well: Catalyst closed Fund III on its $1 billion target in April 2011. But the two parties subsequently disagreed about how much Sixpoint was owed in fees. After an attempt at mediation failed, the matter went to legal arbitration.
New York-based Sixpoint, which is led by former Merrill Lynch executive Eric Zoller, declined to comment.
But according to a statement from Catalyst’s lawyer Edward Weisfelner, a partner at New York-based Brown Rudnick, Sixpoint argued its fee entitlement went beyond the terms of the initial contract – while Catalyst sought a refund for the fees it had initially paid, according to statement sent to Private Equity International from Bruce Nagel, founder of Nagel Rice law firm, who represented Sixpoint during arbitration.
Dana Freyer, a retired partner of corporate law firm Skadden, Arps, Slate, Meagher & Flom, was the arbitrator for the dispute, which ended on 30 July. Sixpoint was ultimately awarded a fee settlement; the two sides declined to confirm the amount, although Catalyst’s statement claimed it was less than Sixpoint had been seeking.
Although this dispute ended up being more serious than most, the basic issue – a disagreement over exactly what the placement agent did or didn’t do – is by no means uncommon. That’s partly because it’s not always straightforward to attribute credit.
A common issue is what Peter Greene, a partner at law firm Lowenstein Sandler, calls the “phonebook problem”: this is when a placement agent submits a list of prospects for which it expects to be compensated. “Firms and placement agents often attach an exhibit to the agreement that says: ‘If any of these parties invest with you, the placement agent gets paid’”, Greene explains. But what if that list contains prospects that are already on the GP’s radar? Or the LP ultimately commits to a different vehicle?
The good news – particularly for managers – is that investors are unlikely to hold such disputes against them, sources say. “I’m not really sure the market cares,” says one global placement agent. “Limited partners have their own decision-making process, and agents aren’t that important when it comes to the reputation of the GP.”
It certainly hasn’t done Catalyst any harm: the firm just closed its fourth fund on $812 million, surpassing its $750 million target; this time it used Atlantic-Pacific Capital, which had previously worked on Catalyst Fund II, as its placement agent.
And Sixpoint has also moved on: it’s currently raising capital for PNC bank spin-out Incline Equity Partners, which was targeting $200 million for its first independent fund as of August.