So you want to remove your GP?

The blow-up between founders of Novalpina Capital is a rare thing. We dig deeper into what constitutes a GP removal.

Novalpina Capital, manager of one of the largest debut funds in history, could be on the brink of collapse as its investors move to take control of the European mid-market firm following a months-long leadership dispute among its founders.

Sky News reported on Tuesday that investors in the London-based firm’s €1 billion fund had voted this month to remove Novalpina as the manager, and hand over management of the assets to a third party.

A significant majority of LPs voted for the decision, affiliate title Buyouts reported yesterday, citing two sources. That decision – which could result in the dissolution of the fund or the replacement of the management by a third party – is expected to be finalised by early August. The fund’s limited partner advisory committee is interviewing and negotiating with potential GPs, Private Equity International understands.

Alaska Permanent Fund, Oregon State Treasury and South Yorkshire Pensions Authority committed to Novalpina Capital Partners I, according to PEI data.

It is understood that the discord among Novalpina’s founders – Stephen Peel, formerly of TPG; Stefan Kowski, formerly of Centerbridge Partners; and Platinum Equity alum Bastian Lueken – centres around the firm’s investment focus and future structure.

Novalpina was founded in 2017 and grabbed headlines last year for its investment in Israeli surveillance software company NSO Group, which allegedly sells its Pegasus software to authoritarian governments. NSO has denied the allegations and said its software is used to track criminals and terrorists.

Here are are three things to know about GP removals.

LPA

The removal of a manager is a rarity, although a limited partnership agreement usually lays out a clause for removal of the GP either ‘for cause’ or on a ‘no-fault’ basis. According to Sarah de Ste Croix, a partner at law firm Stephenson Harwood, the former is triggered by behaviour such as fraud, gross negligence, bad faith, wilful misconduct or a material breach of the fund documents. The latter scenario occurs without any triggering act and requires a majority vote from LPs, typically at about 75 percent.

Gabriel Boghossian, also a partner at Stephenson Harwood, said that in ‘for cause’ removals, the GP forfeits rights to future management fees as well as all (or a significant proportion) of any carried interest generated on the assets of the fund. He added that with a ‘no-fault’ divorce, the GP can expect to receive a compensatory payment of 12-24 months’ management fees and the right to continue to participate in any carried interest generated on the assets of the fund acquired prior to the removal.

“In the majority of cases, a cause removal is not a real option,” Boghossian said. “Even where there may be tentative evidence of bad acts, the time it takes to cross the threshold required under the limited partnership agreement (a court determination, often beyond appeal), let alone the cost, is not a realistic solution.

Strategic review

Investors in the fund typically work with legal and strategic advisors to understand both fund-level and portfolio-level issues and any conflicts with the GP client.

Boghossian said a key question to ask at this point is whether the GP, as currently structured, is the best group to manage the assets. He noted that an obvious choice may be the appointment of a replacement GP active in the same sector, although key-person time dedication restrictions often prevent this. Two other options would be to hire a fund-less sponsor (or GP for hire) or establish an interim manager structure with some members of the existing management team. Their responsibilities – discharged alongside professional advisors acting on behalf of LPs – include effecting the removal of the current manager, stabilising the portfolio and managing an orderly transition.

If the LPAC fails to find a replacement GP, the only option is to liquidate the fund.

Negotiated GP restructure or exit

Boghossian noted that negotiation points typically include the contractual cost of removal, historical fund liabilities – tax, expenses, portfolio recharges – reputational risk, and combined legal and commercial advisory costs. Negotiations on costs include advisor fees, severance and redundancy payments, and one-off set-up costs for the new GP.

Chris Witkowsky and Alex Lynn contributed to this report