Plan to liquidate Paul Capital funds falls apart: updated

A deal that would have provided Paul Capital limited partners with liquidity for their stakes in older funds, as well as fee reimbursement, fell apart after it failed to reach the required LP approval threshold, a spokesperson for Paul Capital confirmed.

The plan, led by Beneficient Co, fell short of the required majority LP approval weighted by capital. It did receive more than majority approval of the 210 Paul Capital LPs involved in the transaction.

Weighted by capital means that LPs with larger exposure in the funds have more influence than those with smaller commitments.

“In general, this was a new form of liquidation transaction which was innovative yet complex, making it difficult for some LPs to provide their consent,” the Paul Capital spokesperson said. “Since not receiving consent, Paul Capital continues to manage the funds under the provisions of the partnership agreements.”

Beneficient is not marketing a new plan to Paul Capital LPs, according to a person with knowledge of the situation.

Beneficient, led by Brad Heppner, the founder of former PE fund-of-funds Crossroads Group, worked with Paul Capital for two years on the deal. LPs in the two funds were expected to be paid 100 percent of net asset value for their holdings, as well as reductions to past and future management fees, Buyouts previously reported. Fortune reported last year LPs in Funds VIII and IX would be reimbursed nearly half of all fees paid over the past two years.

Beneficient also said in the statement it would provide additional value protection over time and underwrite the NAV of LP interests. The plan also included hiring seven people from Paul Capital: David de Weese, Phil Jensen, Daniel Mulderry, Guy Rico, Randall Schwed, Elaine Small and Debbie Wong.

“This isn’t your typically vanilla intermediated auction portfolio,” Heppner said at the time. “It’s complex.”

Several LPs who have talked with Buyouts in recent weeks cited a lack of transparency on the terms of the transaction that kept them from consenting. One LP also said they had a disagreement over the value of their holdings.

“It doesn’t feel very good when you’re an investor in the fund, the management platform is only surviving because of the management fees you’re paying in and they’re trying to sell the management company and you’re not being told what’s being paid for the management company,” said one LP who did not support the proposal.

The regulatory environment prevented Beneficient from providing full transparency on the transaction, the person with knowledge of the situation said. And very few of the non-consenting LPs cited value as the reason they would not consent to the deal, the person said.

Winding down

Paul Capital has been winding down since 2014 when it failed to find a buyer for the business. The firm, formed in 1991 and one of the earliest firms to focus on secondaries, began exploring a sale after it became clear it would not get close to its $2 billion target for its 10th fund, PE HUB previously reported.

As part of the winding down, Paul Capital canceled remaining commitments for Fund X, which raised about $145 million. The firm also raised capital for a separate account that was contingent on the firm raising capital from a similar institution.

Fund X actually called some capital and made some investments, de Weese told Buyouts at the time. LPs in Fund X were expected to pay management fees on the called capital, he said.

LPs in older funds pushed back at the firm for continuing to collect fees even as it wound down, cutting staff and closing all but one of its offices.

Update: This report was updated to provide more information about Beneficient’s plans going forward.

Action Item: Read Paul Capital’s Form ADV here: http://bit.ly/2oSbjiw

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