Sycamore bars LPs in Fund III from removing GP without cause until year 10

Sycamore Partners’ new fund, targeting up to $4.5 billion, does not allow limited partners to remove the GP without cause — known as a no-fault divorce — until the 10th anniversary of the fund, sources told Buyouts.

Most private equity funds have 10-year lives, plus one or two one-year terms. The lack of a no-fault GP removal for the bulk of the fund’s life raised eyebrows with some LPs, sources said.

But the fund, the terms of which could change as it moves through fundraising, does allow LPs to terminate the fund without cause from inception, sources said.

The difference is that instead of LPs removing the GP while keeping the fund alive, they can instead choose to kill the entire fund if the GP engages in bad behavior.

“In a nutshell, the GP would prefer everyone to just go home” — no-fault termination — “as opposed to having someone else manage their money,” no-fault removal and then hiring a new GP, according to a source.

Michael Freitag, a Sycamore spokesman, declined comment.

Generally, documents don’t permit a no-cause GP removal until the manager has a few years to run the fund without threat of removal, a fund-formation attorney said.

No-fault-divorce clauses enable LPs to remove the GP for any reason. For-cause removals require the GP to engage in certain behavior, like fraud, spelled out in the partnership agreement.

Some funds have weaker provisions that instead of GP removal enable LPs to suspend or pause the investment period for any reason.

“A springing 10th anniversary trigger does seem unusual to me, but it wouldn’t necessarily be LP-unfriendly if it had teeth, i.e., a true no-fault in year 11 is worth more than a ‘removal’ provision that really only halts the investment period,” according to a second source familiar with fund terms. “The latter becomes useless once the investment period runs out.”

Overall, GP removals are rare and happen only in the most extreme cases. Not every fund gives LPs the ability to remove the GP or dissolve the fund for no reason.

About 43 percent of North American buyout funds allow no-fault divorce or no-fault fund termination for no reason, according to Buyouts’ PE/VC Partnership Agreements Study 2016-2017.

Around 78.6 percent of North American buyout firms allow LPs to remove the GP or dissolve the fund for cause, the study said.

These provisions are rarely used and come out only in catastrophic situations. In the case of replacing the GP, the process can be challenging in terms of organizing the LP base to approve removal and agree to potentially pay for a new manager.

Strong fundraise

A former Golden Gate executive, Stefan Kaluzny, formed Sycamore in 2011 to invest in distressed consumer and retail businesses in North America.

Fund III is expected to have a quick fundraising. The fund is charging a 2 percent management fee and has waterfall distribution structure that pays the GP after each exit, as long as it hits an 8 percent return threshold.

Sycamore closed its prior fund on $2.5 billion in 2014 and its debut fund on $1 billion in 2012. Fund I was generating a net total value to paid-in of 2.2x and a net internal rate of return of 43 percent, New Jersey Division of Investment reported in November. Fund II was producing a 1.04x TVPI and a 3.3 percent net IRR, New Jersey said.

The firm closed its acquisition of Staples in September for a reported $6.9 billion, CNBC said.

Action Item: Check out NJ’s investment memo here: http://bit.ly/2kwZH3G

A family leaves the Staples store in Broomfield, Colorado, on Aug. 17, 2011 as the back-to-school shopping season begins. Photo courtesy Reuters/Rick Wilking