Could LPs End Markstone? The Answer Is Yes

Earlier this month, Markstone Capital Partners co-founder and chairman Elliott Broidy pled guilty to a felony count of rewarding official misconduct, as part of the New York pay-to-play scandal. According to New York Attorney General Andrew Cuomo, Broidy had bribed state pension officials with around $1 million worth of gifts, in order to secure a $250 million investment for Markstone. Not a bad barter, if you have no scruples and can get away with it (Broidy didn’t, and he couldn’t).

Broidy immediately resigned from Markstone, and was replaced as chairman by a former Israeli ambassador to the UN. What remains unclear, however, is if Markstone investors will pull the plug.

peHUB has obtained a copy of Markstone’s fund PPM, which includes the following passage about early termination:

In the event that a Principal, the General Partner or the Fund Manager engages in any act or omission involving the Partnership that results in a final, non-appealable criminal conviction of such person or a final, non-appealable judicial determination that such act or omission constitutes fraud, willful misconduct or gross negligence, two-thirds in interest of all of the Limited Partners may vote in writing to terminate the Fund and liquidate the Fund’s investments.

Broidy’s guilty plea would seem to meet the above standard, but Markstone’s major investors have yet to make a move. CalPERS spokesman Brad Pacheco said that it is examining the Markstone situation as “part of our review of placement agents” but there is “no action at this time.” Oregon’s Jay Fewel said: “We will defer making any decision until we have had a personal meeting with the remaining partners and the new Chairman.”

peHUB also has left messages with the New York State Comptroller’s Office (now under new management) and the New York City Comptroller’s Office, but have not yet heard back from either of them.

Such hesitance may sound bizarre (“Throw the bums out, and quick”), but is complicated by how much capital Markstone has already called down (the “pot committed” dilemma). Markstone’s fund had already called down $562 million of its $800 million in commitments through the end of Q3, with $218 million returned to LPs and a gross IRR of 11 percent. Limited partners could get off the hook for their remaining $328 million, but who then would manage the existing portfolio?

Below is a copy of the summary of legal terms from Markstone’s PPM. It is worth noting that Markstone’s keyman provision was not triggered by Broidy’s resignation, as that clause requires two of three individuals — Broidy, Ron Lubash and Amir Kess — to depart.

Mark Stone Doc