That’s what happened today with structured settlement company J.G. Wentworth, which filed for Chapter 11 this morning. Private equity firm JLL Partners bought the company in 2005, and since then, it’s profited handsomely on the investment. From Buyouts:
The shop has taken out 2x its initial investment through two recapitalizations, and over the summer it sold $145 million worth of equity on a private exchange run by Bear Stearns. The private placement paid off J.G. Wentworth’s second-lien debt and valued JLL Partners’s remaining equity position at $450 million, generating a 6.1x return on its original $125 million investment, Rodriguez said.
Obviously, it looks very bad for JLL Partners. If the fund ends up unprofitable, its investors could demand a “clawback,” in which JLL’s general partners would need to return money it earned to investors. However, that doesn’t appear to be the case, since the firm more than doubled its investment on its dud.
But instead of a cut-and-run, the firm agreed to commit $100 million in new equity to support ongoing operations for J.G. Wentworth. This is apparently being dubbed a “reverse dividend recap.” Absent of the recap, you could call it “doubling down” or “re-investing,” but I sort of like the ring or “reverse dividend recap.” Surely the presence of cheap capital during the boom years didn’t cause many short-sighted buyout pros to stop and think, “Boy will I look like a jerk if this company goes bankrupt after I take a dividend.”
It’s not clear how much JLL Partners initially invested (JLL owns 80% of the company as of the filing), and it’s not clear where the $100 million in new capital is coming from, although I can assume it’s not the same fund the firm was investing from in 2005. JLL hasn’t called me back. Either way, it’s new investment may serve as a way to stave of LP outrage that their remaining equity isn’t worth that lofty $450 million valuation–right now, it’s worth zilch.