Some big Drama this week in private equity land, with a GP removal, not something you see every day.
But first, some dealage news:
The pandemic has driven demand for behavioral health services, including alcohol and drug addiction treatment. Long-term distress has become a reality for millions amid unemployment and widespread loss of life.
Drug overdose deaths in the US rose nearly 30 percent in 2020, according to preliminary data published earlier this month by the Centers for Disease Control and Prevention.
Into this landscape, Lee Equity and FFL Partners are exploring a sale of Summit BHC, a substance abuse treatment and psychiatric services platform, writes Sarah Pringle on PE Hub. Moelis and Jefferies are providing financial advice on the sale process, Sarah writes.
Lee Equity and FFL partnered in 2017 to acquire Summit. Both firms own equal stakes in the company. Summit provides substance use disorder treatment services, which makes up about 65 percent of the business, with the remaining 35 percent on the acute psychiatric care side. The latter side of the business has grown rapidly through acquisitions since Lee Equity’s and FFL’s acquisition.
Both Lee and FFL are experienced investors in behavioral health. Lee sold Eating Recovery Center to CCMP Capital in 2017, reaping an around 4x return, PE Hub wrote at the time. FFL is invested in Autism Learning Partners, which it acquired in 2017.
Booted: By now you’ve likely read that the LP base of first-time fund Novalpina, formed by three ex-TPG executives, voted to replace the GP. The reasons for the drama can all be read here in my piece from yesterday.
Booting the GP was the easy part (lol). The hard part comes in working on whether LPs want to replace the GP, which comes with all kinds of challenges. For example, enough LPs have to go through the process of convincing their investment committees that they should bring in another manager to run the assets (there are three portfolio companies) after they had such a pleasant experience with the original manager.
There’s also the cost to consider — I don’t know the exact specifics of Novalpina’s LPA, but generally, a GP booted in a no-fault divorce (such as happened here) still retains rights to collect carried interest in investments they made while running the fund. Replacing the GP means paying a new manager, while still having to pay the old manager — which could mean big costs.
A typical arrangement could have LPs calculate current value on all investments in the ground at the time of removal, and pay off the GP in one lump sum, or with each realization. The replacement manager would get rights to carry on investments after removal, as well as be responsible for dry powder.
In a GP replacement, the original manager also generally has an obligation to cooperate in a transition. But if the original GP resists helping out in transitioning a new manager into the fund, a whole new set of challenges arises.
The alternative, of course, is simply pulling the plug on the fund, and liquidating the assets. But if LPs believe the portfolio has value and room to grow, killing the fund may not be the preferable option.
What have you seen? Hit me up at email@example.com with your thoughts.