Justify My Fees

Earlier this month, we reported that Levine Leichtman Capital Partners had sued Apollo Management, in relation to the collapse of retailer Linens ‘n Things. Our post focused on the suit’s primary allegations, so we glossed over a tidbit about how Linens was obligated to pay Apollo millions in fees. From the complaint:

Upon consummation of the Acquisition, the Company entered into a management services agreement with control person defendants Apollo Management V, an NRDC affiliate (NRDC Linens B LLC) and Silver Point. Under the agreement, the Sponsors agreed to provide to the Company certain investment banking, management, consulting, financial planning and real estate advisory services on an ongoing basis for a fee of $2 million per year. Under this agreement, Apollo Management V also agreed to provide to the Company certain financial advisory and investment banking services from time to time in connection with major financial transactions that may be undertaken by it or its subsidiaries in exchange for fees customary for such services purportedly after taking into account Apollo Management V’s expertise and relationships within the business and financial community. In addition, the Company paid a transaction fee of $15 million in the aggregate (plus reimbursement of expenses) to the Sponsors for financial advisory services rendered in connection with the Acquisition.

Apollo and its co-investors bought Linens ‘n Things in late 2005, which means that they owned the company for just over three years. That would work out to $6 million in management fees, plus another $15 million for the transaction fee. So Apollo bled its own portfolio company for at least $21 million, plus whatever Linens might have paid Apollo for “financial advisory and investment banking services… in connection with major financial transactions.”

I know that such arrangements are commonplace, but it’s worth restating my wholesale objection to them. They are little more than self-dealing shakedowns, making investors rich while making portfolio companies poorer. PE firms often like to brag about the added value they bring to their investments, but that line doesn’t work when the added value comes with a bill.