Writing for Fortune magazine, author William D. Cohan today painted a bleak picture of former Quadrangle head Steve Rattner’s current situation. According to the story, Rattner has potential conflicts as Obama’s “car czar,” and he left Quadrangle “in a pickle.”
The story lays out specifically which concessions the firm is making for its key man vote. Remember, as recently as Monday, we were hearing LPs would let the Friday deadline pass. Meaning, investors had until this Friday (tomorrow) to vote to kill the fund, and they’d likely take concessions on things like fees and carried interest in exchange for not voting.
But that was before the State of New York launched its investigation as to whether Quadrangle “intentionally misled” the firm regarding its use of multiple placement agents. With $125 million sunk into the fund, New York is one of Quadrangle’s largest LPs, and knowing that New York is unhappy could change things for the other LPs. Who’s to say they weren’t misled also? It’s clearly a situation in flux, and one we’re anxious to learn more on.
For now, we’ll have to get by on the details revealed in Cohan’s story, which show just how much Quadrangle had to sweeten the deal to keep investors from killing the fund. The firm agreed to reduce its management fee’s from 1.75% to 1.7% for the remainder of the year, which amounts to a weak $1 million in fee reduction on the $2 billion fund. But beyond this year, that fee percentage drops to 1.65% in 1H 2008 and 1.55% for 2H 2010. Other concessions include placing a 15% limit on the amount the fund can invest in one deal and placing an escrow on 25% of after-tax carried interest proceeds.
I have no idea if investors like that plan, but I’m assuming Quadrangle wouldn’t take any risks.
Beyond details on Quadrangle’s key man vote, the Fortune article points out a potentially bad connection between Rattner and the industry he’s supposed to be leading regulation on. As it turns out, one of the largest auto parts manufacturers, Delphi, received DIP financing from a firm managed by two former Quadrangle partners called Monarch Alternative Capital. Obviously, Rattner’s connection to Monarch could be a conflict of interest. But surely the Treasury is aware of this connection; the story says Rattner had “satisfied the ethics police.”
Finally, the article details problems in Quadrangle’s existing portfolio, including bruises on companies like Pathfire, MGM, GT Entertainment (of “Chooch” fame), Grupo Corporative Ono, and Alpha, the distressed owner of Maxim. The firm apparently has an unreliably calculated 10.7% IRR on its first fund and a “net annualized return” of -1% on its second.