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Editor’s Letter: My favorite story this year involved a GP/LP fight

As the world grows increasingly restive and December moves closer to its frozen conclusion, I would like to spend a few minutes reflecting on the year that was and the biggest stories we here at Buyouts covered.

This year’s narrative was, as it has been for the past few years, a vibrant fundraising market, a strong deal environment — even as pricing stayed strong — and increasingly nervous LPs with no choice but to target capital at the private equity markets, which offer the best hope for strong returns.

With more money being raised, GPs have no choice but to deploy into the high-priced markets. This theme ran throughout our coverage this year and tinged each story we wrote with a shade of worry, even in those articles about strong, successful fundraisings.

One wonders whether this theme will continue into 2017 with higher interest rates, which could make fixed-income investments a bit more attractive.

My favorite stories, as longtime readers may have gathered, involve secrets. That’s the journalistic instinct. If we can uncover something, positive or negative, we’ve done our jobs and we can go home satisfied. Another secret unearthed – it’s every reporter’s goal.

For me, I achieved that fleeting moment of satisfaction with a story about an under-the-radar clash between Thomas H. Lee Partners and one of its limited partners, California Public Employees’ Retirement System. The disagreement was revealed in a series of non-public letters between the two over a number of months. (Subscribers can read the story here).

CalPERS’s private equity chief, Real Desrochers, was upset about what he said was TH Lee collecting accelerated monitoring fees in Funds V and VI without having explicitly disclosed its ability to do so in LP agreements. Desrochers also claimed the firm had not been sufficiently up front with LPs about how it allocated expenses to GP-funded co-investment vehicles.

Desrochers asked TH Lee to reimburse Funds V and VI LPs for the accelerated monitoring fees that TH Lee kept and for the expenses he said were improperly charged to the main funds. He also asked the firm to share all findings with all LPs and the SEC.

TH Lee argued that the LPAs gave the firm the right to collect accelerated monitoring fees and to share those fees with investors. A side letter CalPERS signed on Fund VI specifically allowed for the charging of termination fees, which TH Lee executives said included what CalPERS called accelerated monitoring fees.

They also argued the LPAs did not require the GP co-investment vehicles to pay fund expenses, and they pointed out that investors get reimbursed for all fund expenses.

I imagine disagreements of this nature come up more often with the SEC scrutinizing practices that once may have fallen under LPs’ radars. The difference here is that through our reporting, this disagreement was opened to readers, who got to see in plain detail the inner workings of a fund-contract fight.

This is the sort of thing that is important for the public to see, especially when public pension money is involved. Retirees, taxpayers, politicians and journalists should be able to vet these types of issues when millions of dollars of public money is involved.

That’s why I loved working on this story. It felt impactful. We’ll continue to push for more of this type of story in 2017.

Private Equity Editor Chris Witkowsky reflects at home. Photo by Wendy Witkowsky