Yes Virginia, There Were LP Defaults in 2009

Remember all that talk about limited partner defaults, whereby private equity firms would make capital calls that their illiquid investors couldn’t cover? And then how it didn’t seem to happen?

Well, perhaps news of no LP defaults was exaggerated.

peHUB has learned that Granite Hall Partners, a Chicago-based fund-of-funds, defaulted on a $15 million commitment to TPG Capital in the middle of last year. The commitment was for TPG’s sixth mega-buyout fund, and was made just before TPG plugged around $2 billion into Washington Mutual.

At the time, Granite Hall was seeking to raise around $150 million for its third fund-of-funds. Its prior two vehicles had been capped at just over $60 million, with most of the money coming from high-net-worth individuals. The third fund-of-fund instead was designed to entice institutional investors, although the investment focus would remain on big buyout opportunities (Granite Hall relationships include Blackstone Group, Carlyle Group, Madison Dearborn Partners and THL Partners).

As the fundraise progressed, TPG was looking to close its sixth fund. Granite Hall jumped in, even though it didn’t necessarily have the proper money in hand. There is some conflicting info as to whether or not Granite Hall had at least $15 million of hard circles, but suffice to say the capital wasn’t there when it counted (perhaps due to one or more of its own investors defaulting — a sort of secondary default).

Granite Hall did secure credit from a West Coast bank to continue making TPG capital/fee calls, but it soon became clear that the third fund just wasn’t going to happen (WaMu’s meltdown didn’t help). Granite Hall tried selling its TPG interest in Q1 of last year, but got no takers at the proposed terms. By mid-year, the commitment was in default.

Granite Hall declined to discuss the situation, but a source says that it continues to manage its first two funds-of-funds, plus a real estate fund-of-funds. It also hopes to return to market with a new vehicle at some point, but it’s unclear what the focus would be.

If all of this sounds a bit familiar, you’re probably thinking of HRJ Capital — which used a Silicon Valley Bank loan to front-load a buyout fund-of-funds before it was raised. When LPs didn’t come through, HRJ began to implode.

Not exactly apples to apples — HRJ’s mess was of a far larger scale, and the firm was later bought for scrap by Capital Dynamics. But the basic mistake of investing prospective capital was the same. Moreover, both firms were founded by ex-NFL pros (HRJ founders included ex-49ers Harris Barton and Ronnie Lott, while Granite Hall’s managing directors are former defensive lineman Jim Flanigan and ex-Washington Redskins exec John Wagner).

Different but the same. And something that many of us throught hadn’t really happened…