Mark Spinner, private equity partner at law firm Eversheds, examines the implications of the settlement agreed between Robert Adair, chairman of Melrose Resources, and Advantage Capital, the private equity group.
Robert Adair, chairman of Melrose Resources, has agreed a settlement with Advantage Capital, the private equity group, over allegations that he had defaulted on a GBP 37.5m commitment to one of Advantage’s funds.
The decision of Martin Bodenham and his partners at Advantage Capital to sue Robert Adair in respect of his default on his commitments to Advantage Capital’s Fund II was a bit like Hobson’s choice since Adair accounted for over 90% of total commitments and as such over 90% of management fees.
In most private equity funds no one investor accounts for such a high proportion of the funds under management so the fund manager can normally survive one or two minor defaults with other LP’s taking up the slack. In the case of Advantage Capital’s Fund II, that was just not possible.
Whilst I am sure the Advantage capital team thought long and hard about taking the action they did and litigation with Mr Adair, the original judgement, and subsequent settlement would appear to endorse that course of action.
I am not too sure that this particular outcome will have too dramatic an impact on the industry since many GP’s will still prefer to not publicise the fact that they have defaulting LP’s – as it is not a great sign of confidence – preferring to deal with these matters privately and behind closed doors by seeking purchasers for the defaulting LP’s interests in order to maintain the integrity of the Fund. This is particularly so for any Funds looking to come to market to raise their next fund in the next 12 to 18 months.
