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Advantage Capital faces FSA shut down

UK private equity firm Advantage Capital is facing closure by the Financial Services Authority for breaching minimum capital requirements in what would be the first action of this kind against a private equity firm.

Mark Spinner, private equity partner and head of the corporate team at law firm Eversheds, says Advantage Capital is not the only private equity fund that is having to come to terms with actual and potential funding defaults from its limited partner base.

The big difference is that Robert Adair accounts for 90 per cent of the capital committed to the fund, which makes his default almost impossible to survive.

A comparable situation was the collapse of Candover following the inability of its listed cornerstone investor, Candover Investments, to meet its commitments to the latest Candover Fund and Candover’s subsequent failure to secure a buyer.
“Many general partners have faced varying degrees of challenge regarding potential LP defaults and many have looked for alternative solutions to avoid defaults including securing purchasers for potentially defaulting/defaulted LP positions. Generally this is good news all round since the Fund documentation will typically require other, non-defaulting LPs, to take up any slack in the funding requirement created by a defaulted LP,” says Spinner.
“LP defaults are most common in the larger funds, where the individual commitments are more significant, and/or in funds that are only very modestly invested since the ‘cost’ of being defaulted normally results in any existing commitments that have been drawn down being subject to compulsory write-down mechanisms, which are intended to hurt financially, thus making the decision to default a painful one economically.
“Advantage Capital’s decision to sue Mr Adair is the first high profile example of a GP suing an LP but in reality, faced with a default situation of this magnitude, I do not think that Bodenham had any choice. I am also of the view that the FSA will be looking very closely at the capital adequacy position of a number of other European private equity houses although it is unlikely that many will be in such dire straits.”

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