American International Group Inc. (NYSE: AIG) has fired two senior managers in its emerging markets private equity group, prompting questions about the unit’s future viability.
Peter Yu, president and CEO of AIG Capital Partners, and William Jarosz, a managing director, were informed of their terminations on Monday, April 25, and then escorted from their New York offices by company security. Not only did the moves come as a shock to AIG CP staffers, but also to both Yu and Jarosz, according to multiple sources.
“If they knew they were getting fired then [Monday], they probably would have at least packed up their stuff,” said someone within AIG. “Instead, they were told that they’d, in effect, have any family pictures and other personal items sent to their homes… It was very sudden.”
Yu helped launch AIG Capital Partners nearly nine years ago, as a way for the giant insurance company to invest private equity into “non-developed” markets like Latin America and Eastern Europe. It initially launched a handful of vehicles tergeting specific regions, including some in partnership with other institutions. By mid-1997, most of those funds -plus a few other proposed funds-were put under the umbrella of a fund-of-funds structure that would be marketed to outside investors. Named Global Emerging Markets I (GEM I), the fund-of-fund was marketed with a $1 billion target, including $300 million from AIG. It closed in 1998 with $1.04 billion, with Yu in charge of a group that, at the time, included four other senior managers, including Jarosz.
What was particularly interesting about AIG CP wasn’t so much its investment strategy, but rather its unique place within the AIG superstructure. Private equity is a relatively small business at AIG, and most fund managers reported up a belabored chain of command. Yu, however, was an old political hand from his time spent as director of the White House’s National Economic Council. Rather than playing the corporate ladder game, Yu went directly to the top, getting so close to AIG Chief Maurice “Hank” Greenberg that Yu eventually became one of Greenberg’s direct reports.
Not only did such access allow AIG CP to operate as a quasi-independent entity within AIG, but it also helped facilitate an agreement reached late last year, whereby AIG CP would spin out into an independent entity, with AIG continuing to serve as a limited partner. It’s unclear when the spinout would have commenced, but the advantages were clear. Not only would Yu’s team have greater flexibility, but it also would have a more generous compensation structure, and an easier time raising outside capital.
“A lot of LPs stay away from institution-sponsored funds,” said an investor in GEM I, who didn’t re-up for GEM II, which closed on approximately $900 million this past January.
The agreement began to crumble in March, however, when Greenberg stepped down in the midst of an SEC/Elliot Spitzer investigation into accounting irregularities at AIG. New management didn’t particularly like the deal and, apparently, also didn’t care much for either Yu’s or Jarosz’ protestations over its rescission. The two men were fired April 25, with Yu immediately replaced by Hong Kong-based David Yeung, who had been working in an AIG private equity unit related to, but different than, AIG CP. Yeung is expected to relocate to New York. Later that week, AIG CP vice president Charles Mixon-a Yu loyalist and Russia specialist-announced his resignation.
AIG would not comment on the firings, or even confirm that Yu and Jarosz left non-voluntarily. It also would not comment on the possibility that LPs could pull out of GEM II, given the relative lack of capital call-downs, and the fact that both Yu and Jarosz were listed as key-men.
It did, however, insist that the emerging markets private equity program would continue. “We have a long and distinguished history in these markets, and are committed to future business in this area,” said AIG spokesman Andrew Silver.
Buyouts spoke with two limited partners in GEM II, who both said that they had received a memo about the firings, and that they were still analyzing the situation.