Can There Be A Pleasant Divorce? –

Few things make for better drama than a messy divorce. Jerome Kohlberg’s split from KKR, the GTCR splintering when Carl Thoma and Bryan Cressey departed, and John O’Connor’s fireworks when he left JPMorgan Partners all made for some juicy subplots in the normally staid LBO industry.

With a number of firms nearing the end of their most recent funds, and many looking to raise exponentially larger vehicles in the next go-round, it can be expected that there will be another generation of new firms launched in the coming year. But while there may be a level of resentment, departing execs today are generally trying to do everything they can to allay the umbrage.

“Certainly the majority of breakups are not friendly’,” Centurion Capital’s Michael Madden tells Buyouts. “But investors have a multitude of choices today [among funds], and the last thing you need is a lot of noise about who did what to whom. It doesn’t do anyone any good, which is why you go out of your way to part amicably.”

One area that typically requires the most negotiation in a split is how to divvy up the carry. Not unlike a real divorce, this is an area where the legal counsel earns its stripes. The distribution varies from shop to shop. One firm will fully vest a partner as soon as the investment is made, while others will make the process more of a progression, with partners becoming fully vested only after the investment has been realized. But no matter which method is applied, or any variation in between, there’s always some level of negotiation.

“You really have to assume that you’re going to be leaving a good portion of your carried interest behind,” one pro tells Buyouts.

Another area that can become contentious is how firms grant attribution for past investments. In order to raise a fund today, GPs need a track record. But if potential LPs see the same investment highlighted on multiple PPMs, it can be difficult to discern who is really responsible for its success.

“Over a period of time, memories can get dull,” a source says. “Success has many fathers and failures have none. [Working out how to credit investments] doesn’t always work as smoothly as you’d like.”

Stephen Presser, who recently launched Monomoy Capital, says, “Questions of attribution will always be sensitive and complex in any spinoff… But there’s no great mystery about how private equity funds function. Some pros work on some transactions and other pros work on others. Once you get past the emotional issues, the facts are largely the facts.”

However, there are ways to avert these potential flare-ups. Some pros will merely discuss who did what prior to leaving, while others will even go so far as to remain active in the investments following their departure. One pro that is raising a first-time fund says, “The smart thing to do when you leave is to mutually agree on the track record. Figure out what you can use and what you can’t. Sometimes emotion gets in the way, and there’s not much thought put into it.” He adds, “I stayed in touch for about a year, working through the portfolio and helping the firm make the transition, which made it all very friendly.”

In a perfect world, larger shops will spawn new shops and everyone will be able to work together in peace. But in a competitive marketplace that can’t always be the case. The dealmaking environment is more intense, fundraising is more cutthroat and resentment has always bred discord. But if the split is handled with tact, some breakups do end up with both sides happy and moving on.

David Stanton and Dipanjan Deb left Texas Pacific Group to launch Francisco Partners in 1999, but the two ostensibly keep in touch with their old firm, as Francisco and TPG reunited last year for a coinvestment in SmartModular Technologies. Meanwhile, when David Stockman left Blackstone, he gave his old firm co-investment rights in all of Heartland’s future transactions, and Blackstone Group Chairman Peter Peterson even serves on Heartland’s board of advisors.