Diamond Castle Gets LP Vote Of Confidence: UPDATE

The limited partners of Diamond Castle Holdings have voted to re-instate the investment period of Diamond Castle Partners IV LP after the firm earlier this year voluntarily suspended investing upon the departure of co-founder, president and CEO Larry Schloss to become the CIO of New York City’s pension funds.

According to a source with knowledge of the situation, however, the re-instatement came with several GP concessions, including a deferral of the carried interest; an offset of 100 percent of fees against management fees; termination of the investment period if any of the four remaining founders depart; consultation with the LP advisory committee before investing in a new company; and a $150 million cap on follow-on investments after the investment period ends.

The source added: “Those that had a negative perspective obviously viewed Schloss’s departure to be material and key. Sub-par investment performance might have also played a factor.” According to the Oregon Public Employees’ Retirement Fund, the fund’s IRR, as of Sept. 30, 2009, stood at –9.7 percent, with an investment multiple of 0.8x.

Senior Managing Director and co-founder Mike Ranger told Buyouts that more than the 57.5 percent of the LPs needed to approve the re-instatement voted to do so. Thus, investment will continue through the end of 2010. Also, a new key-person provision was drafted to include the four remaining founders, Ranger and Senior Managing Directors Ari Benacerraf, Andrew Rush and David Wittels.

Schloss’s departure triggered a key-person provision of the $1.8 billion Diamond Castle Partners IV LP, which closed in 2006 and is now more than 70 percent invested. The other event that could have triggered the original provision was the exit of both Ranger and Rush.

Backers of the fund include the Canada Pension Plan, Chubb Corp., Cigna Corp., Ontario Teachers’ Pension Plan, the State of Minnesota, the State of Oregon and the World Bank. About one-third of the limited partners are public pension funds; 20 percent are high-net-worth individuals; 15 percent are insurance companies; 10 percent each are corporate pension funds, endowments and funds of funds. Most of the capital came from the United States and Canada, with the rest from Europe, the Middle East and Japan.