Ex-DPL Execs Sue AlpInvest and Lexington –

Two former executives of energy giant DPL (NASDAQ: DPL) have filed a lawsuit in the wake of the company’s sale of its private equity portfolio to AlpInvest and Lexington Partners. Former Chairman Peter Forster and former CFO Caroline Muhlenkamp claim that they are owed future carried interest from the private equity fund they used to manage, even though they were fired from the job.

The sale was welcome relief for DPL. Forster, Muhlenkamp and others at DPL were accused of using the portfolio to give themselves hefty bonuses. A host of government agencies, including the Federal Bureau of Investigation, are investigating the alleged misconduct of DPL’s former management team. DPL said it would use the proceeds from the sale to repurchase debt and possibly make new investments in its core energy business.

The two filed suit against AlpInvest Lexington, the joint venture the two firms formed to make the purchase. Additionally, Forster and Muhlenkamp sued law firm Cadwalader Wickersham & Taft and Cadwalader Attorney Dennis Block. The suit claims Block and Cadwalader acted with AlpInvest and Lexington to deny them future profits from the portfolio. According to the lawsuit, Forster and Muhlenkamp are owed 2.75% and 2.25%, respectively, in profit participation of the portfolio. The suit seeks payment of profit participation in addition to unspecified damages “to be determined at trial.”

The Dayton, Ohio-based company announced last month that it sold its private equity portfolio to AlpInvest Partners and Lexington Partners for $850 million. The portfolio contains about $1.2 billion in fund commitments, and the deal ranks as one of the largest secondary transactions ever.

“Suits like this may embolden other potential plaintiffs that feel, whether rightfully or wrongfully, that they’ve been treated unfairly,” says Michael Littenberg, a partner with the law firm of Schulte Roth & Zabel who specializes in private equity. Littenberg points out that lawsuits such as these are becoming more commonplace as the secondary market and the rest of the private equity industry becomes larger and more institutionalized. He also says this lawsuit may lead to secondary buyers taking the potential for future lawsuits into account when pricing a potential deal.

Both sides and their attorneys either declined to comment or did not return calls. The suit was filed last Tuesday, March 15. Defendants typically have 20 days to respond to such suits.

The DPL portfolio was valued at $754 million at the end of 2004. It contains general partnerships in which Lexington and AlpInvest already serve as limited partners.

A total of 27 firms manage the portfolio’s 46 funds. Firms with funds in the portfolio include American Industrial Partners, CVC Capital Partners, Fremont Partners, Kohlberg Kravis Roberts & Co., Newbridge Capital and Vestar Capital Partners.

The deal was the latest in a consistent string of large private equity portfolio deals closed by big secondary buyers. Landmark Partners recently purchased the $950 million private equity portfolio of Bank One, and Coller Capital purchased a 22-company portfolio from Dresdner Bank.