Looking Back

By Bernard Vaughan

Around this time in 2002, Forstmann Little & Co. was bracing for a legal battle with Connecticut State Treasurer Denise Nappier, whose office had invested $200 million on behalf of various state pension funds into a pair of the firm’s vehicles, according to the Feb. 18, 2002, issue of Buyouts.

Nappier accused the firm of treating the state’s money irresponsibly by repeatedly attempting to prop up doomed telecom services provider McLeodUSA Inc., which filed for bankruptcy in early 2002. The firm had initially invested $1 billion worth of convertible preferred stock into the Cedar Rapids, Iowa-based company in 1999. It tried to revive the company with multiple equity investments after the market soured on McLeodUSA, XO Communications (another Forstmann Little investment) and other telecoms in the summer of 2001.

Nappier eventually took the firm to court, alleging it dangerously exposed Connecticut pensioners’ money to McLeodUSA and XO Communications. The state sought $120 million to cover the pensino fund’s share of the losses.

The two-year battle ended ambiguously in 2004, according to a profile of Nappier in the April 30, 2007, issue of Buyouts. The jury found Forstmann Little guilty of breech of contract. But the court refused to award damages, arguing that the pension fund acquiesced to the investments by honoring the firm’s capital calls. Nappier disagreed with the decision, arguing the jury did not have a deep enough understanding of private equity to make an informed decision. Forstmann Little ended up giving the fund $15.5 million in exchange for its dropping an appeal.

Nappier, who in 1999 inherited a state treasury tainted by a kickback scandal, was elected to her third term as state treasurer in 2006 and is still battling to protect pension fund assets. Legal issues aside, Nappier still sees the good side of private equity, thanks in part to a 19.7 percent IRR the fund realized on post-vintage-1999 funds. She also sees private equity as a vehicle through which she can help enact positive social, economic and environmental changes, according to the April 2007 profile.

Forstmann Little, meanwhile, finally exited McLeod in a deal that closed earlier this month. PAETEC Holding Corp., a communications company backed by a pack of private equity funds, agreed in July to acquire the company from Forstmann Little, Fidelity funds, the Wayzata funds and Jefferies High Yield Trading for $522.75 million, according to CapitalIQ. The deal closed Feb. 8.

Founder and legendary deal-maker Ted Forstmann is still keeping busy as owner of the powerful entertainer and athlete agency IMG Worldwide, and lately, as the amateur partner for Vijay Singh at the AT&T Pebble Beach National Pro-Am.