LP corner, week of July 27, 2009

Emboldened LPs make fund requests

Cash-strapped or not, limited partners are using the difficult fund-raising environment to negotiate for better terms in their fund documents.

Last week, two sets of limited partners separately took action against their general partners. In Munich, buyout fund Nordwind Capital’s investors blocked its deal for a fertility clinic roll-up play, claiming the deal is off-strategy. The firm decided to cancel the deal rather than force the resistant LPs into default. The actions took place in February, but were revelaed last week.

In the United States, investors in two Citigroup infrastructure funds have voted to ban them from making future investments, citing a key man provision and several failed deals.

These actions, while headline-grabbing, are just a part of the behind-the-scenes LP uprisings as of late. Some of the terms that emboldened LPs are requesting include lower management fees, lower or possible “waterfall” carried interest, lower transaction fees, stronger key man provisions and even possible clawbacks on deals that have produced carried interest for GPs.

New terms is what helped led to the demise of West Hill Partners earlier this year. The first-time Boston fund, started by former J.W. Childs professionals, was shut down in March thanks to Ontario Municipal Teachers Employees Retirement System. The LP committed $75 million to the fund, which had a $500 million target. When the firm only raised $120 million in around a year, its investors forced the firm to shut down. —Erin Griffith

Florida wants to stretch its wings

In late June, the Florida State Board of Administration launched its Florida Growth Fund, which allows the LP to invest up to 1.5% of the Florida Retirement System Pension Fund’s assets in technology and growth enterprises that have a significant presence in Florida, including space technology, aerospace and aviation engineering, computer technology, renewable energy, and medical and life sciences.

Investments options available to the LP include venture capital funds, growth capital, mezzanine debt and co-investments. Overall, the Florida Growth Fund will have the ability to invest $250 million of capital.

Hamilton Lane, the limited partner’s private equity adviser, will manage the effort. It plans to open a Florida office to support the project, and it will create a website to field proposal requests and other inquiries. The website, www.floridagrowthfund.com, is currently under construction.

In other news, the state said that it intends to extend its geographic reach, in part, by forming relationships with international managers not currently in the portfolio.

About three-quarters of the private equity portfolio is committed to buyout managers, with the remainder divided evenly between venture capital and special situation. Hamilton Lane said it intends to continue assessing those types of opportunities with top-tier managers in Europe. —Nancy Gordon

New Hampshire seeks investment director

The New Hampshire Retirement System recently launched a nationwide search to find a new director of investments to replace Rick Shafer, who left in May to join the Ohio Public Employees Retirement System as deputy chief investment officer.

The role represents the senior investment position at the pension fund. EFL Associates, an executive search firm, has been retained to conduct the search.

The director of investments provides investment advice to the board and investment committee, serving as the primary staff liaison on investment matters.

Dick Ingram, executive director of the pension fund, said in April the staff is working with New England Pension Consultants to rebalance the portfolio.

“It is worth noting that while we have always had prudent levels of alternative investments in our portfolio, we do not have the serious overhang of non-marketable assets waiting for a markdown that many other public pension funds do,” said Ingram at the time.

As of April 30, the state managed a portfolio of $4.3 billion. The alternative investments target allocation is 10%, including 4% each to private equity and absolute return strategies and 2% to opportunistic strategies; as of March the actual alternative investment allocation stood at 3 percent.

The limited partner expects to commit $60 million this year to the asset class, including $30 million to secondaries, $20 million to mezzanine and $10 million to distressed investments.. —Nancy Gordon