Limited partners in emerging manager Novalpina’s debut fund appear to prefer Berkeley Research Group (BRG) to replace the GP after LPs voted to remove the fund manager earlier this month, two people with knowledge of the firm told Buyouts.
LPs voted overwhelmingly to remove Novalpina’s GP from running the debut fund, which has three portfolio companies. The next step in the no-fault divorce process is for LPs to vote to either replace the GP with another manager to manage the portfolio, or simply let the fund liquidate.
The frontrunner for replacement is BRG, the sources said. A vote on appointing the consultancy has not yet happened, one of the sources said. It will require an LP vote that must come before August 6, the deadline for LPs to decide whether they want to replace Novalpina’s GP.
LPs appear to want to appoint a new manager to keep the portfolio running because the investments have performed well so far, one of the sources said. “LPAC is behind BRG so likely to happen but [they haven’t voted yet],” that source said.
Novalpina Capital Fund I was generating a 1.48x total value to paid-in multiple as of December 2020, according to performance information from the Oregon Public Employees Retirement Fund.
BRG’s alternatives investment advisory practice works with investment firms on issues like disputes, and challenged tail-end funds, including as a replacement manager. The alternatives unit is led by Finbarr O’Connor, managing director, who joined the firm in 2015 from Capstone Advisory Group, and Gavin Farrell, director, who joined in 2017 from SS&C GlobeOp.
Novalpina was formed by three ex-TPG executives: Stephen Peel, Bastien Lueken and Stefan Kowski. The firm raised €1 billion for its debut fund in 2019, but only made three investments out of the pool.
The partnership began to fracture over the past year or so, with disputes ranging from investment acumen to the structure of the firm going forward, according to sources and media reports.
Disputes came to a head and two factions – one with Peel, and one with Kowski and Lueken – submitted proposals to LPs for leading the firm going forward. LPs decided however to remove the GP.
Replacing the GP will come with some challenges, including sorting out economics. In typical GP removals, the original GP is entitled to carried interest, at least on the investments already made. LPs will be on the hook to pay that, as well as pay the new manager who comes in to run the fund. One way this can be sorted is with LPs paying the replaced GP in one lump sum, or after each realization on existing investments, to settle accounts. The new manager then would have rights to carry going forward, as well as on uncalled capital, sources told Buyouts in previous interviews.
If LPs ultimately don’t vote to replace the GP, the fund will move into run-off mode, which is basically an exercise in selling the three portfolio companies. Even in that situation, LPs will have to decide who liquidates the portfolio – whether the original GP, who has the most knowledge of the investments, or an outside manager.
“Replacement is expensive but just pulling the plug isn’t really an option. There are already three portfolio companies and those will be realized over time. Someone needs to be responsible for that asset management,” one of the sources said.
One of Novalpina’s investments, NSO Group, has been rife with controversy. The company makes spyware called Pegasus that recent reporting claims has been used by authoritarian governments to spy on journalists, political dissidents and activists. Novalpina acquired the company from Francisco Partners.
NSO denied the report and said its software is used to track criminals and terrorists. The reporting spurred calls from four Democrat members of Congress for the Biden administration to put NSO on an export blacklist, according to a report in The Guardian Tuesday.
No one from BRG responded to a request for comment this week.