Earlier this year, AIG Capital Partners was celebrating the final close on about $900 million for its second Global Emerging Markets fund (GEM II). Now, limited partners are presented with the option of withdrawing their commitments.
AIG Capital Partners was launched nearly nine years ago as a way for insurance giant American International Group Inc. (NYSE: AIG) to invest private equity dollars into such emerging regions as Latin America, Eastern Europe and parts of Asia. Peter Yu, former director of the White House National Economic Council, was tapped to lead the firm, which began with a series of AIG-supported funds focused on specific regions. By 1997, AIG Capital Partners rolled most of those vehicles – plus a few new ones – into a $1.05 billion fund-of-funds known as GEM I. Limited partners included the Connecticut State Treasury, the Colorado Public Employees’ Retirement System (CoPERA), the Ohio Public Employees’ Retirement System (OPERS) and The World Bank.
GEM I was more than 76% called down as of Dec. 31, 2004, with a net IRR of 3.7%, according to OPERS. Since that time, the fund has achieved exits for portfolio companies Orange Romania (which France Telecom purchased) and GOL Linhas Aereas Inteligentes SA (via a secondary IPO offering on the Sao Paulo stock exchange).
In spite of a promising track record, AIG Capital Partners did not have an easy time raising GEM II, which would have been a direct investment fund (i.e., no fund-of-funds rollup). The vehicle, which was designed to raise upwards of $1.5 billion, came in at about $900 million. Still, by the final close, GEM II backers would include AIG Inc. (which contributed less than 10%), TIAA-CREF, the International Finance Corp., CoPERA, GM Investment & Co. Ltd., KM Technologies (Overseas) Ltd., the Ohio State Teachers’ Retirement System (OSTRS) and the Overseas Private Investment Corp. (OPIC).
Despite the fund missing the target, AIG Capital Partners senior management had received assurances from AIG CEO Yu’s confidant, Maurice “Hank” Greenberg, that the relatively autonomous group could spin out into an independent entity to better facilitate future fund-raising drives.
The fund held only one capital call. Then, the larger accounting and regulatory scandal at AIG Inc. affected plans dramatically. None of the company’s private equity unit was implicated, but the March ouster of Greenberg meant that Yu and company were suddenly without their head cheerleader for independence.
On April 28, AIG fired Yu and AIG Capital Partners Managing Director William Jarosz in a public spectacle. Neither was allowed to retrieve personal items from their desks as building security escorted the pair out of their offices.
Later that week, AIG Capital Partners vice president Charles Mixon resigned, and senior advisor Thomas Armstrong soon followed suit. LPs each received a memo detailing the terminations, and that Yu would be replaced by existing AIG private equity staffer David Yeung.
Yu was a “super key man” on GEM II, which meant that the fund essentially became inactive when he was fired. A meeting of the limited partner advisory board was called for May 19 to discuss GEM II’s future, and so that investors could be introduced to Yeung (who moved from Hong Kong to New York). At the meeting, Yeung and AIG private equity executive Win Neuger talked about the institution’s dedication to the maintenance of GEM II.
The eight-member LP advisory board unanimously agreed to seek an amendment to the existing partnership agreement, whereby all LPs would have an opportunity to formally withdraw from the fund. The decision was communicated via a conference call the following morning, with the actual amendment expected to be drawn up and delivered sometime this week. If adopted, LPs will have between three and four weeks to decide whether or not to continue in GEM II.
If AIG ultimately loses most of its existing GEM II investor base, the firm would have the option of beginning a new fund-raising drive with Yeung at the helm. Yu and Jarosz have not yet stated if they will take legal action against AIG.