LPs To Decide Future Of AIG’s Fund –

Earlier this year, AIG Capital Partners held a final close on approximately $900 million for its second Global Emerging Markets fund (GEM II). Now, limited partners are being given the option to withdraw 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 emerging regions like Latin America, Eastern Europe and parts of Asia. It was headed by former White House National Economic Council Director Peter Yu, and 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, with limited partners that included the Connecticut State Treasury, the Colorado Public Employees’ Retirement System (CoPERA), the Ohio Public Employees’ Retirement System (OPERS) and The World Bank.

According to OPERS, GEM I was 76.6% called down as of Dec. 31, 2004, with a net IRR of 3.7 percent. Since that time, the fund also has experienced lucrative exits for portfolio companies like Orange Romania (sold to France Telecom) and GOL Linhas Aereas Inteligentes SA (secondary IPO offering on Sao Paulo exchange).

Despite this track record, however, AIG Capital Partners did not have an easy time raising GEM II, which would be a direct investment fund (i.e., no fund-of-funds rollup). A regulatory filing shows that the vehicle was originally designed to raise upwards of $1.5 billion

It was this track record that prompted many LPs to drop their typical opposition to institutionally-sponsored funds, and invest in GEM I. Moreover, AIG Capital Partners senior management had received assurances from AIG CEO-and Peter Yu confidant-Maurice “Hank” Greenberg that the relatively-autonomous group could spin out into an independent entity in order to better facilitate future fund-raising drives.

By the final close, GEM II backers would include AIG Inc. (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). It held one capital call, and then all hell began breaking loose.

The catalyst for AIG Capital Partners and GEM II’s implosion was the larger accounting and regulatory scandal at AIG Inc. None of the company’s private equity unit was implicated, but the March ouster of Hank Greenberg meant that Yu and company were suddenly without their head cheerleader for independence. New AIG leadership opposed the idea and reneged on the agreement, and didn’t react well when Yu and AIG Capital Partners Managing Director William Jarosz strenuously objected.

On April 28, AIG fired both Yu and Jarosz in a public spectacle that left other AIG Capital Partners staffers slack-jawed. Neither man was allowed to retrieve personal items from their desks before being marched out of their offices by building security, and a human resources official supposedly clapped her hands and yelled “Showtime” before formally imparting the news. 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 (who would move from Hong Kong to New York).

It is important to note that Yu was a super-keyman 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 Thursday, May 19 to discuss GEM II’s future, and so that investors could be formally introduced to David Yeung. Both Yeung and AIG private equity executive Win Neuger talked about the institution’s dedication to the maintenance of GEM II, but the words largely fell on deaf ears.

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. There is still no word on whether or not Yu and/or Jarosz have taken legal action against AIG.

Meanwhile, things aren’t getting any better for AIG Capital Partners’ parent, as New York Attorney General Eliot Spitzer has filed a civil suit against AIG and two former top executives. Greenberg and AIG Chief Financial Officer Howard Smith were both named in the lawsuit, which cites a pattern of fraud at the insurance insurance giant.