Will confidential information about portfolio companies stay confidential?
That’s the general reaction of private equity players we spoke to concerning the acquisition of Lehman Brothers’s fund-of-funds business by
The conflicts here are obvious but not insidious. The consensus is that ownership of this business by high-profile, direct players like Bain Capital and Hellman & Friedman may initially prompt some unease among firms who don’t necessarily love the idea of their limited partners also being general partners but it’s not necessarily cause for alarm. Lehman itself has its own merchant banking operations, of course, although that group doesn’t operate on the same scale as Bain Capital or Hellman & Friedman.
The main concern from industry people we spoke to was about information flow. LPs typically have access performance data regarding the firms and funds they invest in. This information is understandably kept largely confidential, and the last place that firms would want their deal multiples to end up is in the hands of competitors like Bain Capital or Hellman & Friedman. “The challenge for them (Bain Capital and Hellman & Friedman) is going to be twofold,” said one partner at a well-known fund-of-funds firm. “They have to make sure they maintain objectivity in the minds of their own limited partners as well as integrity when acting as a GP.”
Bain Capital and Hellman & Friedman declined comment for this story but the structure of the deal with Lehman illustrates their awareness of the issues, which also apply in a broader sense in any instance of an investor acquiring an asset manager. The acquired businesses, including the fund-of-funds operations, are to be housed within a “new, independent investment management company.” It should also be noted that, while Bain Capital and Hellman & Friedman will be equal partners in the new company, Lehman portfolio managers and management will also own a significant stake. The legacy Lehman staffers will also be able to increase ownership through an ongoing, equity-based compensation program.
This independent structure for the assets as well as the presence of a third party in ownership should communicate that Bain Capital and Hellman & Friedman are keeping their distance, as is appropriate. But it may still be a while before GPs are completely comfortable with even the remote possibility that they could be feeding sensitive performance data directly to their rivals. Another issue: Bain Capital and Hellman & Friedman could conceivably end up getting bid against by firms whose funds they indirectly hold a stake in. A situation like that would redefine what it means to have skin in the game.