Parthenon Pays Summit Partners $20M: Firms Dissolve Partnership Over Atkins Deal –

The ugly breakup between Ernest Jacquet and Summit Partners is finally complete. All it took was five years and $20 million.

Jacquet is a former general partner with Summit, which he joined in 1990 after serving as a principal with Bain Capital. Jacquet quickly helped build up Summit’s buyout practice, and became a prominent investor in Boston’s private equity community. By 1998, however, Jacquet was itching to run his own show. He also believed that the bull market would eventually run out of steam, and wanted to create a new firm that could pounce on that opportunity.

Jacquet found a kindred spirit in John Rutherford, a former Bain & Co. executive who had launched a strategic consultancy named The Parthenon Group in 1991. The pair began fundraising for the debut vehicle of Boston-based Parthenon Capital in May 1998, just after Jacquet tendered his resignation with Summit.

At first, it seemed that the two firms would get along fine because they didn’t figure to compete against one another. Summit was still viewed as a middle-to-large-market buyout shop, while Jacquet was looking at smaller companies that had a few warts.

Equally important, Jacquet still had legal ties to Summit stemming from his original partnership agreement, which mandated that he would have to tell Summit if Parthenon was planning to invest in any deals that were already active within the Summit database, related to Summit portfolio companies or met some other specified criteria.

The two firms also tried to arrange a more informal deal-sharing and co-investment plan that involved Summit’s telemarketing efforts, according to a May 20, 1998, press release announcing Parthenon’s formation. By the time Parthenon closed its $257 million debut fund in 1999, however, a Summit spokesperson told Buyouts that the prospective arrangement had become “unworkable” and it ultimately was not consummated.

In early 2000, however, Parthenon acquired a public maintenance repair and operating supplies company named Wilmar Industries Inc., with the intentions of taking it private. Wilmar was an old Summit Partners investment, and Summit felt that Parthenon’s acquisition violated Jacquet’s original partnership agreement (even though Summit was divested of the company).

To assuage the situation, Parthenon agreed to a one-way deal sharing and co-investment agreement with Summit on deals that met certain size requirements (Wilmar had been a $300 million buyout). In the proceeding three years, however, the two firms never co-invested on a single deal. The details of what happened are a bit sketchy, as some sources with knowledge of the situation blame Parthenon and others blame Summit. What is known, however, is that the breaking point came last fall, when Parthenon and Goldman Sachs Capital Partners agreed to acquire Atkins Nutritionals Inc. of Ronkonkoma, N.Y.

Summit objected to the fact that it was not invited to participate, and began several acrimonious discussions with Parthenon management. The end result swung decidedly in Summit’s favor, with Parthenon agreeing to cut Summit a check for $20 million, according to multiple sources familiar with the deal. The payout officially dissolved the deal sharing and co-investment agreement, and kept the dispute out of either a courtroom or arbiter’s office. Parthenon took the $20 million out of its management company’s coffers, while Summit distributed its windfall back to limited partners, say informed sources.

Word of the deal began to spread on Jan. 12, when Summit sent its investors a distribution letter. Parthenon investors, however, were told of neither the initial dispute nor the subsequent payout.

“I wasn’t even aware that there was any arrangement between Parthenon and Summit,” says a Parthenon limited partner. “That wouldn’t have changed my decision to invest, but I should have been told about it during due diligence. It must have been pretty significant if they had to pay $20 million to get out of it.”

A source close to Parthenon says that the firm would discuss the situation with any LP who asked, but that the situation wasn’t urgent because Parthenon didn’t take the $20 million from LP fund commitments. Jacquet, who is co-chief executive officer of Parthenon, talked to Buyouts briefly by cell phone while on a business trip in Europe. He said that the settlement was a mutual business decision. “It was just a cumbersome arrangement, and the payment will end up saving us time.”

Summit declined to comment on this story, although sources familiar with the firm say that it is pleased with the final outcome, and relieved that the matter is finally concluded.

Limited partners in Parthenon’s most recent fund include Delta Airlines, Duke University, General Mills, General Motors, Sloan Foundation, State of Oregon, University of North Carolina, University of Chicago and University of Washington. Summit LPs include the Andrew W. Mellon Foundation, CalSTRS, FLAG Venture Partners, Harvard University, Illinois State Board of Investments, International Brotherhood of Teamsters, LACERS, Liberty Mutual Group, Virginia Retirement System and the Wellcome Trust.

Balmuth To Leave

In unrelated Summit Partners news, the firm’s venture capital arm is losing general partner Michael Balmuth. Balmuth joined Summit in 1997 as a vice president focused on mergers and acquisitions, but moved over to the Summit Accelerator Fund in 1999. He had previously been with Broadview Associates and IBM.

No word on where Balmuth is headed next.

Additional reporting by Matthew Sheahan