The quest for proprietary deal flow has been the holy grail for buyout firms. Seemingly every transaction these days ends up being sold through an investment bank, typically with 10 or 12 buyers competing at the auction table. Indeed, its one of the reasons behind the purchase-price expansion seen in the past couple of years and it generally has GPs on the defensive when their limiteds or anyone else ask about deal sourcing.
One firm that was outwardly successful in finding a proprietary deal this past winter was Capital Z Partners. The firm, in December, completed a deal to buy Ingram Industries automobile insurance underwriter Permanent General Cos. (PGC). However, not everything was as it seemed, at least not according to allegations from Southwest Acquisitions Group, an investment bank that is suing Capital Z and the other parties involved in the transaction. The firm is claiming that it had originally arranged for the sale of PGC to Capital Z more than two years earlier, and was maliciously and intentionally cut out of the deal when it closed this past December.
Southwest says it was contracted in February 2002 by the principals of PGC to advise the group on a proposed buyout. The firm says it waived its customary retainer fee and agreed to accept a percentage of the purchase price as payment. Based on the timeline presented in the lawsuit, in April 2002, Capital Z and Southwest entered into a confidentiality agreement related to the purchase of Permanent General, and in June of that year Capital Z submitted to Permanent General, through Southwest, an indication of interest to purchase the company.
On July 16, 2002, the lawsuit alleges that Ingram Industries informed the other parties involved that it did not plan to compensate Southwest and that it required direct discussions with Capital Z. Thereafter, Southwest said, the selling party began a unilateral attempt to change the terms of their agreement by eliminating and/or reducing the fee they had promised to pay Southwest.
Then, in August of that year, Ingram purportedly told Southwest that it had abandoned the proposed Permanent General sale, and in September, Permanent General management confirmed that the deal was in fact off the table and the group formally terminated their contract with Southwest.
The lawsuit goes on to say, During the course of negotiating the terms of the buyout, Defendants [in Permanent General management] began secret discussions with Defendants Capital Z and Ingram Industries concerning the fee to be paid to Southwest Upon information and belief, the Defendants secretly agreed that they would intentionally misrepresent to Southwest that Ingram Industries was not willing to sell Permanent General with the intent to defraud Southwest of the fee to which it was lawfully entitled.
In the complaint, Southwest will only identify that it is seeking damages in excess of $75,000, although The Tennessean reports that the suit will seek a minimum of $3.1 million, which represents a 4.5% commission on the roughly $15 million to $17 million sale. Further, through the suit Southwest will look to receive pre-judgement interest and punitive damages and recoup costs, attorney fees and all other relief to which it may be entitled.
While the circumstances surrounding the sale may appear dubious, investment bankers say the deal was probably a case of bad luck more than anything surreptitous. One pro told Buyouts that it would be unlikely anyone would put off a deal for the sake of avoiding a fee, while Piper Jaffray Managing Director and M&A co-head Jeff Rosenkranz noted that it is something that he has never seen during his 18-plus year career.
Rosenkranz has seen instances where companies have abandoned a sale only to resume talks and complete a deal at a later date, but he does not believe such instances were an attempt to sidestep the intermediary. He said that such a scenario would be unlikely given how many things can go wrong.
Capital Z and Southwest both declined comment for this story, as did Latham, Stall, Wagner, Steel & Lehman, P.C., Southwests legal counsel for the proceedings. Calls to Smith Cashion & Orr PLC, another law firm representing Southwest, were not returned by press time.
Southwest Acquisition Group is an affiliate of Williams & Partners International, a tax research and estate planning firm for small business owners. Capital Z, meanwhile, manages over $4 billion through its Capital Z Investment Partners arm and its Capital Z Financial Services Partners fund.
Plaintiff: Southwest Acquisitions Group
Defendant(s): Capital Z Management, Ingram Industries, (Randy Parker, David Hettinger, Parker Holdings the management of PGC)
Court: U.S. District Court for the Middle District of Tennessee