Sarah Bradley, a well-known private equity executive who helped launched Kainos Capital, has sued the Dallas firm she helped start seven years ago, along with three principals.
The lawsuit, filed Jan. 25 in Delaware Court of Chancery, alleges that Andrew Rosen, co-founder and managing partner; Robert Sperry, co-founder and partner, and CFO David Knickel perpetrated a fraudulent scheme to steal Bradley’s 25 percent stake in the firm’s investment manager, Kainos Capital.
Kainos released a statement calling the allegations in the lawsuit false and saying the suit lacks merit. “This is a financial dispute over something that happened nearly three years ago, and Ms. Bradley has been well aware that her ownership was reduced,” the firm said. “The Kainos team will not be influenced by improper litigation tactics and we intend to defend ourselves vigorously in this matter.”
Founded in 2011, Kainos focuses on food and consumer investments.
Recent deals include the sale of SlimFast to Glanbia LLC for $350 million in late 2018. The firm also sold Florida Food Products to MidOcean Partners in September and merged portfolio companies Kettle Cuisine, Bonewerks Culinarte and Savory Creations into one company. Several Kainos founders come from HM Capital Partners, the former Hicks Muse Tate & Furst, which has dissolved.
Bradley, a partner, co-founded Kainos as an LLC with Rosen and Sperry. Each founder received membership interests that carried the same rights but did not include the ability to force out another member, according to the lawsuit.
The co-founders agreed to the following membership percentages: 42 percent for Rosen, 33 percent for Sperry and 25 percent for Bradley, the lawsuit states.
In 2016, as Kainos was about to close its second fund, Rosen, Sperry and Knickel “concocted a scheme” to convert the firm to a limited partnership from an LLC, the suit alleges. Such a move would reduce Bradley’s ownership to zero, the suit said.
Knickel allegedly told Bradley that the switch from an LLC to LP was only for tax purposes, and that her rights and interests under Kainos’s manager’s governance documents “would not materially change,” the suit states.
The defendants also told Bradley that if she didn’t immediately sign off on the change from an LLC to LP, Fund II would not close, the suit alleges.
After Bradley signed off, the defendants allegedly stopped her from discovering that the conversion would extinguish her LLC interest, deprive her of participating in management and subject her to an LP structure that was “fundamentally different” than the one the founders agreed to when they started Kainos, the lawsuit states.
Kainos Fund II closed on $895 million in October 2016, nearly double the $475 million the firm raised with its debut pool in 2013.
Rosen and Sperry carried on a “campaign of coercion” that kept Bradley quiet while she managed investor relations for the firm and raised funds, the lawsuit alleges. Rosen repeatedly threatened to fire Bradley if she “raised any trouble,” the suit states.
“Bradley was repeatedly told to either do what she was told, or she would be forced to leave Kainos and would lose her investment in and future at Kainos,” the suit states. It claims that Bradley had mortgaged her house to fund the $1.5 million needed for the GP commit of Kainos Fund I and that she is the major breadwinner of her six-person family.
In late 2018, as Kainos was gearing up to raise its third fund (targeted at $1.5 billion), Bradley obtained documents that showed she had been duped, the suit alleges. It was then that she realized the other Kainos co-founders had secretly created a new entity with the same name, one in which she held no ownership interest, the suit claims.
“She didn’t know Kainos Capital LLC, which serves as the GP, was a different Kainos Capital LLC in which she held no ownership,” said William Reid, of Reid Collins & Tsai LLP, the attorney representing Bradley.
Bradley is seeking damages as well as a declaration that the firm’s conversion was ineffective or invalid.
“Sarah wants what was taken from her,” Reid said. “She wants her 25 percent restored or to be compensated for it.”
Bradley is also seeking an accounting of the profits and bonuses that were paid to other partners over the years, Reid said. “There does seem to be an undercurrent of culture where men do seem to have been compensated more than Sarah. As a co-founder, this doesn’t seem to add up,” he said.
Bradley leads Kainos’s IR and fundraising efforts. She was previously a managing director at Investcorp, where she was head of IR and fundraising. She was also previously a managing director at Deutsche Bank in the financial sponsors group and consumer group.
Prior to Kainos, Rosen was part of the food and consumer team of HM Capital Partners, the former Hicks Muse Tate & Furst. Rosen recruited Bradley, a so-called “rising star in the industry,” to launch Kainos, the lawsuit said. Rosen had no experience “starting up a private equity firm and needed Bradley’s skill and expertise,” the suit claims.
Before co-founding Kainos, Sperry was a partner at Brynwood Partners. He was also an operating partner at Hicks Muse Tate & Furst from 1997 to 2003. Before joining Kainos, Knickel was employed by Hicks Muse beginning in 1995.
Action Item: A PDF of the lawsuit is here: Bradley lawsuit against Kainos