TA Associates returned $38 million to investors in late August to avoid eventual clawback obligations, and it has decided not to draw about $15 million worth of scheduled management fees from investors, says Kevin Landry, chief executive officer of the giant private equity firm.
In a very candid interview, Landry told Private Equity Week last Thursday that the refund for the potential clawback centers around three funds: one started in 1993, one in 1996 and one in 1997. The vehicles aren’t in the red; it’s just that when they come to an end, the general partnership will have to pay back LPs as part of a clawback agreement, or what Landry calls a “make-well” agreement. “The declines [in the value of the funds] have been fairly modest,” Landry says. In one case, LPs have already made $3.30 for every dollar they invested, he notes.
Rather than go to its LPs and work out a plan to reduce future fees in lieu of the clawback payment, TA’s general partners felt it was much simpler to just take money out of their own pockets and pay the LPs. Since the firm essentially has 16 general partners (12 managing directors and four principals), each partner was required to return an average of $2.4 million. It is important to note, however, that senior members of the general partnership tend to receive a higher portion of overall distributions than do junior members, thus the senior members actually each returned more than the $2.24 million average.
TA started collecting money for the potential clawback in December of 2000. Its general partners made a total of four or five payments between then and June of this year. That money was then pooled and distributed to the appropriate LPs in late August.
Since there was no amendment to the LP agreements, the payments were a surprise to investors. Landry says that one LP-an entrepreneur going through a rough patch-was so happy he called Landry at 9 p.m. at his home to thank him.
Landry jokes that his three children had the opposite reaction, since they received most of their father’s distribution winnings. “You get something for nothing and you hate to give it back,” he says with a laugh.
As for the decision not to draw fees, TA once again decided it was simpler to just not take the additional fees that it was scheduled to receive rather than go to LPs and seek an amended agreement. In each case, it is foregoing a 0.5% increase. Landry declined to reveal the specific amount of the fees.
“We decided we wouldn’t take [the step-up in fees] until we feel we’re on a more appropriate investment pace,” Landry says.
The fees affected are for the following funds: TA Atlantic & Pacific IV LP, a $500 million late-stage vehicle raised in 1999; TA IX LP, a $2 billion late-stage fund raised in 2000; and TA Subordinated Debt Fund LP, a $500 million mezzanine-stage vehicle raised in 2000. PE Week was unable by press time to confirm the funds affected by the clawback refund.
TA IX alone has more than 50 limited partners, including Colgate University, Dow Chemical Co., Fleet Equity Partners, Ford Foundation, Andrew W. Mellon Foundation, New York State Common Retirement Fund, SBC Communications, USAir Inc. and Wellesley College.