Transom Capital Group got the green light from limited partners to continue investing its most recent fund after a senior-level departure threatened to trigger key-person protections earlier this year.
Key-person situations are relatively rare, but a few have cropped up in the past few months, involving both new and well-established firms. Such protections are in place to ensure the leadership teams LPs back at the beginning of the fund remain in place through its term of 10 or more years.
The departure of managing partner Ty Schultz caused Transom to seek a waiver to its key-person provision in its most recent investment pool, the $300 million Fund III. Schultz left around June after working at Transom since 2015, according to his LinkedIn profile. He led the firm’s Seattle office.
LPs worked with Transom and granted the waiver, sources told Buyouts. Going forward, the firm is led by its two co-founders Ken Firtel and Russ Roenick, and newly minted managing partner James Oh, two sources with knowledge of the firm told Buyouts. Oh joined Transom in 2015, and was made partner in 2018.
When a key-person provision is tripped, the fund usually is barred from making new investments until re-approved by LPs. LPs use this as leverage to approve any new leadership slate the firm is proposing, before reactivating the fund. In rare cases, LPs could decide to simply end a fund, redeeming any uncalled commitments and winding down the portfolio.
In Transom’s case, the key-person provision was not tripped, so the fund never stopped investing, one of the sources explained. It’s not clear if LPs negotiated concessions as part of the waiver agreement. Sometimes key-person negotiations will include concessions like fee breaks, but more frequently they simply result in what one source called “leadership substitutions.”
“Is there someone else who can be put in that place as a substitution, who can get promoted within to kind of substitute that individual?” the source said. Such situations “usually are pretty benign.”
Transom closed its third fund on $300 million in 2018, its largest fund to date. It raised $133 million for Fund II in 2016. The firm invests in small and mid-market companies with a need for operational improvements, from slightly underperforming to distressed, according to the firm’s Form ADV.
It’s not clear why Schultz left. He declined to comment.
Around 97 percent of funds included key person provisions, according to a survey from MJ Hudson published earlier this year, analyzing terms of funds raised in 2019 and 2020. Of those that include key-person provisions, 83 percent require immediate notification of investors and/or the limited partner advisory committee of the key-person breach.
For funds that have key-person protections, 92 percent suspend the investment period automatically upon triggering the provision. As well, 92 percent of funds with key-person protections allow for the termination of the investment period if the key-person event is not resolved within a certain time period, the survey found.
“Investors choose the funds they want to invest in based largely on the strength of managers and their investment teams,” the report said. “Ensuring that investment team members remain dedicated to the day-to-day management of a fund and its portfolio is, therefore, a key investor protection.”
Another firm dealing with a key-person situation is New York Life Insurance-backed GoldPoint Partners. The majority of GoldPoint’s senior leadership resigned en masse earlier this month, halting new investment activity across its three active funds.
GoldPoint named new leadership, and is working with the investor bases of each pool to get the funds reactivated for new investing, sources told Buyouts.
Update: This story was updated to clarify that the key-person provision in Fund III was not triggered; rather, the firm worked with LPs for a waiver from the key-person protections in the fund after the departure of Ty Schultz, which was granted.