H.I.G. vs. Audax Lawsuit
Curious what everyone else thinks will happen as a result of the lawsuit (and countersuit) with H.I.G. and Audax and what the longterm implications for PE will be?
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There’s a few possible outcomes here, my view on each -
1) Audax wins / found not liable, life continues as normal for PE world (most likely IMO). Can’t imagine Audax would’ve maintained a position if it was truly fraudulent
2) Audax was actually being fraudulent, they will get in trouble, life continues as normal for rest of PE world.
3) this is the situation that actually impacts the industry IMO. Let’s say Audax didn’t do anything blatantly wrong but is somehow found liable for trying to “show better numbers” or “optimize for a sale”. Let’s be honest, every single one of us does this when trying to sell a company. This could be a very bad precedent if there is a ruling that PE firms can be liable for a company blowing up after a sale or a buyer finding issues under the hood (which, again, anyone in the industry will confirm happens 100% of the time, you never get the full picture as a buyer).
IMO 1 is by far the most likely and maybe 2 (Audax is the devil), but 3 is probably the only case that impacts all of us
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Context?
3 is exceedingly unlikely and nearly impossible to prove absent outright fraud, which is obviously already illegal.
Portco exit window dressing usually consists of more aggressively bidding on business that doesn’t make economic or strategic sense just to show more growth, cutting costs deeper than is sustainable longer-term but is management shorter-term to show higher margin profile/EBITDA, or MOST commonly calling a bunch of stuff non-recurring that in fact is recurring.
Last of which is most common but all of which are nearly impossible to prove ill intent and fraud.
Does anyone have a link to the actual court filing?
Here you have
https://s3.documentcloud.org/documents/24087862/hig-vs-audax.pdf
Didn’t Audax roll partially into the sale? Would think they wouldn’t do this if they actually thought the company was shit
Never mind, just read the legal document, I rescind my prior comment
Sounded like both bidders on the company (HIG and an unnamed group) would require Audax to roll into the deal so not sure
Don’t think there will be any long term implications for the broader industry but the guys involved will all suffer reuptationally a bit. That is to say that I think people will be a bit more sceptical buying from Audax in future and HIG will lose some goodwill with LPs in what is already a tough market.
What’s the blowback from LPs? Is there a fraud clause or dd check list question that this would trigger for current or prospective LP?
"Prospective LP's" are irrelevant but reputable funds will always have some sort of clawback provision around carry and management fees
If one of these groups are actually charged with fraud I'd assume there could/would be more severe repercussions
Backdating of invoices before the deal announcement, increased fake billing hours to pull revenue forward for POC accounting recognition, creation/introduction of fake company to submit millions of $ invoices with proof of payment/viability. WhatsApp and email trails. The liaison guy listed between PE and Portco will likely be listed as the fall guy.
Prospective LPs are certainly relevant. You better believe the first question in fundraising will be about this.
Would also wonder on current portfolio companies if at sale there is less upfront and more DPP/Earnout, issues with getting or cost of R&W I and overall increase in length of sale process for DD.
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Shouldn’t this be covered under RWI?
They probably didn't purchase a policy with a big enough limit for what they are claiming...may have went with 10% of PP coverage.
RWI wouldn't cover all if it, it wouldn't cover anything if Audax committed fraud
Doesn't buyer RWI cover seller fraud given it's a breach of fundamental reps (and obv not known prior to the closing)? That said, I doubt the policy is big enough to cover the entire claim.
The seniors at my firm often come across the folks involved with this company on both sides (HIG & Audax). The thing I believe is being missed is that to get to this stage, there has have to have been many attempts at resolving the dispute internally/privately settling- adding additional chaos/uncertainty around your firms in this type of market is not in favor of either firm- it's hard to raise and deploy right now- so there is a strong feeling that there is likely something fishy going on.
Also, there is a strong negative sentiment against the private equity universe among the legal circles- for how much the US GDP has grown in the last 20 years, an incredible amount of that growth is privately captured, and if holes get poked around what firms need to disclose/how they disclose it, it has the potential to make widespread ripples. Chances are this just gets settled quietly, but if not it will be interesting to see what type of precedent this may set. Talking to my friends in the law world, a lot of folks are really looking for the chance to publicly analyze/expose internal practices at these funds, which have a small fraction of the disclosure requirement of PubCo's.
The language being used is pretty serious- HIG is claiming “brazen, massive, systemic fraud” from Audax; and if they really do find something, how many additional companies did they do this with? Is it common among other PE firms who are trying to find any and every method to outcompete each other? It's being alleged there are WhatsApp chains and email messages with damning proof around this matter.
What's interesting is this may turn into a "battle of survival" for both HIG and Audax.
Audax is notorious for not integrating its buy and builds and my sense is people are increasingly skeptical of buying anything from them. You get a bundle of sticks that can easily fall apart. Burden of proof to exit assets may materially increase for them going forward, especially if caught with fraud.
Likewise, HIG has already been known to be a tough, nefarious counterparty. If they are found guilty of making up fraud just to intimidate a seller to the limits and try to get them to buckle, they risk being blackballed from all but the harriest assets.
Regardless how it turns out, they both have already "lost" to some extent.
I’ve heard that general sentiment of H.I.G. and worked with a former VP from there. I’d be concerned of being a Audax port co and attempting a sale process.
I read through both the suit H.I.G. filed as well as Audax’s counter suit. It really does seem like Audax did some fraudulent stuff in terms of booking a high degree of revenue at a fake customer (or one that never had the wherewithal to pay) as well as changing revenue recognition to be much more agressive than appropriate. The Audax counter suit was pretty weak in my opinion.
If the Audax Board was complicit to their exec creating fake customers and issuing fake invoices to book more revenue / accelerate revenue recognition, that is textbook financial fraud (Marty Byrd would be proud). Skimmed the Audax countersuit and agree with above poster that it came off much weaker in comparison to HIG's claims.
can someone share link to these legal documents?
H.I.G Capital Suit: https://lnkd.in/gdw7dCSB
Audux Countersuit: https://lnkd.in/gi4Qxhxc
Thanks Sri P
Thanks Sri P
Classic shitco vs. shitco battle, both firms are awful counterparties
Exactly. It’s honestly comical that it’s these two shops
I've just got an offer to intern for them this summer. I feel like it's a great way to break into PE out of undergrad. After reading this idk now. Would love to hear others thoughts
You’re an intern. It doesn’t affect you, and having Audax experience at such an early stage will only help you. Congrats, btw!
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