Deals, Death and Deception - A Banker's Tale

Prelude:

I wanted to share this story because it is a fucking fascinating tale of blood and sweat, life and death, greed and litigiousness.....everything that makes this country great. Very rarely does life actually play out like a TV show but I swear this could be a plotline on Billions...

T.L.D.R. version:

We find a deal for our client and they win the auction but our guy FALLS OFF A LADDER AND DROWNS

Remaining guys get told they have to find a partner for the Deal, now hanging by a thread

WE FIND A PARTNER, DEAL IS SAVED

Partner and Client's LP choose to complete fuck over client

Client threatens to sue and gets something in the end

(see end for takeaways)

Part 1: The Deal

My firm had been working for a small, sector-focused start-up PE firm to identify and acquire LMM targets with capital from their Fund 1. The firm's Fund 1 had 1 LP, the employee pension fund for one of the oldest industrial conglomerates in the U.S. (think Honeywell, 3M, etc.). The founding partner of the PE firm used to work at that same industrial conglomerate and convinced his former colleagues to put money into his fund despite him having no track record as an independent investor.

My firm identified a potential target and got our client a meeting with the owners of the target through our industry contacts. A few months later the owners auctioned the business and our client put in the highest bid.

My firm, the client, accountants, lawyers, HR consultants, insurance companies, etc. conduct extensive diligence and create a package of materials. Our client has to submit the diligence package to their LP for approval before they can sign. That is done and our client is given a verbal approval that they can go ahead with the deal. Two weeks before signing the Managing Partner of our client PE firm, falls off a ladder while cleaning his gutters, hits his head falling into his pool and DROWNS.

The deal is obviously put on hold while the remaining guys at the PE firm figured out what to do. There was a key man clause in the Fund 1 documents that allowed the LP to rescind their capital commitment in the event of the death of 1 of the 2 partners of the PE firm.

A note about the LP....post the LP committing capital to our client, their operations were acquired by one of the large investment management firms (think State Street, Vanguard, T. Rowe Price). This resulted in our client's buddies being knocked down in the pecking order.

Part 2: The Aftermath

Our client met with the guys that the dead guy originally had relationships with to pitch for continuing the fund (i.e. their jobs), despite the loss of a key man. About halfway through, a higher up from the new owners came in with no knowledge of the situation and requested that he be updated from the beginning. Regardless of this, our client felt that the meeting had gone well and shortly thereafter got the news that the LP would likely want to continue and they could move forward with the deal.

Things move along (our client keeping the LP informed of the progress the whole time) and we get close to signing and our client issues a capital call to the LP for the funds to buy the target. They then get an unexpected call from one of their guys at the LP whom told him that he was not going to like the response to the capital call.

Apparently the deal had moved through the various levels of approval at the LP and at the last stage, someone from their risk department put a kibosh to it. Our client is, understandably, shocked and frustrated. After some conversation with the LP, it was clear that they had concerns that our clients firm only had 1 senior partner left and that if something had happened to that guy, there would be no one left to oversee the investment. They told our client that they were unwilling to be a majority owner but they might be open to a deal where they were a minority partner and the majority partner had people who could oversee the investment.

At this point we and our client were fairly pessimistic about our chances to get a deal done. We had worked on the deal for months and the seller had already had to tolerate multiple delays. Despite this, we set about trying to find an equity partner with experience in the sector.

Part 3: The Resurrection

We and our client set up a number of calls with potential equity partners. We get pass after pass with potential partners citing size, lack of track record, valuation, etc. for why they're not interested. A few weeks go by and we're having a call with our client and they tell us that one of the MF's (think KKR, Blackstone, Apollo) whom they pitched to via a b-school relationship, is interested in the deal. We are absolutely shocked that a MF is interested in a LMM deal but elated regardless.

This MF had recently set up a sector-focused growth equity fund and had been trying to build a platform company in the exact space of the target. FUCKING YAHTZEE!!! Things move forward and our client and their new partner submit a revised joint bid for the business. Obviously the partner wants a lower price and because they are a MF and the seller's options, at this point, are limited, they get their price.

Things are looking up. A price has been agreed. There isn't much diligence left. Our client, the MF and the LP are working out how the deal would work among the three parties. A deal is agreed to in principle that the MF will supply 51% of the equity and the LP will supply 49% through their commitment to our client. Our client tells us that the MF and the LP are having some conversations that he is not privy to. We think this is odd but our client doesn't seem worried...

Part 4: The Other Shoe Drops

A date is set for the signing and announcement and our client issues a capital call to the LP for their share of the equity. To our complete and utter shock, the capital call is DENIED.

Our client contacts his LP to find out wtf is going on and they inform him that as far as they are concerned, any relationship between them and our client died with the guy who drowned.

This is a complete 180 from what the LP had communicated about their willingness to participate in the deal. They were only willing to invest under a very unlikely set of circumstances and through our blood, sweat and tears, we orchestrated those circumstances. Our client contacts the MF to let them know what has happened and they are eerily silent.

At this point we are fairly convinced that the LP convinced the MF to worked out a deal to cut our client out of the transaction so they could avoid paying a management fee and screw our client out of their share of the upside. This was a deal that we and our client 1. sourced, 2. diligenced, 3. negotiated and 4. brought the MF partner into. All of this was done under the written (prior to death) then verbal (after death) agreement that the LP would supply the capital when requested.

Our client commissioned the diligence work that the MF would be using in order to purchase the target and as such they felt that they could sue the MF if they attempted to consummate a transaction using said diligence work. Furthermore, they also believed that they could damage the standing of the buyer group with the owners of the target by voicing their suspicions to them. Finally, they believed that any media coverage of a lawsuit could potentially damage the reputation of the very iconic/well-known MF. These "threats" are conveyed in a letter to the MF. They immediately contact our client and schedule a time to talk.

Part 5: All is well that Ends Well?

According the MF, it was the preference of the LP to invest in the deal directly through a platform vehicle operated by the MF and, in exchange for "bringing them the deal", avoid a management fee. It was the legal opinion of the LP that any diligence work provided to them by our client was the property of the LP and they were free to do with it as they pleased. While the MF was in a position to take the high road here and refuse to fuck over fellow industry professionals with whom 1) members of their firm had personal relationships with (overlapping MBA's) and 2) had brought them a fully diligence deal that they liked, they chose "not to be involved with disputes between LP's and GP's of another fund." The MF had consulted with their counsel and they were of the opinion that our client did not have a legal claim. Despite this, they would probably be willing to provide our client with some economics in the transaction as a means of avoiding any potential delays or risks to the deal closing.

Our client consulted with their counsel and they advised that even though our client might have a claim against the MF and the LP, any remuneration for damages would be impossible to calculate given that the present value of our client's potential equity stake, given the range of possible investment outcomes, was impossible to determine.

At this point, our client was mentally and emotionally drained. They had worked on the deal for months, traveling thousands of miles and spending countless hours with accountants, lawyers and consultants. Their leader and friend, whom they had known for years, died in a drastic and horrible fashion. They had had to beg for their jobs and upon making good on the chance to keep them, had been absolutely railroaded by people with apparently no appreciation for fairness nor sympathy and motivated entirely by greed.

Our client goes back to the MF and requests that they cover their expenses for the diligence and give them a board seat, a portion of the management fee and some "management equity" in exchange for being a "consultant" to the business. My firm's M&A fee (drastically reduced from its original %) is included in the expenses.

While these negotiations between our client and the MF are going on, the seller issues a press release citing the MF as the sole buyer. Our client is mentioned as having "collaborated" with the MF on the transaction and my firm is not mentioned at all.

Ultimately the MF and the client come to an agreement and my firm is paid our reduced fee. The transaction closes.

Lessons

Everyone in finance...and I mean everyone...from New York to Boston to Des Moines from Blackstone/KKR/Apollo to Jefferies/Cantor Fitzgerald to Madoff Investment Securities is in it to make their nut....however honorably or dishonorably that happens they DO.NOT.GIVE.A.FUCK. Do not ever assume that anyone will treat you fairly. People you know work for somebody. People you don't know work for somebody. If you don't know that somebody they work for....they can fuck you.

Legally lock your shit up. Someone on this forum once said that Business is ultimately all about translating what is said verbally to what is written down on paper. If our client had made the MF sign a non-circumvent, they would have been in a much stronger position. Because they only had them sign an NDA (as it was so unlikely that they would be interested) they were vulnerable, and that vulnerability fucked them and us.

Appreciate the people you work with and care about. They are the ones you see everyday and those are the guys/gals that you learn the most from. They can go at any time and leave you very much wishing they hadn't.

Region: 
United States - Northeast

Comments (6)

Jan 31, 2020

A no-shop and NDA is standard where I come from- I wouldn't even shop for a co-invest or a LP without a locking up the target.

Jan 31, 2020

An NDA was in place with the MF. The LP insisted on talking to the MF to gauge their interest in the transaction, so our client had no choice but to put them together. We were not able to get the seller to agree to a no-shop but it wouldn't have mattered as there were no other real bidders for the business besides our buyer group.

It's possible that a no-shop could have prevented the MF from buying the business without our client involved in the transaction however, they would have just waited until the no-shop term (in my experience these are usually ~90 day periods) expired and then re-engaged with the seller...

What we really needed was to have the MF sign an ironclad non-circumvent with a 2-3 year term along with the NDA. That way the MF couldn't buy the target in a reasonable time frame and our client would have to be involved.

Jan 31, 2020
Draper Specter and Co.:

What we really needed was to have the MF sign an ironclad non-circumvent with a 2-3 year term along with the NDA. That way the MF couldn't buy the target in a reasonable time frame and our client would have to be involved.

Which who knows if you would have been able to get given your position in the negotiation. That is crazy man. I'm really sorry to hear that. Just an awful situation all around, thanks for sharing.

    • 1
Jan 31, 2020

Well that was a crazy story. Goddamn.

May 17, 2020

Damn, stone cold moves. You really do swim with sharks in this industry.

Vincet Voluntas - Will shall win

May 21, 2020
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