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Jun 18, 2019 - 4:57am

I came across an interesting example where a smaller-mid cap European PE fund sold a brand and the entire trademarks portfolio of a recently acquired company a to the unknown offshore company b for X millions. Company a has made X millions "on paper", but it never got that money, because since the sale, the a has been paying royalties to b for the use of the brand (the royalties has been deducted from the purchase price). Afterwards, the a got the brand and its trademarks' portfolio back by using another interesting maneuver. The b has undertaken the recapitalization of the company a and invested its brand in a's capital. As a result, offshore company b became (50%) owner of a.

The tricky part of this maneuver is that before the recapitalization, b re-valued and increased the value of the previously purchased brand for 3X.

... magic

Right now reading about Cerberus and their practices...

Jun 25, 2019 - 9:34pm

Would be very interested to read about Cerberus's practices. Do you have a good resource?

"The strongest of all warriors are these two - Time and Patience" (Leo Tolstoy)
Jun 18, 2019 - 6:42pm
Bass12:

Not really cheating...but counting tax distributions in excess of what you actually owe in taxes as dividends for your IRR and MOIC calculations. Did this recently on a portfolio company we exited

I was going to share this one - because it's not cheating, but it's total bullshit. Especially when the GP just counts tax distributions, period, as capital returned for the purpose of IRR calc. Seen that one done, couldn't believe it.

The smart LPs have started to ask for returns as if all portcos were C-corps.

"Son, life is hard. But it's harder if you're stupid." - my dad
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Jun 18, 2019 - 8:26pm

Curious to hear more about this, as I'm not as up to speed on the tax component as an LP.

Just connecting this comment and the one above. How is tax distributions counted as a dividend and a return of capital, should be one or the other.

Jul 3, 2019 - 9:20am

I'm not in PE, just coming out of UG, but very interested in this. Do you have a link where I can read more about this?

Don't @ me

Jun 18, 2019 - 2:24pm

Expanding on the subscription line comment, GPs increasingly use this as a tool to boost IRRs by deferring LP capital calls. For instance, when a GP makes an investment, they will fund using the sub line and call capital from LPs at some point in the future (usually 3-12 months). This creates an inherent IRR benefit and usually can add anywhere from 100-300bps of return, which, mind you, can be the difference between a GP generating carry or not. While optically this helps returns, it also creates a funding misalignment with LPs that did not realize their funding curve would get pushed out due to this financial engineering. LPs have caught onto this misalignment and now it's becoming more commonplace for GPs to show returns that are gross of sub line leverage, as well as providing an option for LPs to invest in feeder funds that are not able to use sub line leverage.

Jun 18, 2019 - 11:27pm

In my experience this was and is usually done in a fundraising process. Got some investments that are not doing great but not a year old? Mark them at cost. Mark other things at above cost that LPs or others may or may not ask questions And if public markets are good. Then mark them lower later (post audit and after you've secured said fundraising). Usually the argument is the company WAS doing better but hit a rough patch in the next three months. Oh but that was after LPs committed to the next fund? Oops. My bad. There are a number of studies that have said that this is quite a practice at times of fundraising so even "dumb" LPs are wise to it. Selective comps with public companies? Check. I know this sounds super basic and JV but it is how it is.

Hope this helps.

I used to do Asia-Pacific PE (kind of like FoF). Now I do something else but happy to try and answer questions on that stuff.
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Jun 19, 2019 - 12:13pm

I have seen dividend recaps whose funds are re-invested into the same company using a fund's recycling provision only counted once for MOIC purposes. Imagine investing $100M. After 6-9 months, you do a recap and get $30M of equity returned to the fund. 6 months later, you do an add-on acquisition and re-invest the $30M of equity. Then you say, "oh yeah, we invested a total of $100M of equity here"...

Funny money

Sep 3, 2019 - 5:16am

Oh boy!
"hey, how come these $3m dollars in marketing spend are making their way back into our adjusted Ebitda?"
"it's non recurring mate!"
"but aren't we doing the same event next year and another 2 that are even bigger than this one?"
"......."

Jun 23, 2019 - 1:08am

Very short sighted of a PE firm to do anything that "tricks" the people funding them into believing their IRR is higher than it really is. Same deal with fucking over lenders and saying "lol gotcha" when a lender brings up an issue. Like yeah...you can legally get away with it but you probably shouldn't because you'll damage your reputation long term and the PE community is very small.

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