The masters of the universe seem to be losing control of their own destiny.
Jon Moulton, founder of private equity firm Alchemy Partners, has walked out acrimoniously amid a succession and strategic spat with his partners, and Dominique Megret, chairman at PAI, has been ousted. Both cases could trigger so-called “key-man” clauses in the groups’ funds, a nuclear option that allows investors to halt new investment, or in extreme cases even liquidate the fund.
Both Alchemy and PAI’s bust-ups are unique, but we’re likely to see more like them as the private equity model comes under pressure in the aftermath of a global credit crisis.
Key-man risk has always been an issue in private equity. Because investors commit to tie up their capital for several years, they need some kind of fallback mechanism in case a key partner walks out. The clauses also typically have a “level 2″ layer, which is triggered if a certain number of senior managing directors leave. More than 90 percent of buy-out funds include some form of key-man clause, according to Preqin, an alternative assets research firm.
In the good years such clauses are less of a problem because managers are typically locked in by their share of the funds’ profits, or carry, which is paid out over time once a hurdle rate is reached.