Background

• State pension fund was a large investor in an under-performing private equity fund with numerous, smaller funds
• Pension fund itself was in challenging position having recently written down a substantial amount of its overall portfolio
• The pension fund wanted to remove the GP, but had no experience in the matter
• Kirchner was engaged to provide an independent assessment of the situation to help educate the pension fund whether GP removal, or another alternative, would be most effective
• Engagement was scoped to include an evaluation of the underlying portfolio companies and their prospects for generating meaningful recovery of capital to help inform the LP’s decisions regarding their go forward options (replace or augment the GP, write off, let things play out)

Activities

• Kirchner began the engagement by first collecting and reviewing all of the portfolio company files made available by the LP and GP
• Kirchner then met face-to-face with all management teams
• Kirchner conducted a detailed analysis of each of the individual companies, their management teams, business models, and other pertinent information to inform its perspective on the quality of growth prospects for each company, and as a portfolio
• Kirchner quickly realized that there were thematic issues with how the portfolio had been constructed and managed that would make it difficult to materially improve the value of the companies. These issues included:
  • Systematic customer concentration issues throughout the portfolio
  • Poor internal accounting and costing systems, making it difficult for portfolio companies to actually understand and optimize product/volume mix
  • Lack of ownership for management teams (i.e. no incentive compensation or ownership, creating an “employee culture”)
  • Lack of product differentiation or competitive advantage against competitors

Results

• Kirchner’s evaluation of the portfolio companies identified these issues and more
• The analysis also included a company-by-company recommendation on what could be done in order to materially increase the likelihood of an attractive exit
  • In spite of this, Kirchner also noted that the time and additional resources required to effectuate these improvements to the companies may not lead to enough of a lift in value to offset the additional costs and political drama associated with the LP’s ongoing unrelated issues
• Kirchner also provided the LP with an overview of go-forward options at the fund/portfolio level with regards to additional support and resources that could help the GP succeed
  • As a result of this analysis, the LP did not move to replace the GP, and began to focus their resources on the low hanging items Kirchner identified that could create value within the portfolio companies in conjunction with the existing GP