Fund investor found in breach of contract

An important precedent for the private equity industry has been set by a High Court ruling that Robert Adair, chairman of oil group Melrose Resources, breached a contract by refusing to put more money into Advantage Capital’s buy-out fund.

Mr Adair, who owns more than half of London-listed Melrose, now faces a hearing to determine damages with Advantage Capital seeking tens of millions of pounds in lost fees and expected carried interest – a profit share – from the fund.

While the financial crisis has increased the tensions between private equity groups and their investors, normally any disputes are settled behind closed doors and it is very rare for such cases of investor default to reach the courtroom.

Mr Adair said in a statement to the FT: “Quantum [of any amount payable] is in dispute and this issue will be determined in due course at trial with the assistance of expert evidence. I have yet to file my defence and counterclaim.”

If Advantage Capital were to win a big damages award, it would be a big deterrent against other investors defaulting on their commitments to private equity funds. Ian Rosenblatt, head of City law firm Rosenblatt, which is representing Advantage Capital, said: “This shows there is a bigger appetite for private equity to sue their investors than before the crisis.”

Mr Adair, estimated to be worth £210m ($333m) by the Sunday Times Rich List, committed £37.5m to Advantage Capital’s £40m second fund in 2006. He also backed its first £10m fund in 2001, alongside Lloyds Bank and Jon Moulton, the former head of buy-out group Alchemy.

However, at the height of the financial crisis in early 2009, Mr Adair informed Advantage Capital that he was unable to meet his commitment because of his financial difficulties.

The private equity group, which has former Sun newspaper editor Kelvin MacKenzie on its advisory panel, suspended the fund for 18 months.

In February, Mr Adair stopped paying its £78,333 monthly management fees and defaulted on the rest of his commitment, having provided about £17.5m. The fund, which still had £20.5m left to invest when it was suspended, has gone into run off.

“A new case like this could strengthen the hand of private equity firms in negotiating with defaulting investors,” said Mark Mifsud, a lawyer at Kirkland & Ellis.