Wednesday, September 11, 2013

An Emerging Conflict of Interest in PE: Neiman Marcus and CPP

An Emerging Conflict of Interest in PE: Neiman Marcus and CPP

The private equity owners of Neiman Marcus have agreed to sell the company to a new set of private equity owners for $6 billion.[1]  In the industry, this is known as a “pass the parcel deal” or a “secondary sale.”  As recently as last month the sellers, TPG and Warburg Pincus, were still exploring an initial public offering.[2]  An IPO would have only allowed the PE firms to sell a small portion of their holdings in Neiman Marcus.  By passing the parcel to new PE owners, TPG and Warburg will immediately liquidate their interest in the retailer.
 
Wilmington Update (1998)
There’s an interesting twist in this deal.  One of the buyers, the Canadian Pension Plan Investment Board (CPP), is also an investor in TPG IV, which is an owner of Neiman Marcus.  CPP is also a large investor in TPG V.[3] As a result, there’s a conflict of interest embedded in this deal.   Undoubtedly, CPP had every interest in acquiring Neiman as cheaply as possible.  On other hand, the existing investors in TPG IV, including CPP, should want to maximize the sales price.  If I were an investor in TPG IV, I’d be a bit suspicious about CPP’s relationship with the management of TPG.  Did TPG and Pincus achieve the best possible price?  Did they come to terms that protect their long-term relationship with CPP rather than the best interests of all of TPG IV investors?  As an investor in TPG IV, did CPP receive information about Neiman that was not available to other bidders?  How was CPP walled off?

Ares Management is acquiring Neiman Marcus along with CPP, and CPP is a huge investor in Ares private equity funds.  Thus institutional investors in Ares Management might also have some concerns about this deal. Ares has a prior interest in Neiman, having helped to finance the original transaction in 2005.  As an investor in Ares, I’d be wondering if CPP wasn’t getting special treatment from Ares.

I doubt these questions will receive much attention. Neiman Marcus has been a difficult deal for its private equity sponsors since the great recession forced them to hold the company for much longer than they had hoped.  The press is reporting that investors are doubling their money on the deal.  However, the net returns to investors after fees will probably only reach the high single digits.   TPG’s investors will be relieved that Neiman Marcus has finally been sold, and they’ll be getting capital back.  Of course, some of them will have to turn right around and wire funds to Ares, since they are investors in both the seller and the buyer.[4]

Private Equity is a business rife with conflicts.  When large institutions like CPP decide to get directly into the PE business instead of relying on funds, they’re adding another conflict into the mix.



[1] http://online.wsj.com/article/SB10001424127887324094704579065673522614060.html
[2] http://www.sec.gov/Archives/edgar/data/1358651/000104746913008174/a2216143zs-1a.htm
[3] http://www.cppib.com/dam/cppib/What%20We%20Do/Our%20Investment/Q1F14%20Private%20Equity%20relationship%20listing%20(EN).htm
[4] For example, the California Teachers’ Retirement System (CALSTRS) and the California Public Employees’ Retirement System (CALPERS) are investors in TPG (the seller) and Ares (the buyer).

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