Tuesday, April 7, 2015

Former Employee Sues TPG: Exposing Private Equity’s Weakness

Former Employee Sues TPG:  Exposing Private Equity’s Weakness

In late January, TPG, the large private equity firm, sued its former employee Adam Levine.  Mr. Levine had been TPG’s Managing Director for Global Affairs.  In its lawsuit, TPG accused Mr. Levine of attempting to extort money from TPG and leaking documents to the press.  I wrote a blog post indicating that this lawsuit might expose the business practices of TPG (see, “TPG Sues a Former Employee: A Potential Window into Private Equity [January 29, 2015]”).  Last week Mr. Levine sued his former employer claiming that he was whistleblower who was fired because he tried to point out improper practices.[1]

The two lawsuits set up the classic dispute between an employer and former employee.  TPG claims that Mr. Levine is disgruntled because he was passed up for promotion.  The PE firm alleges that Mr. Levine decided to ruin the firm’s reputation and leaked documents to the press.  Mr. Levine claims that he was a valued employee until he questioned how TPG charged expenses to its portfolio companies and fund investors.  According to Mr. Levine’s complaint, he tried to raise his concerns with management before taking them to the SEC.  According to Mr. Levine, executives at TPG threatened to destroy his career and reputation.

Mr. Levine is treading on a very sensitive and profitable aspect of private equity.  In addition to earning a 1.5% to 2% management fee, a private equity manager has the ability to charge expenses to the funds it manages as well as the portfolio companies owned by the funds.  While many expenses should legitimately be borne by the funds or portfolio companies, PE managers can line their own pockets by shoving all sorts of other expenses on their investors or portfolio companies. 

Mr. Levine allegedly came across these practices when he proposed building an investor relations department for TPG as the company prepared to go public.  While TPG accepted the need for an IR department, it allegedly told Mr. Levine to retain consultants and contractors instead of employees so the expenses could be charged to portfolio companies instead of TPG.  According to Mr. Levine, this is a common practice at TPG.

Andrew Bowden, Director of the Office of Compliance Inspections and
Examinations, raised Mr. Levine’s sensitivity to the subject of expense allocation in his now famous speech on May 6, 2014 (see, “The Regulators Understand:  SEC Examinations of Private Equity [May 8, 2014].”)  That’s the same Andrew Bowden I’ve written about recently because he inappropriately lauded the value added by and profitability of private equity (see, “Quick Note # 2: Poorly Chosen Words by an SEC Regulator [March 18, 2015]”).  Mr. Bowden and his colleagues at the SEC will have to try to figure out if TPG has been fairly allocating expenses or engaging in the practices alleged by Mr. Levine.  In the process, Mr. Bowden may discover that private equity isn’t quite the wonderful business he has gushed about at conferences.

Meanwhile, the lawsuits between TPG and Mr. Levine may provide us with some useful (and not so pretty) insights into the behind-the-scenes activities of private equity.  I’ll leave you with one colorful morsel from Mr. Levine’s complaint.

One senior executive reportedly warned, “Take this little game as far as you want Levine, but if you bring [Founder David] Bonderman into it, I will fucking kill you.”  After Mr. Levine sent Mr. Bonderman and another founder an email outlining his concerns, the same executive allegedly said he would have “hunted” Mr. Levine down and “gutted [him] like a carp” if he’d received that message.

We’ll see how this legal battle plays out.  However, there’s something in Mr. Levine’s complaint that rings true.  We’ve seen it over and over again when an insider decides to pick up the whistle.

[1] http://www.bloomberg.com/news/articles/2015-04-02/tpg-sued-by-ex-spokesman-who-says-whistleblowing-got-him-fired

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