Pressured, Investment Firm Is Said to Skip Fees
Score one for private equity investors.
After suffering steep losses in one fund, the Yucaipa Companies, the money management firm run by the billionaire Ronald W. Burkle, has cut fees for investors in the portfolio. As part of the deal, Mr. Burkle agreed to forgo the firm's annual management fee until the fund's investors recoup their money, according to several people with knowledge of the matter. Such concessions reflect the broader pressure in the industry.
During the boom years, institutional investors flocked to private equity funds in search of high-octane returns. But they have been more cautious since the financial crisis damped the buyout market. Pensions are now investing money in private equity at half the rate that prevailed from 2006 to 2008, said Andrew Junkin, a consultant at Wilshire Associates.
Faced with weaker returns, some big investors have been pushing private equity firms to lower their fees or make other concessions. In 2010, Apollo Global Management lowered some expenses for one of its biggest clients, the California Public Employees' Retirement System, known as Calpers.
"It's tough to justify the fees" on a money-losing fund, said Howard H. Pohl, an investment consultant to pension funds and endowments at Becker, Burke Associates in Chicago, adding that managers might cut expenses "to keep everybody happy."
Mr. Burkle, a former grocery chain owner who made his name buying and selling food companies, is feeling the heat from investors in a social impact fund.
Started in 2008, Yucaipa Corporate Initiatives Fund II, a partnership with the former pro basketball star Magic Johnson, looked to help underserved, urban areas by investing in companies that support such locales. The effort attracted some of the nation's biggest investors, raising $450 million. The New York City Retirement Systems and Calpers each committed $100 million to the fund, while the California State Teachers' Retirement System, known as Calstrs, agreed to invest $50 million.
Mr. Burkle, a strong Democratic contributor with ties to Hollywood and labor unions, put much of the money to work. Over the next few years, he bought stakes in about 10 companies, including Inner City Broadcasting, the Aspire TV network and Vibe Holding, parent of Vibe magazine and the TV show "Soul Train."
In one of the fund's biggest moves, Yucaipa invested $100 million in AFA Foods, a Pennsylvania-based ground beef processor, which had operations and employees in lower-income areas. At the time, Mr. Johnson was also a longtime franchisee for Burger King, then a customer of AFA.
But AFA Foods soon ran into trouble. Profits at the company sank in the face of rising commodity prices and an industrywide "pink slime" scare over the use of boneless lean beef trimmings. In April 2012, the company filed for Chapter 11 bankruptcy protection.
The problems have roiled the fund. By the end of 2011, the fund showed losses of 40 percent, and was still down by 19 percent at the end of 2012, according to public pension reports and people familiar with the fund. Representatives of Mr. Johnson did not return calls for comment.
The fund's woes also mirror issues in the broader sector of social impact investing, which has estimated assets of $12 billion, according to Tessa Hebb, an adjunct professor at Carleton University in Ottawa, Canada. She noted that some pensions had been disappointed. Calpers, one of the largest investors in this segment, concluded in a report last August that its social initiative had not met "investment return expectations."
After the Yucaipa fund showed early losses, big investors pushed back and Yucaipa proposed some initial concessions. In November 2011, Mr. Burkle said he proactively offered to reduce fees "until the fund returned to profitability."
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The fee cut wasn't enough. Last fall, some of the pension investors raised the possibility of ousting Mr. Burkle as the fund's manager, according to two people with knowledge of the fund. A Yucaipa spokesman said no such threat was made directly to the firm.
In November, representatives from several investors including Calstrs, Calpers and the New York pension fund met with Mr. Burkle at the Manhattan headquarters of Bank of America Merrill Lynch, which serves as a consultant to the California teachers' pension fund. In the three-hour meeting, the investors conveyed their disappointment in the fund and lack of confidence in its future, according to people with knowledge of the discussions.
Amid the grumbling, Mr. Burkle offered a broader set of concessions. Along with forgoing his annual management fees of just under 2 percent, Yucaipa would not invest most of the remaining commitments, about $50 million. And the firm would not recover any of its own money in the fund until the investors got their money back.
Some issues remain unresolved. Investors complained that Mr. Johnson was receiving compensation from the Gospel Channel, another fund holding. They urged that the proceeds — estimated at more than $3 million over multiple years — be used to help repay investors.
Mr. Burkle seems confident that the portfolio will get back on track. He said the early AFA loss "immediately put the fund in a hole." But he added that other investments "candidly look very good," citing holdings in Inner City Broadcasting, the Aspire Network and the union-owned Amalgamated Bank.
Other Yucaipa funds have fared better, too. One of the firm's flagship funds, Yucaipa American Alliance Fund I, has reported annualized gains of 7.9 percent since its inception in 2002, and another, Yucaipa American Alliance Fund II, has annualized gains of 17.7 percent since its founding in 2008, according to a mid-2012 report by Calpers. But an earlier corporate initiatives fund is down by about 5.7 percent annually since 2001, the same report says.
Yucaipa said the firm, which currently manages $11 billion, had an overall return of 25 percent a year since 1986. Yucaipa said all the concessions on its Corporate Initiatives Fund II were voluntary.
But the clash with investors comes at a sensitive time for Mr. Burkle. The firm is trying to raise a new $1.5 billion fund.