PE Panorama: More than words

11 August 2014   Category: News, Asia, Global, USA   By Paul Mackintosh

An interesting, albeit ultimately abortive, deal getting much extra air time right now for factors outside the usual private equity industry considerations is the attempted sale of the Perseus Books Group, “an independent company committed to enabling independent publishers to reach their potential” and “the industry's sixth largest general interest trade publisher”, by its owner and creator, private equity firm Perseus LLP, to “big five” publisher Hachette Book Group, with distribution and services assets going to US distributor Ingram Content Group. The sale process was getting extra interest because commentators have been talking it up in the context of Hachette’s standoff against leading online bookseller Amazon – and because Perseus itself is deeply embroiled in restructuring and litigation proceedings. Financial terms were not disclosed, but the distributing business alone is thought to be worth at least US$300 million per year.

Toronto-Dominion Bank, one of Perseus’s many creditors, has just filed a complaint alleging that Perseus founder Frank Pearl, fraudulently transferred more than $300 million of his interest in Perseus funds to his wife and a trust to evade creditors, while terminally ill from cancer. Since February this year, according to Wall Street Journal (WSJ) reports, the firm, which has not raised a fund since 2006 when it closed the $602.5 million Perseus Partners VII LP, has been working with secondaries firm Cogent Partners to recapitalise and/or restructure its ageing funds, which have been dogged by poor performance. The WSJ quoted a net internal rate of return (IRR) of -22.4% as of mid-2013 for the Perseus Partners VII fund.

Perseus Books Group itself, meanwhile, was put together by Frank Pearl in 1996 from various publishing assets, and later went on to acquire further press and distribution assets in 2007. In 2007 it also won the Publishers Weekly Publisher of the Year award, so it clearly developed some value in the eyes of the industry, and its sale made sense as a timely asset disposal for its parent. However, the deal apparently fell apart at the last minute, with a communique from Hachette stating: “Despite great effort from all three parties, we could not reach agreement on all of the issues necessary to close the transaction”.

The whole principle of caveat emptor in private equity investing has rarely been more graphically demonstrated. The WSJ quotes communications from New York City Retirement Systems LP officials complaining over "outrageous" and "disruptive” sales processes and valuations for their tranches of Perseus funds. Investors and creditors hoping to see some more of their money come back through the Perseus Books Group sale can only aim now to be more diligent in future.