LP found in breach of contract

The UK’s high court has ruled Robert Adair, chairman of Melrose Resources, an energy exploration and production business, was in breach of contract for having refused to oblige a capital call from private equity house Advantage Capital.

“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,” Adair reportedly said in a statement to the Financial Times. The UK newspaper reported that at the start of 2009 Adair had told Advantage he would not be able to honour capital calls due to financial difficulties.

Adair could not immediately be reached for comment.

London-based Advantage Capital will seek compensation for lost fees and expected carried interest, an amount totalling in the “eight figure range”, according to a source familiar with the situation. The fund’s unique circumstances – Adair committed more than 90 percent of the £40 million raised for Advantage’s second fund – will leave the buyout fund “suspended”, said the source.

Adair committed £37.5 million (€45 million; $59 million) to Advantage’s fund and had been a member of the firm’s advisory board; he will now face a hearing to determine damages.

‘’We expect to go all the way to the final trial to obtain the assessment of damages,” Martin Bodenham, one of the firm’s two co-founders, said in a telephone interview.

Adair, who was estimated to be worth £270 million (€326 million; $425 million) in the 2008 Sunday Times Rich List,  backed Advantage Capital’s first £10 million fund in 2001, alongside Lloyds Bank and Jon Moulton, the former head of buyout group Alchemy, according to the Financial Times.

The outcome will potentially provide managers that expect greater LP defaults in the near future an important precedent when deciding whether or not to take legal action against investors.

At PEI’s 2009 CFO and COO Forum in New York, roughly two-thirds of the 200 private equity executives surveyed at the event stated they were either unsure or anticipated increased LP defaults in the future.