Brazilian Fund, Under Fire, Has a Defender

SÃO PAULO, Brazil â€" GP Investments, one of Latin America’s largest private equity funds, has come under fire over its executives’ compensation while its stock price languishes, but the fund is receiving some support from Wall Street.

The investment firm Third Avenue Management, which owns about 12 percent of GP Investments, co-founded by the Brazilian billionaire Jorge Paulo Lemann, said that it remains positive about the firm’s long-term outlook and pushed back against the criticism about compensation.

Late last month, James Gulbrandsen, a partner at the investment firm NCH Capital, another shareholder in GP Investments, sent a letter to the firm criticizing how it pays its executives. “We demand that you change your compensation policies to align with shareholder interests,” he wrote, adding that the company needs to “reduce cash compensation to management dramatically.”

In a statement, GP Investments said: “With respect to the methodology for calculating bonuses, GP Investments would like to make clear that team remuneration is in line with market practices for the sector.”

Cash compensation to management in 2012 was 24.5 million reais, or $10.47 million, nearly double what it was in 2011, according to documents filed with the CVM, Brazil’s counterpart to the Securities and Exchange Commission. The firm does not disclose what each executive is paid individually. Its share price, meanwhile, has dropped 75 percent over the last five years.

NCH contends the stock is lagging not because of bad investments â€" it describes them as excellent, in fact â€" but because of outsize compensation and a failure to live up to promises to stockholders, who hold nonvoting shares in the firm, to share more of the management and performance fees. NCH is also pressing GP Investments to buy back more stock.

But Amit Wadhwaney, who manages Third Avenue’s international portfolios, rejected the criticism, calling it specious, and said his firm did not support NCH’s campaign.

He said that investors should have known what they were getting into when they bought their nonvoting shares. “You can kick and scream all you want, but you don’t have a leg to stand on,” he said.

Mr. Wadhwaney added that public investors, including his firm, “own the shares but GP owns the general partners” and should be able to determine the cost of managing their business.

He also thinks the firm deserves to do so, arguing that “GP’s historical investment record has been stellar.”

Mr. Gulbrandsen does not dispute this, but he disagrees with the notion that owners of nonvoting shares should not protest compensation. He contends that since his firm started investing, it has been misled by GP Investments in investor presentations and internal meetings.

“Since the company went public, it has sold its stock to investors under the premise that we will be able to participate with them in sharing management and performance fees and carried interest,” he said. But he contends that by his calculations, since 2006 all of the management fees and 76 percent of total fees have been paid as compensation.

GP Investments “is still operating as a private partnership but has the gall to purport to shareholders that we are partners with them,” he said.

At the moment, the firm is facing tough times, at least on its balance sheet.

On Wednesday night, the company reported a wider second-quarter net loss of $63.8 million, compared with a $49.46 million loss in the period a year earlier. Its net asset value dropped to $477.6 million from $560.7 million.
Its stock closed Thursday at 3.90 reais, compared with 4.44 reais a year earlier.

Still, the company’s stock trades at significant discount when net asset value is compared with market capitalization, a reason that NCH says that it continues to buy shares.

While Mr. Paulo Lemann is no longer involved with GP Investments, it continues to play an important role in Brazil. In its 21-year history, the firm, run by Antonio Bonchristiano and Fersen Lambranho since 2003, has invested more than $5 billion in at least 52 deals.

It has backed important Brazilian companies like BR Malls, the country’s largest shopping mall operator, and the steakhouse chain Fogo de Chao. Last year GP Investments sold that company to Thomas H. Lee Partners for $400 million, generating an internal rate of return of 25 percent.

GP Investments’ current fund backs companies considered promising, like BR Towers, a bet on Brazil’s need to ramp up telecommunications infrastructure. On Thursday, during an investors’ conference call, the company said it had added 2,113 cellphone towers during the second quarter, doubling its total to 4,128.

GP Investments has also done some out-of-the-box thinking. In May it acquired 26.7 percent of the Swiss fund APEN, previously known as AIG Private Equity, which was established by the AIG Group in 1999. As part of this transaction, AIG sold its remaining shares in the fund while Newbury Partners and the Fortress Investment Group joined GP, which said it acquired its stake at a 48 percent discount to net asset value.

Mr. Wadhwaney called it a savvy move by GP, saying, “There is a whole bunch of stuff they are doing which is not obvious.”

That is in part why he is cool to NCH’s push for a stock buyback.

“GP has to invest in building businesses and new opportunities and can do a lot better in this environment than just buying back its stock,” Mr. Wadhwaney said.