
Australia's PEP fails in legal action against Adamantem
A legal action by Australia’s Pacific Equity Partners (PEP) to force the founders of Adamantem Capital – who previously worked for PEP – to disclose marketing materials used in fundraising with a view to establishing whether they have breached obligations to their former employer has been dismissed.
The Supreme Court of New South Wales ruled that PEP had failed to demonstrate sufficient grounds that it may have a valid claim for breach of contract. The private equity firm was ordered to pay costs.
Given these were proceedings for preliminary discovery – the court was not asked to rule on whether a breach had actually occurred – it is possible that PEP will return with a full action. Indeed, part of the Adamantem defense was that “PEP is determined to commence proceedings in any event,” did not need more information, and therefore disclosure should be refused as a matter of discretion.
Anthony Kerwick and Rob Koczkar, spent a combined 25 years at PEP before departing in early 2013, saying they could not commit to managing another fund over its full investment cycle. PEP had announced plans to raise its fifth fund at the end of 2012 and launched the vehicle the following year. It closed in September 2015 at the hard cap of A$2.1 billion ($1.5 billion).
Kerwick pursued other business interests, while Koczkar became CEO of Social Ventures Australia. Last year they established Adamantem and launched their debut fund, targeting A$600 million.
In some instances, where one or more executives spin out from a private equity firm and establish their own investment business, there is an agreement with the former employer regarding the extent to which they can refer to past investments while fundraising. There might also be restrictions as to when they can begin the marketing process for a new fund.
Kerwick and Koczkar were leaving PEP to pursue other interests, so there was no such arrangement. However, there was an agreement – under which Kerwick and Koczkar were guaranteed their share of outstanding carried interest payments – that meant they continued to be subject to certain parts of their employment contracts, including restrictions on the use of PEP’s track record and the disclosure of confidential information.
In October 2016, The Australian Financial Review (AFR) ran an article on Adamantem in which Kerwick and Koczkar discussed strategy and their favorite investments while at PEP. The article claimed that the pair are well known for deals such as Veda Group, Energy Developments and Spotless Group, “where they initiated investments, represented PEP's interest on boards and worked with management teams.”
The same publication reported in December of last year that Adamantem would shortly complete a first close on its fund with about A$300 million in commitments.
PEP became concerned that Kerwick and Koczkar might be using confidential information from their time at PEP in support of the fundraise. It requested to see the relevant materials. Kerwick and Koczkar refused, saying they continued to comply with their obligations to PEP and noting that information relating to past transactions was available from public sources.
Further correspondence followed, before PEP initiated legal action in April. The request for a pre-trial hearing to ask the court to instruct Kerwick and Koczkar to demonstrate that their marketing materials did not break their contractual obligations to PEP was first reported by the AFR in August.
The case in part rested on what constitutes track record as defined by the agreement: PEP observed that it is not only statistical indicators of performance but also the strategies employed in delivering that performance. The firm accepted that information in the AFR article was already in the public domain, but questioned whether a newly formed GP would be able to raise A$300 million without offering investors a detailed analysis comprising both the tangible and intangible aspects of track record.
However, the judge stated that there is nothing secret or confidential about the techniques used to improve a portfolio company’s performance. He also concluded that, based on information in the public domain and on Kerwick and Koczkar’s reputations as investors, it was not certain that Adamantem would be unable to produce convincing marketing materials without breaching confidentiality.
As a result, while the judge accepted there was a plausible claim for breach of contract for engaging with the media, he found there was insufficient reason for discovery on the basis of disclosures to potential investors.
“It is possible that such disclosure has taken place, and that it has happened in breach of the defendants’ obligations. But this is a mere possibility, one of the unlimited number of possible situations consistent with the known facts as disclosed by the evidence before the court. It is in no sense a likelihood,” the judgment said.
Following the ruling, Kerwick said in a statement: “This action has been completely baseless. It’s a matter of public record that Rob and I are established private equity executives who are well known in the market. Private equity deals are reported by the press, by public market investors in private equity and by subscriber databases.”
Tim Sims, one of PEP’s founders, said that “it would be unusual to be able to put together a private equity fund on the basis of newspaper reports and general reputation.” He expressed surprise and disappointment that Kerwick and Koczkar had not taken the opportunity during private discussions with PEP over many months to clarify the contents of their marketing materials and demonstrate that they were not in breach.
Separately, a spokesperson for PEP said the firm “will consider its options in order to protect its rights under established contracts between the parties.”
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