Since peaking in 2007, when its ‘Fund 2’ was valued at 2bn Euros, Lion Capital’s subsequent funds have steadily decreased in value. In 2010, its ‘Fund 3’ closed at 1.5bn Euros, ‘Fund 4’ at $1bn dollars, when its initial target was $2.5bn. Although some believe Lion Capital is already a zombie fund, its managers are not ready to give up. In fact, underlying disagreements with the Limited Partners (LPs, the fund’s investors) have come back to the surface, and the future does not look bright.
Summarising a very complex situation, one might say that investors in Lion Capital’s second and third funds are frustrated that despite having invested over a decade ago (14 years for fund 2!), their demands are not being met. As they have been waiting to cash out for 10 years, Lion’s rejection of at least one attractive offer for its large stake in Picard, a French food company, which would have allowed them to finally withdraw some profit, was rejected by the fund managers. This was the final straw.
So in an attempt to defuse protests from investors stuck in poorly performing funds, in 2018 the GP hired Lazard’s New York office to sketch them a way out.
To defuse the explosive situation, Lion hired Lazard and tasked its restructuring experts with raising a continuation fund. Initially the operation did not work on the American markets, and it was therefore relaunched – under codename ‘Simba’ – in Europe through Lazard’s Paris office.
The scope of the transaction involved French Picard and American ABG. According to an inside source: “Lion Capital is seeking to raise at least 400m Euros, of which at least 250m would be for Picard… to date, only Glendower Capital has committed to contribute 150m.“
Another source explained that the intended deal did not go down well with Lion’s Limited Partners who, Lion’s management made clear “would not be allowed to sell their holdings, and would to have to make do with working with Glendower Capital, or they’d have to wait three more years before being able to withdraw from the fund”.
The last aspect of this extremely complicated situation lies in the fact that by the end of 2023, the Zouari family, who hold 44.5% of Picard, will be able to activate a special purchasing option thus acquiring the fund’s remaining capital…
Controversially, some argue that the only reason Lion’s management has been so flippant about its commitment to the LPs is that they want to continue earning their management fees, as disgruntled as those who pay them may be. An extremely serious allegation that goes to show just how profound the disagreements have grown.
“We are witnessing a last-ditch attempt by Lion Capital, who know they will not be able to raise new funds and are therefore trying to take advantage of their LPs” according to a key player involved.
“The General Partner (GP) is known to be aggressive on the debt structures of its holdings and he has suffered from a strategy which is overly focused on consumption and retail – sectors badly affected by the pandemic“, one investment banker noted.
Apparel brand ‘John Varvatos’, in Lion’s fund 3 portfolio, underwent Chapter 11 bankruptcy in May 2020. The following month, British fashion label ‘All Saints’ (also part of the same Lion portfolio) dealt with serious problems and applied for a voluntary company arrangement (a British corporate support scheme which would entitle it to rent reductions). French companies that Lion’s invested in face similar difficulties.
How Lion Capital makes it out of this crisis remains to be seen. But one thing is for certain: the LPs are tired of waiting for fund managers who have not made their investments roar for much too long.