Following the insolvency of KCP, defaulting investors are rapidly becoming a matter of concern.
One of the victims of the administration of Kaupthing Singer & Friedlander Limited in the UK, and the failure of other members of the Kaupthing group in Iceland and across the globe, has been Kaupthing Capital Partners II (KCP). KCP was a private equity fund, whose investors were Kaupthing entities and employees and unrelated third parties.
As a capital fund, KCP had access to loan facilities within Kaupthing, enabling investment in advance of drawdowns from investors. While this afforded freedom and flexibility, the general failure of the Kaupthing group precipitated a demand for repayment on loan facilities, rendering KCP insolvent as it was unable to pay its debts as they fell due. Our appointment as administrator of KCP duly followed.
Very few private equity funds have such loan arrangements, and we are not aware of any other funds which have entered an insolvency process for similar reasons.
Investors' default is, however, becoming a matter of increasing concern for fund managers, and there is anecdotal evidence from the legal profession of defaults from investors and indications that they will not be able to make future drawdowns. Such defaults should not, however, lead to the insolvency of private equity or other investment fund values unless, like KCP, the fund itself has borrowed against future capital calls.
Insolvency practitioners are well versed in assisting and acting for entities in financial difficulty. Our appointment over KCP has presented a welcome change, bringing the opportunity to engage with investee companies which are not in financial distress and have good management and sound business plans. We have maintained continuity in the management of the investments and the future looks promising, despite the difficult economic climate that lies ahead.
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