Jana Can’t Just ‘Take That Money and Run,’ Dyal Says in Lawsuit

(Bloomberg) -- Barry Rosenstein's Jana Partners oversaw about $10 billion of assets and was expanding its hedge funds in March 2015, when Dyal Capital Partners decided to buy a 20% stake.

Today, Jana is less than a quarter of that size, and one of its main portfolio managers, David DiDomenico, has allegedly stepped back from his day-to-day responsibilities to run a separate business. So Dyal wants its money back, claiming in a lawsuit Thursday that his reduced role triggered a repurchase agreement that allows the firm to recoup its initial investment.

Dyal, a Neuberger Berman unit that's the largest of its kind to acquire stakes in hedge funds and private equity firms, knew the risks of handing over millions of dollars to people running these entities. It didn't want them to just “take that money and run,” according to the lawsuit filed in New York State Supreme Court.

“We believe this claim is without merit and that the contract dispute will be resolved in our favor,” Jennifer Fanjiang, Jana's chief legal officer, said in a phone interview. “We will continue to focus on our business.”

The case highlights one of the biggest perils of buying stakes in alternative investment firms -- the bet that a few important people will stick around and not get distracted. The money can help founders plan for succession, but there's no guarantee these businesses will thrive under new leadership.

Despite that risk, money is pouring in. Dyal, founded in 2011, has led the charge in taking minority stakes in alternative asset managers, including Vista Equity Partners and H.I.G. Capital.

At least 39 buyout shops sold minority stakes from 2014 through 2018, according to a report last year by Bain & Co. That's more than triple the number from the previous five years as Dyal competes with Blackstone Group Inc. and Goldman Sachs Group Inc. On Thursday, the Wall Street Journal reported that Goldman's Petershill unit is in talks to buy a minority stake in European private equity firm Permira.

Dyal, which said it owns interests in 23 private equity firms and 18 hedge fund firms, generally expects managers to stay actively involved for the long haul. The company said in the complaint that it was “startled” by Jana's decision to shut two flagship funds last year and that it wanted Jana to grow, with DiDomenico as a key player.

“Dyal ultimately consented to the liquidation on the express understanding that Rosenstein and DiDomenico would keep working full-time at Jana” to help turn the business around, according to the lawsuit.

New Gig

Fanjiang said DiDomenico is still at the firm and that his role changed after the funds were shuttered. His responsibilities now include being chief executive officer of Osprey Technology Acquisition Corp., which recently raised $275 million in an initial public offering and plans to pursue takeovers in the enterprise software industry. Jana co-sponsored the venture, she said.

Reduced roles for either Rosenstein or DiDomenico “could spell disaster for Jana's future,” Dyal alleged, “just as it has for other hedge-fund firms that have seen their principals step back from the business, only to see massive withdrawals of investor money and inferior investment performance.”

As a cautionary tale, Dyal cited Goldman's 2010 investment in Shumway Capital Partners, a hedge-fund firm with $8 billion of assets under management. Less than a year later, founder Chris Shumway, “who enjoyed a strong reputation as a stock-picker,” announced he would step down as chief investment officer, setting off a stampede of limited partners seeking to withdraw their money.

“Faced with this backlash and the risk of further redemptions, Shumway returned all outside capital to investors, effectively shuttering his firm and massively impairing Goldman's investment,” Dyal said.

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--With assistance from Peter Jeffrey and Melissa Karsh.

To contact the reporter on this story: Sonali Basak in New York at sbasak7@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Peter Eichenbaum, Pierre Paulden

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