Crossroads to buy out
Kamehameha stake

The venture-capital firm gets court
backing that paves the way to
sever ties with the Hawaii trust

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By Randy Whitestone
Bloomberg News

Wilmington, Del. >> Crossroads Group LP, which sued investor Kamehameha Schools for blocking fund-raising efforts, won backing from a Delaware judge to buy out the Hawaiian charity, its top outside investor.

Delaware Chancery Court Vice Chancellor Jack B. Jacobs in an April 1 ruling said Pauahi Management Corp., whose parent Kamehameha Schools made $2 billion on an investment in Goldman Sachs Group Inc., must appoint an appraiser to value its stake in Crossroads. The appraisal, which will probably take place this week, would pave the way for a buyout, said John Buser, chief operating and chief financial officer for the Dallas-based firm.

"They have blocked our efforts to move forward," said Crossroads' Buser, who said management will now invest $15 million, boosting the fund-management firm's capital to more than $55 million. "This frees us to expand the business the way we see fit."

The worst venture and buyout returns on record the past two years have prompted court battles between private-equity partners that in the past would likely have been settled behind closed doors. The Crossroads suit was filed Feb. 28, the same week Connecticut's state pension fund sued buyout firm Forstmann Little & Co. over money-losing telecommunications investments.

Crossroads, started in 1981, is a "fund of funds" firm that takes money from institutions like Pauahi and invests in venture-capital and buyout funds managed by other firms. Since 1981, it has raised $2 billion, acquiring stakes for investors in more than 200 private equity funds.

Crossroads in its suit charged that Pauahi more than once kept the firm from making investments. Pauahi this year objected to a $30 million fund-raising plan, part of which was to be used to buy a stake in early-stage venture fund Matrix Partners VII LP, while in early 2000 it blocked an initial public offering that was slated to raise as much as $1 billion for Crossroads.

Under its 1996 partnership agreement, Pauahi invested $12.3 million and had the right to block additional outside investments in the management company because it owned more than two-thirds of the limited-partner interests. Crossroads management, which owned the rest of the limited and general partner interests, had the right to buy out the investor's 26 percent stake after an appraisal if Pauahi objected to further outside investments.

Pauahi claimed in court papers that Crossroads with the IPO sought to force the investor to sell out at an unfair price -- as little as one-sixth its original investment -- and hadn't shared investment distributions.

Kamehameha President Wallace Chin and Donald Reid, Pauahi's Delaware attorney, didn't return telephone messages seeking comment.

Crossroads last year needed money in part to fund a $25 million May 2001 commitment to Matrix, whose four previous funds returned 50 percent to 400 percent a year through the end of 2000, Crossroads said. Pauahi in an Oct. 26 letter said it was unwilling to provide additional money to Crossroads because the Matrix investment was improper.

After Matrix made a capital call for $1.25 million from Crossroads in January, Crossroads sought to borrow money to meet the commitment, a move Pauahi blocked, saying the terms weren't favorable to the partnership.

On Feb. 15, Crossroads issued a formal call requiring Pauahi to name an appraiser for its existing stake within five days. Crossroads sued two weeks later, and Pauahi asked the court to delay appointment of an appraiser until its disputes with Crossroads were settled by an arbitrator.

One of those disputes centers on distributions: since 1996, Pauahi said, Crossroads has received $35 million from investments made by the management company, while Pauahi received $100,000.

Kamehameha Schools/Bernice Pauahi Bishop Estate, Hawaii's largest private landowner and a trust whose mission is educating native Hawaiians, invested $500 million in Goldman when the investment bank was a private partnership.

The charity has since realized more than $2 billion selling shares in the now-public Goldman.