Claw back: Could John Darby and George Kerr be owing PGC $8m?

As a follow up on the EPAM deal we noted the following article by Marta Steeman, which is doing a stellar job of following PGC.
The important parts of the article states,” Pyne Gould Corporation (PGC) has tightened up its $18 million deal to buy director George Kerr's asset management business, after questions were raised. PGC can claw back up to $8m of its $18m purchase of Equity Partners Asset Management (EPAM) if revenue performance targets are not met in the wider Perpetual Asset Management (PAM) business of which EPAM will form the initial foundation.
Questions have been raised about the related party deal between Kerr and PGC, since it was announced on July 21…….. under the new amending agreement the purchase price could fall by a maximum of $8m if actual revenue for PAM did not exceed targeted revenue in the two years from the completion of the transaction till June 2011……….The (EPIC) prospectus shows the close relationship between EPAM, EPIC, Kerr and Macquarie……Macquarie is also EPIC's arranger and adviser on the Moto purchase, plus one of the sellers, the prospectus says…….PAM's new chief executive, John Duncan, worked for Macquarie for 15 years. He declined to talk about how the amending agreement would work..”

The natural question to ask; Were the targets met and is the claw back due?


The EPAM targets are dependent on EPIM's performance, which again depends on EPIC's performance. 
The EPIC prospectus (page 30) states that EPIM receives the following fees;
Management fee: 1% of gross asset value of EPIC (monthly in arrears),
Performance fee: None Thames Water investment, but once could be negotiated for subsequent investments, in this case Moto investment.
Transaction fee: 1% for any investments made, in this case Moto.

(‘000)	2009	2010	2011
Management fee
Gross Assets	$105,888	$139,202	$122,303
1% from Aug 2009	$441	$1,392	$1,223
Reported in EPIC 2011 annual report		$1,503	$1,586
Performance fee
Reported in EPIC 2011 annual report *		$0/$3,531	$0
Transaction fee
Reported in EPIC 2011 annual report**		$0	$0

* The performance fee for Moto according to note 20 of the annual report is calculated as follows, 20% of the IRR above 9%/annum hurdle rate. As at 31 March 2010 a provision of $3.5m was made and remains in the accounts. However, note that it was not paid yet.
**We find it very strange that no transaction fee seems to have been paid, but none is showed in the accounts, which means it has been lobbed in with some other expense, but even that seems unlikely. It seems very odd thought that EPAM would not take a fee it is entitled to.

To get back to the main point of whether a claw back is payable by Darby and Kerr. Consider firstly that EPAM’s performance is solely dependent on the performance of EPIM, which is again dependent on the performance of EPIC. EPIC is down -87% from 2009-2011, which is the period the claw back references. Fees, as described above, come to about $3.5m, so it is extremely likely that a claw back is due. Either that or the performance targets were set so ridiculously low that it was almost impossible to miss. However, if the independent directors, Bryan Mogridge, George Gould and Bruce Irvine, did more than just a cosmetic deal it strikes us as highly unlikely that Darby and Kerr could have met their targets when the underlying investments are down 87%!

That is something worth pursuing with PGC’s independent directors!!