`Roll Ups' Are Raising Eyebrows In CongressDean Foust
When real estate and oil-drilling partnerships turn sour, promoters inevitably turn to two things: Rolaids and "roll-ups." That's Wall Street parlance for the merger of several limited partnerships into a single, publicly traded company. In recent years, more than 275,000 small investors have experienced roll-ups--and a lot of them are very upset about it. For promoters, roll-ups mean hefty fees. But for the investors, whose partnership interests have been converted into stock, roll-ups these days usually mean only one thing: The value of their investments declines. The main reason is that the stock market has been taking a more negative view of these investments than has the illiquid market for partnership interests.
But big changes in the roll-up game are afoot. Investors have flooded regulators and lawmakers with complaints, elevating partnership roll-ups into the hottest securities issue now before Congress. Lawmakers and regulators are mulling measures to stem perceived abuses in the conversion process. "Limited partners feel that they have been sacrificed and fleeced for the financial benefit of the general partners," declares Senator Alfonse M. D'Amato (R-N. Y.).
RAIDER-PROOF. Critics contend that promoters often put their own interests ahead of their customers'. Promoters were hurt by 1986 tax-law changes that made it hard for them to sell new partnerships. And the slumping real estate market has cut partnerships' cash flow and promoters' annual fees, which are paid out of cash flow. The critics say promoters seized on roll-ups to generate new fees. And as heads of publicly held companies instead of partnerships, they have been able to award themselves hefty management salaries. They frequently entrench themselves with antitakeover provisions that further deflate share prices.
The consequences for investors can be devastating. In recent years, they have suffered a $1.4 billion decline in the market value of their holdings because of roll-ups, according to the Emeryville (Calif.) Liquidity Fund Management Inc., which trades partnership interests in the secondary market.
Investor advocates who are surveying roll-ups say they have found other abuses. They claim that the voting procedure for conversions makes investors pushovers for opportunistic general partners. Promoters often pay brokers for each "yes" vote they deliver. And promoters often employ proxy-solicitation firms to deluge investors with calls and letters advising them to support the roll-up. "If municipal elections were run the same way, they would have been outlawed 100 years ago," says Glen Bigelow, president of New York-based Bigelow Management, which trades LPs.
Regulators and lawmakers are now working hard on a roll-up cleanup. In January, Senator Donald W. Riegle (D-Mich.) asked the Securities & Exchange Commission to investigate investors' allegations of voting fraud in a roll-up last December engineered by Concord Assets Group in Boca Raton, Fla. A Concord executive confirms the SEC is investigating, but denies any wrongdoing. The National Association of Securities Dealers is considering outlawing the kickbacks that brokers get from promoters for delivering investors' "yes" votes.
LESS SMOKE. Government officials are also looking for ways to make the roll-up process more investor-friendly. High on the congressional list is improved disclosure. One measure under consideration is a "plain English" requirement to simplify the huge and complex proxy statements. SEC Chairman Richard C. Breeden told Congress on Feb. 27 that his agency is studying whether to require better disclosure. Congress is considering giving dissident investors greater rights. For instance, they might be entitled to cash or to a note equivalent to their original stake when more than 20% of investors oppose a roll-up. Another proposal would slap a 50% tax on promoters' fees from roll-ups that don't give dissidents such an alternative.
For their part, partnership promoters argue that the problems have been overstated. They contend that roll-ups diversify risk, reduce administrative costs, and provide investors with greater liquidity than the secondary market for LP interests. The reason for the plunge in partnership stock prices, industry officials say, is that with the ailing real estate market, the climate for such investments has deteriorated.
Whatever the merit of these arguments, the prospect of congressional action is already having an effect on the roll-up game. As many as 300,000 more investors were expected to vote on roll-ups this year. But promoters have withdrawn seven of the 10 most recently planned conversions awaiting SEC clearance. Senator Christopher J. Dodd (D-Conn.), chairman of the securities subcommitee, vows that if promoters try to rush roll-ups through to beat congressional action, he'll make any reforms retroactive. That will be a relief to investors who would otherwise be forced into deals not in their interest. But there's one thing Washington can't do for investors: bail them out of investments that maybe weren't so smart in the first place.