Cargill Hedge Fund in Chaos as Fat Salary, Feud Sink Sale Plan

Updated on
  • Cargill abandons effort to sell $10 billion investment arm
  • CarVal President Brice sued Cargill for wrongful dismissal

When agricultural giant Cargill Inc. put its investment arm up for sale last year, it had all the looks of a simple and quick transaction. Goldman Sachs was in charge of shopping the $10 billion firm, known as CarVal Investors, and powerhouses like Blackstone and Carlyle were among those sniffing around.

But in recent months the deal has turned into an embarrassing black eye for Cargill, the largest private company in the U.S., that set back its efforts to trim its sprawling empire. In June, the company fired John Brice, a brash and confrontational Brit who helped transform CarVal into an influential distressed-debt shop on Wall Street, and the two sides are now exchanging nasty allegations in an acrimonious legal battle. Amid the chaos, the sale has been abandoned and a string of senior executives have exited the firm.

Court documents and people familiar with the matter point to an excruciating year-and-a-half for Cargill. Some executives largely blame Brice for the debacle, saying he stymied and frustrated their attempts to sell CarVal, according to those people. But there was another, maybe bigger stumbling block to the sale -- a lavish compensation package for Brice and his team that potential buyers found untenable, they said.

Fractured Relationship

Any hope of reconciliation between Brice and Cargill vanished on June 9.

That day Brice commanded an all-employee meeting at the Hopkins, Minnesota-based firm. He described a fractured relationship with Cargill executives, one that wasn’t going to be repaired, according to a recounting by Cargill lawyers in court documents. Employees were stunned, sensing that something had gone seriously wrong after months of speculation a sale was imminent, people said.

Less than two weeks later, Brice was summoned to a board meeting in London where he was dismissed after a 20-year run. His rhetoric during the staff meeting had left the board “with no choice” but to terminate him, company lawyers said at a court hearing in early August.

He was fired, they said, for “creating a corrosive and demoralizing environment, for being dishonest, and because CarVal’s board lost faith and confidence in his ability to lead,” according to a transcript of the hearing in Delaware Chancery Court.

‘Secretive Plot’

Within weeks of his departure, Brice filed a lawsuit challenging his dismissal, stating that he was the victim of a “coordinated, secretive plot to oust him" that led to his "abrupt, unlawful and retaliatory” firing, according to a brief filed by his legal team.

Brice contends that the Cargill-dominated board exceeded its authority in dismissing him, and denies the company’s allegations.

Representatives for CarVal and Cargill declined to comment. Mark Lerner, a lawyer at Kasowitz Benson Torres & Friedman, which represents Brice, also declined to comment.

Representatives for Goldman Sachs Group Inc., Blackstone Group LP and Carlyle Group LP also declined to comment.

By the time of the dispute, Brice was already a larger than life character at Cargill, with a reputation as an abrasive, suffer-no-fools manager with an all-chips on the table investing style. He had joined CarVal in 1996 when it was still an internal unit investing Cargill’s money. Cargill was among other commodities conglomerates that had set up investment units to take advantage of information gleaned from its global reach.

Asset Manager

In 2006, Cargill spun off CarVal as an independent subsidiary as it sought to expand its role as an asset manager. While that allowed Cargill to remain the owner of the firm, it was divorced from making investment decisions.

Soon after, it named Brice to president and chief investment officer of the new entity.

CarVal’s fee structure was similar to what many hedge funds charge investors, known as 2 and 20. Those firms get roughly 2 percent of the investment as a management fee, and 20 percent of profits, or carried interest, after its funds exceed a certain performance benchmark.

But its pay package was unusual, according to people familiar with the matter. Cargill had granted Brice and management an unprecedented 90 percent of the carried interest that the firm generated and 50 percent of the management fee.

Brice earned a large share of the carried interest himself, court documents show, for what his lawyers describe as exceedingly profitable trades. They argue that he has the right to $60 million of carry from one fund and "a very large portion" of what they believe to be $165 million in carry value in another, according to the transcript.

Star Managers

The generous incentive plan was structured as a way to reassure outside investors that CarVal, now independent of Cargill, could retain star money managers, people said. Plus, CarVal traders had delivered strong returns in the years leading up to its separation, according to filings.

Brice had also put in some of his own money as guaranty, meaning that he would be hurt if his bets failed. Brice largely delivered, according to people who worked with him. He was instrumental in driving some of the biggest gains at CarVal in the years since the financial crisis, with returns exceeding 20 percent during some years, feasting on classics in the distressed-debt world. The firm’s most recent flagship fund has gained 14 percent since inception.

Brice’s most successful trades involved Lehman Brothers. One of them is still playing out. It tracks back to about $850 million of claims the firm bought tied to Lehman’s U.K. entity. If a U.K. court rules in its favor, it could become one of CarVal’s most profitable trades ever, people said.

Poached Talent

As the business grew, Brice poached talent from Credit Suisse Group AG, Morgan Stanley and Goldman Sachs. And his hard-charging reputation also grew, as he took apart analysts who made missteps and barked streams of invectives into the phone with colleagues across the world, according to people who witnessed the events.

But more recently, Cargill was looking to discard a business that wasn’t core to its operations -- which covers everything from hauling wheat across Russia, trans-Atlantic shipments of commodities and even a road salt business for melting ice.

As the sale effort moved forward, CarVal began to lose senior executives. Among them were Nick Weber, a managing director in the emerging markets business who left to join Oaktree Group, and David Chene, who oversaw the distressed business in the U.S. Bob Perry, who ran the real-estate business, and Pete Vorbrich a former chief financial officer, also departed in the last year.

Black River

The 151-year-old company had already shed its Black River Asset Management firm by spinning it off last year into three employee-owned firms. That came after it had liquidated some of its funds due to lack of investor demand, the company said then. Cargill had initially hoped to combine Black River and CarVal before shopping its sale.

Cargill was now hoping for a more conventional sale of CarVal. But bidders were making one thing clear -- the 90/50 split for management was a huge impediment, the people said.

Potential buyers, realizing they would be left with little in profit after the payouts, put in either low-ball bids or just walked away, according to people familiar with the matter.

To make the sale more appealing, Cargill offered Brice compensation to restructure his package. He rejected it. Cargill also encouraged Brice to explore a management-led buyout in which third parties might buy a minority stake.

Brice agreed to explore that but as the weeks went on his relationship with Cargill managers worsened. They were convinced Brice was going out of his way to sabotage any reasonable deal they could get, the people said.

Cargill soon concluded it had no choice but to abandon the sale, leaving the firm for now under the care of a three-person team.