[L]imited, not [P]owerless

With great power comes great responsibility. And with little power? With little power comes limited liability.

That, in essence, was what London’s High Court told 22 angry limited partners (LPs) in the Henderson PFI Secondary Fund II in response to their attempts to pursue legal redress against Henderson for alleged breach of mandate.

One should not underestimate the significance of this closely watched judgement, which can still be appealed against by Henderson’s LPs. With it, the court has effectively underlined the fundamentals of the LP/general partner (GP) relationship: that is, LPs have to accept that, once they put their money into a fund, their role is mostly passive. 

In exchange for that relative passivity, LPs get enhanced protection: should disaster strike, they are only liable on debts incurred to the extent of their investment in a firm. GPs, on the other hand, are fully exposed and personally liable, meaning they stand to lose much more than their investment – if things get really nasty, they can lose their shirt.

What Henderson’s LPs are trying to do – aghast at seeing their £573.5 million (€718.4 million; $912.7 million) investment in Henderson PFI II now worth 30 percent less and delivering an internal rate of return (as at June this year) of minus 8 percent – is subvert that general principle.

In order to do that, they’ve unleashed a barrage of arguments against Henderson, ranging from the persuasive to the less convincing.

On the persuasive side is LPs’ claim that Henderson convinced them to buy into the fund on the premise that it would invest in low-risk PFI assets. Instead, they argue, Henderson used all the money raised to purchase UK developer John Laing. 

Now, it’s true John Laing has a significant portfolio of PFI assets. But it’s also much more than a mere holding company – John Laing is a fully fledged firm, with several lines of business and a pension deficit.

On the more doubtful side of the argument is LPs’ contention that they didn’t know Henderson was intending to buy John Laing. This despite Henderson’s involvement in a three-month bidding war against insurer Allianz over John Laing. If true, that shows a surprising cavalier attitude towards monitoring their investments.

No matter. London’s High Court has effectively told LPs that – whatever they think of Henderson’s strategy – the fund manager did not breach its mandate. But as victories go, this is a pyrrhic one for Henderson.

That’s because the court’s legal absolution cannot protect the fund manager against the damning reality: that a majority of LPs in one of its funds were so angry and disapproving of Henderson’s strategy that they were willing to take the fund manager to court over it. In terms of reputational damage, that verdict is devastating.

Yes, it’s true that Henderson PFI II will only unwind in 2016. Theoretically, that means LPs can still make money out of their investment. But even if they do, they are unlikely to thank Henderson for the ride. After all, they thought they had signed up for Driving Miss Daisy; instead, they found themselves aboard The Fast and the Furious.

Despite the court ruling, the message coming from Henderson’s LPs rings loud and clear: ‘L’ may stand for limited, but ‘P’ does not stand for powerless.