WASHINGTON : Proposals Aim to Protect Investors When Partnerships Are ‘Rolled Up’
When the going gets tough and the real estate and oil-and-gas limited partnerships go bad, general partners get rolling. Rolling up, that is.
“Roll-ups” are mergers of several limited partnerships, some good and some bad, into a single investment vehicle that can be traded publicly on an exchange. Some see them as the latest cure on Wall Street for general partners--the day-to-day managers of limited partnerships who are responsible for the partnership’s financial liabilities.
For general partners, roll-ups offer huge new fee income, despite the economic downturn that has plagued businesses that typically rely on limited partnership financing, such as commercial real estate construction and oil and gas exploration. They also convert a finite investment, usually seven to 10 years, into an infinite one for which fees can be collected in perpetuity.
The problem is that the limited partners--individual investors who have limited liability and are not involved in management of the partnership--are not always happy because they are losing money on such deals. The Securities and Exchange Commission is developing new regulations for them, and key members of Congress are considering legislation to reform the roll-up process to protect limited partners.
The general partners promise that the new investment will reduce expenses, take advantage of economies of scale and provide liquidity by listing the partnership on a securities market. But the reality is that these advantages come with a hefty price tag and a measure of risk.
Of the 13 roll-ups done through 1990, the value of a limited partner’s share dropped an average of 44% on the first day the rolled-up version began trading on an exchange, said Richard Wollack, chairman of Liquidity Fund, a San Francisco-based investment firm.
If roll-up investments spread, the potential impact could be enormous. Between $50 billion and $60 billion is held in limited partnerships nationwide, much of it by small investors. Margaret Hooker, a Connecticut unemployment benefits specialist, recently testified before Senate Banking, Housing and Urban Affairs Committee’s securities subcommittee that she had invested $25,000 in a limited partnership as a long-term saving for her retirement. When her partnership was rolled up into several others, she saw her share plummet to $11,000.
Ronald Rybicki, a school social worker from Detroit, testified that he invested $20,000 in the most “comprehensive and conservative” limited partnership he could find. Despite his opposition, a roll-up went through, and after a single day of trading, he suffered a 75% loss on his retirement money.
Few small investors have the financial savvy to understand the roll-up process and its implications. Even among those who do, fighting a roll-up is often beyond their financial means because it can mean having to hire expensive lawyers.
Before a limited partnership can be rolled up with others, the partners are given the opportunity to vote. They make their decisions on the basis of a lengthy proxy statement prepared by the general partner, the broker who sold the original investment and a recommendation from an independent investment banker. Limited partners may often be unaware that the broker is typically reimbursed by the general partner only for “yes” votes. The investment banker, too, is paid by the general partner.
Sen. Christopher J. Dodd (D-Conn.), chairman of the securities subcommittee and sponsor of a Senate reform bill, summed up the problem this way: “Investors in more than 30 states have written to me, saying that they have been confused by 200- and 300-page proxy statements. They have felt pressured to vote ‘yes’ for the roll-ups. And, even if they vote ‘no,’ they are being forced into investments they had no intention of being in because other investors did not fully understand the risks and voted for the roll-ups.”
Dodd is waiting to see how the SEC deals with the problems with a set of new regulations of its own before deciding how hard to push his legislation. He has 14 co-sponsors so far.
Dodd’s bill (SB 1324) and similar House legislation (HR 1885) proposed by Rep. John Dingell (D-Mich.) address the potential for abuse in the conversion process. They focus on four main areas: straightforward disclosure, both for the potential risks and by comparison with the original investment; restrictions on communications among the limited partners; pressure tactics by brokers, and alternative investments for investors who do not want to participate in the roll-up.
“Unscrupulous sponsors are using abusive practices to stampede investors into voting in favor of the roll-up,” warned Dingell, the powerful chairman of the House Energy and Commerce Committee. “And the stock price almost always dramatically sinks once the unit becomes publicly traded. The investors are sunk, while the general partners make out like a bandit.”
Cutting Paperwork for Small Business
Sen. Sam Nunn (D-Ga.), a member of the Senate Small Business Committee, has introduced legislation to control the amount of paperwork that small businesses are required to file with federal agencies.
The Paperwork Reduction Act (SB 1139) would reauthorize similar legislation from 1980, which required, among other things, that before requesting information from businesses, a government agency must conduct a thorough review to ensure that its requests are necessary and practical.
Nunn will set an initial goal of 5% reduction in the forms that the federal government requires small businesses to complete. New reviews will be established for information requests and agencies will be required to use information more efficiently.
“The cumulative effect of the government’s information requirements is drowning the small-business community,” Nunn said. “Of the $330 billion in estimated annual paperwork costs to business, one-third are borne by small businesses, which have the least resources for handling the paperwork load.”
Labor fears that new reductions will impede the free flow of information required to monitor business.
But a large coalition of business groups are supporting Nunn’s proposal. “Red tape has a real economic cost,” said Leslie Aubin, a lobbyist for the National Federation of Independent Businesses. “It is not just an esoteric concept.”
