Awkward times at Lee
Thomas H. Lee Partners welcomes 200 or more of its nearest and dearest private equity clients this morning to the firm's annual investor meeting, long a showcase for portfolios that have reliably earned fortunes for their limited partners.
The one-day event at Boston's Four Seasons hotel will be a jam-packed program. Individual presentations on more than two dozen investments are scheduled to cover more than eight hours through the day.
In that respect, the meeting today will be business as usual. What is different is the elephant in the conference room: Lee's big investment in the bankrupt brokerage Refco Inc., which melted down in a very public mess last month.
There is no good time for bad investment news, but this is a particularly awkward moment. Lee executives are reaching out to the very clients in today's audience and asking them to invest billions of new money in the firm's next and biggest private-equity fund.
Beyond sheer size, the new fund isn't just any fund. Though Tom Lee himself took a big step into the management background of the firm's last fund, the next one will be the first in which Lee has no role in raising the money and will have no hand in its investment. Lee's next-generation lieutenants, Scott Sperling, Scott Schoen, and Anthony DiNovi, are in charge as never before. Put yourself in their shoes. Would you want the one big meeting of all those clients to get bogged down in questions and discussion about what went wrong with Refco?
Lee executives have done an effective job in recent weeks of diffusing exactly that potential problem. They have talked and written the subject to death with clients, so there isn't very much left to say.
Lee executives conducted at least two conference calls on the subject with limited partners, most recently eight days ago. They have also written to clients at least twice. A Nov. 3 letter I saw was an exhaustive Refco examination stretching over eight pages.
''In our 30-year history, this is the first time we have been victimized by such a fraud," the letter said. ''What makes this particularly painful is that we continue to believe that Refco could have been an extraordinarily successful investment."
The letter notes that former Refco chief Phillip Bennett, now charged with fraud, was a guest at last year's meeting of Lee investors. ''Many of you . . . no doubt found him as impressive as we did," it said.
The letter was signed by DiNovi, Schoen, and Sperling, but not Lee himself. Though Lee has had a limited role in the management of his firm's last fund, he did sit on the Refco board.
The communication blitz has gone over well with clients I spoke with recently. ''They've been pretty upfront and honest about it," one limited partner said.
One key fact that makes a lot of good will possible: The performance of the last Lee fund, which has written off its Refco stake, is still generating huge annual returns in excess of 30 percent. Refco is the ugly exception in a portfolio with more than its share of big winners.
Refco will come up at today's meeting. But so will Lee's investments in companies like Warner Music Group, Houghton Mifflin, and Simmons mattresses. The schedule says they'll all get about 15 minutes and everyone has incentives to keep the program moving.
The Red Herring
In other Tom Lee news: Three principals from Lee's venture capital arm, TH Lee Putnam Ventures, are starting a firm of their own. Harvey Golub, Ramanan Raghavendran, and Renny Smith are forming GRS Partners and expect to launch their own fund next year. They will continue to manage investments in the Lee venture portfolio.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com. 
