Will Paul Capital’s investors revolt?

April 1, 2014, 11:43 PM UTC
How long can the fee hogs keep collecting their fees?

FORTUNE — Last month we wrote about Paul Capital, the large private equity secondaries firm that is winding down after failing to successfully raise its tenth fund. At issue was the firm’s decision to continue charging full management fees to investors, despite closing most of its offices and laying off most of its employees (i.e., eliminating the very overhead that such fees are designed to cover).

Now, sources close to the situation tell me that certain limited partners in Paul’s active funds have begun discussions about voting for a “no-fault divorce,” which basically would wrest control away from current Paul Capital management.

Around two-thirds of LPs would need to vote in favor of such a move, which rarely occurs within the private equity industry. But the investors I’ve spoken with are livid over the ongoing fees, which are said to total more than $40 million for calendar 2014 (and ratchet down over time).

Key would be identifying a third-party manager to handle the fund assets post-divorce, although I’ve heard of at least two different organizations that have expressed interest. Such a manager likely would be paid via a budget-based fee, rather than the current fee structure that is a predetermined percentage of committed and drawn capital.

Paul Capital did not return requests for comment.

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