Prophet Equity Management LLC (“PEM”), is a Delaware limited liability company based
in Southlake, Texas. PEM provides investment advisory services to Prophet Equity LP, a
Delaware limited partnership, and any parallel or alternative investment vehicles related to
Prophet Equity LP (collectively, the “Fund”). The Fund was formed in 2008, primarily to
acquire controlling equity positions in, and seek to improve the operations of, strategically
viable, asset intensive lower-middle-market companies that are underperforming their full
potential. Prophet Equity GP LP, a Delaware limited partnership (the “General
Partner”) serves as the general partner of the various Fund entities.
The Fund’s investments benefit from several unique capabilities: (1) an established and
unique network of professionals (including restructuring advisors, the Fund’s network of
operators and asset based lenders) from which the Fund sources significant transaction
opportunities; (2) demonstrated expertise in creatively and effectively structuring and
closing transactions in complex, underperforming situations (including the purchase of
assets of operating businesses out of Bankruptcy Court, the carve-out of entire businesses
units from larger companies, and the acquisition of stand-alone operating platforms); (3) a
rigorous process for screening investment opportunities based on size, industry segment,
strategic viability, detailed value creation plans, and price; and (4) the hands-on
involvement of PEM executives in defining and implementing operating improvements
that significantly improve cash generation and profitability in the Fund’s portfolio
companies.
PEM’s principal owners are Ross Gatlin and George Stelling.
PEM’s assets under management were $344,118,835 as of March 31, 2019, all of which is
managed on a discretionary basis.
Description of Advisory Services.
PEM serves as investment adviser to the Fund as set forth in a Management Agreement by
and among the Fund, the General Partner and PEM (the “Management Agreement”).
PEM’s services include:
• examining and evaluating investment opportunities,
• structuring and negotiating acquisitions and the related financing thereof,
• monitoring and managing investments and portfolio companies of the Fund, and
• evaluating and executing divestiture opportunities for such portfolio companies.
The individual needs of the investors in the Fund are not the basis of investment decisions
by PEM. Investment advice is provided directly to the Fund by PEM and not individually
to the Fund’s investors. The investment period for commitments to the Fund closed on
January 1, 2010.
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[Please note that any summary set forth herein of the terms and conditions of an
investment in the Fund is qualified in its entirety by the actual terms and conditions of
such an investment contained in the offering documents of the Fund. These include,
among others, the Fund’s Confidential Private Placement Memorandum (“PPM”),
Limited Partnership Agreement (“Partnership Agreement”), and Subscription
Agreement.] Per the Partnership Agreement and the Management Agreement, PEM is entitled to
compensation for its services in the form of an annual management fee (the “Management
Fee”); during the initial investment period—which ended on December 12, 2014—this fee
was equal to 2% of total capital commitments, and after the initial investment period until
the termination of the Fund this fee is equal to 2% of the total capital contributions used to
make investments in portfolio companies less any distributions constituting returns of
capital contributions and certain write-offs. The Management Fee is also subject to certain
offsets for investment banking fees, directors’ fees and other net fee income. The
Management Fee is payable by the investors in the Fund semi-annually in advance pursuant
to a capital call.
As set forth in Item 6 below, the General Partner is eligible to receive performance
allocations. The PPM and the Partnership Agreement and Management Agreement of the
Fund include further details on fees and compensation and related matters.
Additional Fees and Expenses:
In addition to the Management Fee, investors in the Fund bear all reasonable expenses
made on behalf of the Fund, including:
• expenses associated with the acquisition, holding and disposition of proposed or
actual investments in portfolio companies, including any in connection with
unconsummated transactions;
• legal, auditing, bookkeeping and accounting fees and expenses;
• expenses of meetings of the advisory board and the investors;
• insurance and indemnification expenses;
• interest expenses, investment banking, consulting, custodial, brokerage fees, finders
fees, custody, transfer, registration, advisory board, commissions, discounts and
other similar expenses;
• extraordinary expenses, such as litigation;
• expenses of liquidating the Fund;
• taxes, fees or other governmental charges levied against the Fund and all expenses
incurred in connection with any tax audit, investigation, settlement or review of the
Fund; and
• subject to certain limitations, expenses incurred in connection with the organization
of the Fund, the General Partner, PEM and any alternative or parallel investment
vehicles, and the offering of the limited partnership interests in the Fund (excluding
any placement fees).
Investors in the Fund are advised to review the PPM and the Partnership Agreement for a
more extensive description of the fees and expenses associated with an investment in the
Fund.
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In addition, the General Partner is entitled to receive a portion of the profits of current
disposition proceeds received by the Fund with respect to its portfolio companies from each
limited partner of the Fund, equal to 20% of the amounts otherwise distributable to such
limited partner. Such allocation of profits is only allocated to the General Partner when
specific conditions are met, including the return of all capital contributed to the Fund by
investors for realized investments and any writedowns on unrealized investments, as well
as fees and expenses allocable to such investments and the receipt of a preferred return on
such amounts.
One investor in the Fund – the Special Limited Partner – which is a coinvestment fund
consisting of related persons and employees of PEM or the Fund, is not subject to the
performance-based fees in connection with its investment in the Fund. This relationship is
clearly disclosed to the investors in the Fund as described in the PPM.
The Funds distribute current income from an investment to their partners generally in the
manner described above relating to the distribution.
The fact that the General Partner, as an affiliate of PEM, is in part compensated based on
the performance of the Fund may create an incentive for PEM to make investments on
behalf of investors that are riskier or more speculative than would be the case in the
absence of the performance‐based compensation arrangement. However, PEM manages the
Fund in accordance with the investment strategy disclosed in the Fund’s offering materials
to help ensure that investors are aware of this investment strategy and the risks associated
with this strategy. The PPM contains further details regarding the incentive allocation and
risk and strategy associated with the Fund’s investments.
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PEM manages the Fund, which is PEM’s sole client. The Fund was fully subscribed and
closed to new investment on January 1, 2010. The Fund’s investors consist primarily of:
• Insurance companies
• Public and private retirement and pension plans
• Fund of funds
• Business entities other than those listed above
• Trusts and estates
• High net worth individuals
All investors are subject to applicable suitability requirements. The General Partner
requires that each investor in the Fund be an “accredited investor” as defined in Regulation
D under the Securities Act of 1933, as amended, and a “qualified purchaser” as defined in
the Investment Company Act of 1940, as amended. The General Partner also generally
requires a minimum investment of $5 million, although the General Partner reserves the
right to accept lesser amounts.
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As noted in Item 4 above, PEM provides management services to the Fund including:
• examining and evaluating investment opportunities,
• structuring and negotiating acquisitions and the related financing thereof,
• monitoring and managing investments and portfolio companies of the Fund, and
• evaluating and executing divestiture opportunities for such portfolio companies.
Pursuant to these activities, PEM offers advice to the Fund generally to invest in equity and
equity-related securities in conjunction with privately negotiated transactions. These
investments are generally made in connection with acquisitions, dispositions,
restructurings, workouts, management acquisitions and other similar situations and utilize
some degree of leverage.
The Fund’s investment strategy is to focus on strategically viable, underperforming,
asset-intensive, lower- and middle-market companies with less than $250 million in
enterprise value and which PEM believes are performing well below full potential value.
Target portfolio companies may have a wide array of management, financial, and operating
problems and/or be subject to industry turbulence, but they must have sustainable
competitive advantages across a reasonable share of their business. In order to
implement operating improvement and growth plans, PEM brings to the Fund’s portfolio
companies extensive management tools, a unique and proven value and cash creation
process, and on-site implementation capabilities.
PEM’s investment professionals generally meet weekly to discuss potential and pending
transactions and the current investments in the Fund’s portfolio companies. At these
meetings every transaction being pursued is discussed. If PEM’s consideration of a
transaction has advanced beyond the preliminary evaluation stage, a value creation plan
and a detailed financial model is prepared and the transaction will continue to be discussed
at these regular weekly meetings. If at such meetings the PEM team authorizes the
transaction team to continue to pursue the transaction, the transaction team will conduct
further work. If the transaction reaches the stage where the transaction team proposes to
make a definitive bid to acquire or invest in the target portfolio company or business, it will
prepare a detailed memorandum on the transaction and convene a meeting at which the
PEM investment professionals will discuss the transaction in depth with the transaction
team and decide whether to authorize such a definitive bid and what the bid should be. In
addition to an in-depth discussion of the target company or business and the investment
thesis, deal tactics and potential exit strategies will usually be discussed.
Risk of Loss:
An investment in the Fund entails a significant degree of risk and therefore should be
undertaken only by investors capable of evaluating the risks of the Fund and bearing the
risks such investment represents. Set forth below is a non-exhaustive list of such risks:
• No assurance of investment returns; past performance is not a guarantee of Fund
performance
• Dependence on PEM’s key personnel
• Difficulty locating suitable investments
• Financial market fluctuations
• Illiquidity of investments by the Fund
• Illiquidity of investment in the Fund
• Use of leverage
• No operating history of the Fund
• Competition for investments
• Risks associated with foreign investments
• Risks associated with acquiring material, non-public information
• Risks associated with minority investments
• Risks associated with a limited number of investments
• Risks associated with legal, fiscal, and regulatory regimes and subsequent changes
thereto
• Risks associated with bridge financings
• Dependence on portfolio company management
• Obligation to indemnify PEM, the General Partner and their owners, employees
and agents
• No right of investors to control the Fund’s operations
• Potential conflicts of interest
• Failure of another investor to make its capital contributions
• Tax considerations
As well, stock markets and bond markets fluctuate substantially over time. As recent global
and domestic economic events have indicated, performance of any investment is not
guaranteed. As a result, there is a risk of loss of the Fund’s assets that may be out of PEM’s
control. PEM cannot guarantee any level of performance or that investors in the Fund will
not experience a loss of their investment. There is no assurance that the Fund will be able to
generate returns or that the returns will be commensurate with the risks inherent in their
investment strategy. The marketability and value of any such investment will depend upon
many factors beyond the control of the Fund. Therefore, an investor should only invest in
the Fund if the investor can withstand a total loss of its investment. The past investment
performance of the personnel of PEM cannot be taken to guarantee future results of the
Fund or any investment in the Fund.
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Neither PEM nor the Fund have any legal or disciplinary events to report.
On occasion, in the ordinary course of its business, the Fund is named as a defendant in a
lawsuit or arbitration proceeding. PEM does not believe that any current litigation or
arbitration proceeding to which the Fund is a party will have a material adverse effect on
PEM and/or the Fund.
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Neither PEM nor any member of the management of PEM is registered, or has an
application pending to register, as a broker-dealer, commodity pool operator, futures
commission merchant, commodity trading advisor, and there are no relationships material
to the management of the Fund with any of the following:
• broker-dealer, municipal securities dealer, or government securities dealer or
broker
• investment company or other pooled investment vehicle (including a mutual
fund, closed-end investment company, unit investment trust, private investment
company or “hedge fund,” and offshore fund)
• other investment adviser or financial planner
• futures commission merchant, commodity pool operator, or commodity trading
advisor
• banking or thrift institution
• accountant or accounting firm
• lawyer or law firm
• insurance company or agency
• pension consultant
• real estate broker or dealer
• sponsor or syndicator of limited partnerships
PEM has entered into “side letters” with investors in the Fund, which allow for certain
additional rights with respect to the Fund. These “side letters” are presented to all investors
in the Fund and each investor is allowed to elect to receive the rights and benefits of each
such “side letter.”
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Personal Trading
PEM has adopted a code of ethics (“
Code”) for all of its employees describing PEM’s
standard of business conduct, and duty to its clients. The Code includes provisions relating
to the prohibition of insider trading and personal securities trading procedures, among other
things. All employees must acknowledge the terms of the Code, as amended, annually.
A copy of the Code is available to any investor in the Fund upon request by calling
(817) 898-1500 or emailing
[email protected].
An affiliate of PEM’s coinvests with the investors through the Fund (as the Special Limited
Partner) in all of the Fund’s investments on a pro rata basis (based upon the relative
commitments of the Special Limited Partner and the investors in the Fund as measured on
the date of each investment by the Fund).
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All securities held by the Fund were acquired directly through private transactions, and no
intermediary served as a broker for any subscription for, or serves as a broker for any
redemption of, any interests in the Fund.
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The Fund holds all of the investors’ funds and all securities acquired with respect to an
investments by the Fund; the Fund does not use a qualified custodian for either of these
functions. The Fund furnishes quarterly unaudited and annual audited financial statements
of the Fund to all investors in the Fund. The Fund advises investors to carefully review
such financial statements.
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PEM accepts discretionary authority to manage the Fund and its assets, pursuant to the
Management Agreement and the Partnership Agreement. PEM maintains the authority to
manage the Fund on a discretionary basis, subject to the overall supervision of the General
Partner, in accordance with the investment guidelines, limitations, other provisions and
terms set forth in the Partnership Agreement and the Management Agreement. In all cases,
PEM exercises its discretion in a manner consistent with the stated investment objectives
for the Fund.
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PEM has discretionary authority over the Fund’s assets. There are no current financial
conditions that are reasonably likely to impair PEM’s ability to meet its contractual
commitments to the Fund.
Item 19 – Requirements for State-Registered Adviser
This item is not applicable to PEM.
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