LONDON—Charterhouse Capital Partners LLP is the elder statesman of British private equity, 80 years old and among London’s most prestigious and private firms. Based in a square by the London Stock Exchange and St. Paul’s Cathedral, it has long thrown off profits to a tight circle of principals.  But behind the genteel facade, Charterhouse has been a scene of friction, involving both how its earnings are divided among the staff and how to hand power to a new generation. At a sensitive time—as the firm asks investors for billions for new deals—it is grappling with two soured investments, and details of its internal discord have been laid bare in a lawsuit by a disgruntled former partner.  The lawsuit also revealed a fateful choice made by executives who became Charterhouse’s owners nearly 14 years ago: They would make as much money as possible, and pay little heed to their successors.  “The absolute intention is to maximise the value of [Charterhouse] to the people who are there today,” Gordon Bonnyman , then chief executive and now chairman, wrote in a 2001 letter made public in the lawsuit.  “In other words, no one is particularly concerned with the financial well being of those who will succeed us.”  Charterhouse partners never aimed for the firm itself to become valuable, according to testimony in the suit, filed in London’s High Court. The approach contrasts with that of big American buyout firms, which don’t just profit from their deals and fees but also build the value of their brands, making it possible to raise large sums by someday selling shares to the public.  Blackstone Group LP, KKR & Co., Carlyle Group LP and Apollo Global Management LLC have become public companies with multibillion-dollar market values, and are global leaders in private equity. Charterhouse and most of the rest of Britain’s buyout firms remain private and have less market impact.  Geoffrey Arbuthnott, the petitioner in the suit and for years the second-largest shareholder after Mr. Bonnyman, wrote his own understanding of Charterhouse’s guiding principles when he and others purchased it. The buyers “intend to strip [Charterhouse] of cash each year,” Mr. Arbuthnott wrote in a fax to his lawyer. He referred to this practice as one of “paying ‘excessive’ bonuses.”  The ownership philosophy is “brutal,” said Tim Jenkinson, a finance professor at Oxford University who specializes in private equity. “The value of a company is not just in the current humans who are running it,” he said. “Given that funds typically have a life of at least 10 years, investors really, really care about the next generation.”  The goal was different at the firm’s beginnings in 1934. A panel of economists including John Maynard Keynes was delving into the causes of the Depression. One they identified was a gap between the financial world and industrialists in need of funding.  Charterhouse set out to bridge the gap. The firm, named for a private school started centuries ago, later survived World War II aerial bombing of its offices, opened its funds to outside investors in the 1970s and then was owned by a succession of banks.  In 2001, the 15 executives who ran Charterhouse sought to buy it from its owner, HSBC Holdings PLC. They drove a hard bargain. The bank valued Charterhouse at £102 million, then equaling about $145 million. The partners, arguing that the firm’s value lay in their willingness to work for it, got it for £6.1 million.  Mr. Bonnyman, the chairman, makes no apologies for their expressed purpose of making as much money as possible for themselves. The 70-year-old son of a Glasgow brewery manager, he attended Columbia Business School on a scholarship funded by an earlier Scottish tycoon, Andrew Carnegie. In the 2001 purchase, Mr. Bonnyman acquired a 17.8% stake in Charterhouse.  “If we do a job for [investors] and they pay us for it, I think we should have that. And I don’t worry, in saying that, what generations in the future will have,” Mr. Bonnyman said in an interview in his office overlooking St. Paul’s Cathedral.  “It doesn’t convey greed,” he added. “It conveys the rewards that we generate from our investors for doing a good job are ours. They’re not anybody else’s.”  A flurry of deals followed the executives’ purchase of the firm. Charterhouse collected a management fee of 1.5% of funds and 20% of profits on its deals when they matured. A buyout fund it raised in 2003 delivered £353 million, or about $560 million, in profit for the partners from 2007 to 2010, according to documents filed in court.  The profit didn’t have to be divided many ways; the team on the firm’s website numbers fewer than 30.  Two Charterhouse policies complicated matters. The deal profits and fee earnings weren’t paid to partners in strict proportion to their holdings but according to decisions made by firm leaders.  And Charterhouse provided no mechanism for retiring partners to sell their interests to those who remained or for young staff members to acquire shares.  Mr. Arbuthnott, the lawsuit petitioner, held nearly 9% of Charterhouse. His compensation totaled almost £50 million from 2002 to 2008, court documents filed by Charterhouse showed.  But in 2006, his share of deal profits was cut. In court, he likened this to being “mugged.”  Mr. Arbuthnott, now 58, had become conspicuous by his absence from takeover deals, and younger deal makers complained he wasn’t pulling his weight, according to witness statements from other partners. Mr. Bonnyman testified that Mr. Arbuthnott spent time at work reading the Racing Post and playing online chess.  Mr. Arbuthnott declined requests for an interview. In court, he said that he had been Mr. Bonnyman’s right-hand man and informal chief operating officer, meeting with him regularly about the firm’s affairs.  In 2007, Mr. Arbuthnott’s bonus was cut to £400,000. He called this humiliating.  That year, a public share sale by Blackstone showed how highly investors could value a top private-equity firm, as the offering raised billions of dollars. Mr. Arbuthnott’s lawyers said the IPO plans of U.S. firms prompted him to envision a similar path for Charterhouse.  But Mr. Bonnyman called the shots, and he had no interest in a stock-market listing for Charterhouse. Partly because of its modest size, he was dismissive when bankers suggested that a public offering could make him very rich.  “I did not take this remotely seriously,” he wrote in a witness statement for the suit. “When I discussed this suggestion with my colleagues, there was a good deal of hilarity.”  In the interview, Mr. Bonnyman said that in his view, public ownership of a private-equity firm creates a conflict of interest between shareholders and investors in the firm’s funds. “I don’t know which agenda is dominant at any time,” he said.  Not all private-equity leaders in the U.K. see public ownership that way. “What sets the American leaders apart,” said Mark Florman, a former CEO of the British Private Equity and Venture Capital Association, “is their ability to share ownership, which is a form of risk-taking, because you’ve got to have the self-belief that the act of sharing will create more value for everyone, including yourself. The British and other Europeans were much less willing to do this.”  A showdown came in December 2007. It was time for Mr. Arbuthnott’s annual appraisal. By then, he was afraid of disagreeing with his boss, Mr. Bonnyman, he testified.  Mr. Bonnyman, in his own testimony, said Mr. Arbuthnott’s “brooding, sullen presence” had become “a burden and even an embarrassment” to the team.  The subject of bonuses arose.  “I asked him how things were going,” Mr. Bonnyman said in court documents. “Arbuthnott said: ‘I f—ing hate it,’ an unusual opening to a bonus discussion, I thought.” Mr. Arbuthnott denied saying this.  At the end of the appraisal, Mr. Arbuthnott resigned.  In his separation agreement, he obtained access to the firm’s Wimbledon tickets for 2008. But he didn’t get anyone to buy his shares. There was no agreement on what the price should be.  One day in the summer of 2008, he traveled to the Hoste Arms, a pub near the sandy North Norfolk coast of England, to meet with Charterhouse’s chairman at the time, Edward Cox.  Over lunch, according to a note Mr. Cox wrote afterward, Mr. Arbuthnott said that Charterhouse had engaged in practices during an acquisition that would make the financial regulator “go nuts,” and said that Mr. Bonnyman had allowed a “gangster” culture to develop at the firm.  The message Mr. Cox took from this, he wrote in his note, was: “Buy my shares & I go away.”  Mr. Arbuthnott testified he “had no intention of blackmailing anyone” to buy his shares.  Following the lunch, Charterhouse wrote to Mr. Arbuthnott saying that if a €6 billion ($7.16 billion) fundraising then under way was delayed, it would hold him liable for lost management fees—potentially €250,000 a day—according to letter excerpts cited in court. Mr. Arbuthnott testified the letter scared him into silence about his allegations.  Charterhouse obtained a law-firm review of the allegations, which found “no significant breach” of regulatory rules, according to a document filed by the private-equity firm’s lawyers.  In 2010, turmoil arose when Mr. Bonnyman named three partners to succeed him, a group one dubbed the “triumvirate.”  Shortly afterward, fees on funds took an unexpected jump, a result of delays in selling investments. It was a windfall of £8 million. The triumvirate, traveling in the U.S. at the time, decided during an Arizona stopover to divide the windfall among themselves and Mr. Bonnyman.  Discontent spread through the firm over this. Two partners tendered their resignations, which they eventually withdrew, Mr. Bonnyman said.  He scrapped the triumvirate and named one of its members, Lionel Giacomotto, to be sole managing partner. Another member of the trio soon decided to leave the firm.  Mr. Giacomotto declined to be interviewed. In his witness statement, he said the triumvirate’s higher compensation reflected “the long-standing model whereby Mr. Bonnyman, as the CEO and the most important member of the investment team, received by far the largest bonus.”  The firm had developed what Mr. Bonnyman described in court as a “misalignment” in ownership, with older partners retiring and younger staffers having no equity. The solution was a holding company created in 2011 that would buy out the partners. They then would become members of the new company for a nominal £200, which they could receive back upon leaving the firm.  Mr. Arbuthnott refused to sell. The plan valued the company at just £15.15 million, and thus his stake at £1.35 million. He thought that far too low, and soon offered to buy the whole company at a 25% premium to this valuation, according to court testimony. The offer wasn’t accepted.  In April 2012, Mr. Arbuthnott sued Charterhouse and former colleagues, saying his rights were being trampled, asking for an independent valuation of the firm, and saying he and Mr. Bonnyman had an oral agreement there would be such a valuation.  Mr. Bonnyman denied such an agreement and said Mr. Arbuthnott was pressuring the firm to buy him out at an inflated price. Mr. Arbuthnott said Charterhouse was worth up to £465 million.  In May, the court found for Charterhouse, saying testimony didn’t support the claim of an agreement to get an independent valuation.  Mr. Arbuthnott is appealing the ruling. A hearing is set for the spring.  With its latest fund almost spent, Charterhouse is now raising a new buyout fund of €3 billion. It must do so in an atmosphere of legal wrangling as well as a performance that has sometimes faltered in recent years.  A €4 billion fund the firm raised in 2006 showed no gain as of last March. The fund was used for investments including French retailer Vivarte, which was taken over by lenders in 2014. Charterhouse also invested in a provider of washroom services called PHS Group, whose lenders later took over a controlling stake.  A fund Charterhouse raised in 2009 has fared better, delivering a 16.7% rate of return as of June.  “Today’s investors are uncompromising. They have choices, and they don’t want to deal with complexity,” said Mounir Guen, who has advised private-equity firms on fundraising for more than 20 years.  As for Mr. Bonnyman, he plans to remain chairman of Charterhouse “for the foreseeable future.” In the interview in his office, he had little to say about the legacy he will leave the firm when he retires.  “I enjoy it. It’s good at the time,” he said. “That’s it.”  Write to Simon Clark at simon.clark@wsj.com and Becky Pritchard at becky.pritchard@wsj.com
Behind the genteel facade of London’s Charterhouse private-equity firm are internal friction and an explicit focus on financial reward for current managers with little regard for their successors.