Private Equity Dow Jones April 2005

Guide to Investor Consultants >p.50 THE NEWSLETTER SERVING INVESTORS AND MANAGERS OF ALTERNATIVE ASSETS » APRIL 2005 | VOLUME XV | ISSUE 4 Inside » States limit disclosure > p.4 » Pension funds move into PE > p.6 » Morelli talks restructuring > p.22 » The promise of nanotech > p.26 » Carlyle raises $10B+ > p.32 SURVIVOR BIAS New, Independent Merchant Bank Groups Won’t Get A Free Ride Will have to prove they can thrive without parent company BY ZACHERY KOUWE Many VC Firms Formed In Bubble Soldier On BY LAURA KREUTZER C learstone Venture Partners faced its share of skeptics when it set out in early 2004 to raise $250 million for its third fund. The Pasadena, Calif.-based venture firm had ended its relationship with Idealab!, the incubator that nurtured a number of the dot.com home runs – including Goto.com and MP3.com – that helped generate triple-digit returns for Clearstone’s $105 million debut fund, raised in 1998. At the same time, Clearstone’s second effort, a $364 million fund closed in late 1999, got hit with a number of early losses – including AdExchange, Bestoffer.com and Freemusic.com – following the collapse of the tech bubble. “They hung their hat on the > continued on p.59 nvestors seem to delight in giving merchant banking teams a hard time. When they try to raise money within the cocoon of their parent investment bank, investors grill them about whether they’ll be tempted to put the interests of their parent ahead of Spinouts Hit those of their limited The Fund-raising Trail partners. Now that so The following chart shows how much money many are spinning new firms created by investment bank spinouts are expected to raise over the next 12 months, out, investors are compared to the total amount of capital buyout treating them like funds are expected to raise this year. first-time firms that have yet to prove they $70.0B can generate their own deal flow. “New spin-out groups will have to demonstrate that they are responsible for $13.6B their own track record and deal flow, and that the advantages of runSpinouts Overall ning an independent firm outweigh what- Source: The Private Equity Analyst ever benefits they received from the bank,” says Rebecca Silberstein, an attorney who has worked on spinouts for Debevoise & Plimpton LLP. “It’s going to be on a case-by-case basis.” In the next year or so, at least six spinout groups from investment banks, including J.P. Morgan Chase & Co., > continued on p.56 I © Copyright 2005 Dow Jones & Company, Inc. All Rights Reserved | www.dj.com APRIL 2005 | VOLUME XV | ISSUE 4 News Illinois, California join Texas in moving to place limits on disclosure 4 Several state hold-outs move to allow pension funds to invest in PE 6 Texas Comptrollers launches fund-of-funds search Ohio PERS awards $100M to Pathway Returns Roundup Returns are strong for firms out raising money 24 Deal of the Month Nano-Tex applies nanotech promises - now 26 8 Deal Trends Venture capital: Clean tech charges up VCs 10 10 10 14 28 28 Fairview gets mandate for venture fund of funds Lexington Partners buys Merrill Lynch portfolio Dresdner Bank sells PE portfolio to AIG Leveraged Buyouts: LBO firms like ASP model 12 16 Deal-Makers Top March venture capitalists Top March buyout artists 30 Oregon gives Grove Street 2nd captive mandate GM Asset Management team spins out 31 GP Management Update ILPA plans GP trade show The Fund Raisers Roundup ABRY sticks to $900M for fifth fund Carlyle raises $10B+ 32 42 19 32 45 Limited Partner Profile WestAM trumpets efficient frontier for PE Spectrum Equity holds $1B first close 20 Avalon Ventures raises $75M El Dorado closes on $200M People Profile Morelli applies lessons of restructuring career 46 22 Guide to Investor Consultants 50 League Table: Placement Agent Rankings 62 PRESIDENT & EDITOR Richard A. Shaffer EDITORIAL DIRECTOR Kenneth M. Andersen III MANAGING EDITOR David Toll, 201-938-4309 david.toll@dowjones.com EDITORIAL | VP, Venture Capital David Barry | Assistant Managing Editor Jennifer Rossa | Editorial Staff Sree Bhaktavatsalam, Giada Cardoletti, Russell Garland, Brian Gormley, Zachery Kouwe, Laura Kreutzer, Tom Salemi ISSN 1099-9302 Copyright 2005 © Dow Jones & Company, Inc. All rights reserved. Copying and redistribution prohibited without permission of the publisher. Private Equity Analyst is designed to provide factual information with respect to the subject matter covered, but its accuracy cannot be guaranteed. Dow Jones is not a registered investment adviser, and under no circumstances shall any of the information provided herein be construed as a buy or sell recommendation, or investment advice of any kind. Private Equity Analyst is published 12 times a year at 888 Worcester Street, 3rd Floor, Wellesley, MA 02482-7919. Tel: (781) 304-1400. Fax: (781) 304-1440. 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Sapienza, Jodi Tsui, Tim White Advertising Programs Manager Joseph Spas CUSTOMER SERVICE & SUBSCRIPTIONS 781-304-1500 | Customer Service Manager Kevin Smith Customer Service Representatives Steve Domanski, William Machado, Dean Rigo Private Equity Analyst NEWS Illinois, California Join Texas In Moving To Place Limits On Disclosure By Laura Kreutzer I llinois and California are joining Texas in moving to protect their state pension funds from having to disclose private equity portfolio company data under open records laws. If the laws pass, the three states would join at least four others – Colorado, Massachusetts, Michigan and Virginia – that have passed similar legislation in the past two years. Public pensions are turning increasingly to lawmakers for help with protecting the sensitive portfolio company data, as more general partners turn away public money for fear that they might be forced to reveal such data. Austin Ventures, Austin, Texas, for example, said recently that it would not accept commitments to its latest partnership from Texas public pension funds – including previous backers University of Texas Investment Management Co. and Teachers’ Retirement System of Texas – over concerns about that state’s aggressive open records laws. Other firms that have turned away public money include buyout shop American Securities Capital Partners, New York, and venture capital firms Charles River Ventures, Waltham, Mass., and U.S. Venture Partners, Menlo Park, Calif. States With Legal Limits On Disclosure » Colorado » Massachusetts » Michigan » Virginia Source: The Private Equity Analyst In Illinois, the crafters of Senate Bill 52 hope to address the problem by specifically exempting the state’s public pension funds from having to go public with portfolio company performance data and other data that private equity firms say shouldn’t be disclosed for competitive reasons. However, the bill would still require disclosure of fund-level data and fund manager names. A recent amendment attached to the bill would also require disclosure of portfolio company names. Introduced by State Senator Don Harmon early this year, the bill is expected to come to a vote in the Senate by the second week in April before being introduced in the state’s House of Representatives, which would have until the end of May to vote on it. Harmon was able to get a similar bill through the state legislature in 2003, but Illinois’ governor rejected it, saying the language was too vague. This time around, however, the senator said that he believes the bill contains language that everyone, including the governor, can accept. “We hope this bill will become a template for other states to use,” Harmon said. At least four of Illinois’ largest public funds have sizeable private equity portfolios. Teachers Retirement System of the State of Illinois manages an $852 million portfolio, Illinois Municipal Retirement Fund manages about $700 million, Illinois State Board of Investment manages $441 million and State Universities Retirement System of Illinois manages $332 million. In California, State Senator Joe Simitian is crafting a bill that would exempt portfolio company data and other proprietary data from disclosure under California’s open records laws. The senator continues to work on the bill’s language with input from both industry representatives and public information advocates. But he said that most parties involved remain comfortable with public disclosure of data such as fund names, commitment amounts and fund level returns. Simitian introduced the bill after he was approached by representatives from two of the state’s largest private equity fund backers – California Public Employees’ Retirement System and University of California. Both are concerned about the effect of California’s open records laws on their ability to get into prime funds. Simitian, whose district includes Palo Alto, home to many of the nation’s oldest venture firms, plans to have a formal version of the bill crafted by May. He said he hopes to see it pass the state senate and move into the state’s general assembly this summer. Meanwhile, a recent bill introduced in Texas by State Representative Dan Gattis is in committee, according to the Texas legislature’s Web site. The bill outlines 13 specific types of private equity data that state institutions would be required to disclose under open records laws. They include fund names, dates of investments, commitment amounts, distribution amounts, fund IRRs and fees. In its current form, the bill does not explicitly exempt portfolio company data from public disclosure, but a source at one Texas private equity firm said that he believed such exemptions may be included in a revised version. Texas Attorney General Greg Abbott last summer denied requests by Utimco to keep private portfolio company data from >Continued on page 8 April 2005 4 Private Equity Analyst NEWS Several State Hold-Outs Move To Allow Pension Funds To Invest In PE M any of the last few states that don’t allow their pension funds to invest in alternative assets are moving to lift those restrictions. Following in the footsteps of New Jersey, Mississippi has just amended a law to expand the types of assets its pension funds can invest in. A similar law in New Mexico is pending the governor’s signature, and South Carolina legislators are pushing for an easing of restrictions too. Such policy changes could presage the eventual entrance of much more money to the asset class. Mississippi Governor Haley Barbour signed a bill March 23 that allows the Public Employees’ Retirement System of Mississippi to invest up to 10% of its assets, or around $1.7 billion, in asset classes other than stocks, bonds or real estate. The new investments must be in the form of limited partnerships, commingled funds or separate accounts. The law takes effect July 1. San Francisco-based consultant Callan Associates is helping the pension fund evaluate its investment portfolio to see how it might expand its asset mix, according to Mississippi Public Employees’ Chief Investment Officer Lorrie Tingle. Tingle added that the fund has no immediate plans to dramatically alter its asset allocation. “It’s going to be a long, slow process,” she said. A 5% allocation to private equity would translate into an $850 million portfolio for Mississippi Public Employees. The Mississippi law passed less than a month after New Mexico’s state legislature approved a bill that would allow the $11 billion New Mexico Public Employees’ Retirement Fund and the $7 billion New Mexico Educational Retirement Board to make their first investments in private equity, real estate and other alternative asset classes. Governor Bill Richardson is expected to sign the bill into law soon. A 5% allocation would translate into roughly $900 million between the two plans. Frank Foy, chief investment officer at the Educational Retirement Board, said it would likely take at least a year before his pension fund begins making private equity commitments. In South Carolina, seven lawmakers have proposed an amendment to the state constitution that could pave the way for the $24 billion South Carolina Retirement Systems to tap private equity. The amendment faces several hurdles before it can be enacted, as it must first clear the legislature and then be approved by a public vote in South Carolina’s next general referendum, scheduled for 2006. In these states, as well as in Georgia, Tennessee and West Virginia, laws have until now limited the pension systems to a list of permissible assets, mainly stocks and bonds, due to concerns about the riskiness of other asset classes. Most other states broadened their investment strategies in the wake of the 1994 Uniform Prudent Investor Act, which, among other things, allowed pension trustees to invest assets as any prudent investor – a bank, for example – might. The changes appear to be motivated to some extent by the problem of under-funded pension systems. In New Mexico, as of late last year, the Educational Retirement Board faced a nearly $2.4 billion pension shortfall, although the Public Employees’ Retirement Fund was nearly fully funded. In South Carolina, the system’s assets in 2004 represented only about 82% of funding liabilities, according to a study by Wilshire Associates. Changing the law on such matters can be tricky, as legislators in Georgia and West Virginia will attest. This year, state representatives in Georgia tried unsuccessfully to pass legislation that would allow the state’s two largest pension funds to invest up to 3.5% of their respective assets in venture capital. Lawmakers intend to introduce revised legislation next year. West Virginia lawmakers have also tried unsuccessfully over the past few years to alter laws that prohibit the state’s pension funds from investing in alternative assets. Even in New Jersey, which has led the current wave of changes, the success of its plan to build a $3 billion private equity portfolio isn’t a sure bet. While the state is moving ahead with plans to hire two private equity consultants to help it build the portfolio, it continues to face resistance from unions, which have filed a lawsuit to block the changes. Reach the New Mexico Public Employees’ Retirement Association at 800-342-3422. Reach the Educational Retirement Board at 505-827-8030. Reach the South Carolina Retirement Systems at 803-737-6800. Reach the Mississippi Retirement System at 601359-3589. April 2005 6 Private Equity Analyst NEWS >Continued from page 4 the state investment fund Texas Growth Fund. But he has since softened his stance, saying he would back a bill to keep portfolio-level investment data private. Reach Harmon’s office at 217782-8176. Reach Gattis’s office at 512-463-0309 and Simitian’s office at 916-445-6747. Texas Comptrollers Launches Fund-of-Funds Search Texas Treasury Safekeeping Trust Company, which manages about $28 billion in assets for the state of Texas, plans to commit $100 million to one or more fund of funds. The program is designed to be a launching pad for the trust company to eventually make fund commitments on its own, according to Chief Executive Paul Ballard. Texas Treasury is willing to consider a broad range of specialized or diversified funds of funds, Ballard said, including buyout and venture capital funds, mezzanine and distressed debt funds, secondary funds, and funds invested in real assets such as timber and energy. The $100 million is likely to wind up with more than one manager, although the trust company plans to select a “core” manager to provide strategic advice and to assist in building out the endowment’s private equity program, according to the RFP. The core manager would also analyze the private equity portfolio and teach trust company staff about the asset class. Funding for the program comes from a $3 billion endowment, which is funded largely by proceeds from state lawsuits against tobacco companies. The trust company plans to invest up to 5% of the endowment’s assets in private equity, part of a 20% target allocation to alternative investments approved last summer. Candidates for the mandate must be registered as an investment advisor with the Securities & Exchange Commission, or be exempt from registration. Firms must also have at least five full-time employees, including three full-time investment professionals with at least two years of experience in the private equity industry. The deadline for proposals is April 12 and the trust company plans to interview finalists between April 22 and May 6. The contract or con- April 2005 8 Private Equity Analyst NEWS tracts would likely begin on June 30. Reach the Texas State Comptroller’s office at 512-305-8673. date, Ohio Public Employees’ in 2004 committed $410 million to seven buyout funds, including Carlyle Partners IV LP, CHS Private Equity V LP, Hellman & Friedman Capital Partners V LP, Kirtland Capital Partners IV LP, Lincolnshire Equity Fund III LP, New Mountain Partners II LP and Providence Equity Partners V LP. The pension system also committed $170 million to three venture funds – CMEA Ventures VI LP, Essex Woodlands Health Ventures VI LP, Granite Global Ventures II LP – and one venture fund of funds, Paul Capital Top Tier Investments III LP. Finally, Ohio Public Employees’ committed $50 million to OCM Opportunities Fund III LP, a $1.4 billion distressed debt fund managed by Los Angeles-based Oaktree Capital Management LLC. Reach Ohio PERS at 614-228-1151. tween $5 million and $15 million. The new mandate builds on a portfolio of $667 million in venture fund commitments built by Crossroads Group (now a division of Lehman Brothers) over a 15-year period starting in 1987. Fairview Capital took over management of the portfolio last summer, after State of Connecticut opted not to renew Crossroads Group’s contract, following disagreements over whether the firm was entitled to reinvest distributions. Since 1987, Constitution Fund I (now called the Constitution Liquidating Fund) has generated a 20.7% net internal rate of return for the State of Connecticut, making it one of the strongest performers in the pension system’s portfolio, according to minutes from the pension fund’s January investment council meeting. The portfolio includes commitments to more than 75 partnerships, a number of which Fairview Capital has also backed through its own funds of funds. They include funds managed by Accel Partners, Palo Alto, Calif., Battery Ventures, Wellesley, Mass., Matrix Partners, Waltham, Mass., and Oak Investment Partners, Westport, Conn. State of Connecticut’s newest commitment brings it well on its way to what sources say is a goal of committing some $200 million to $400 million annually to the asset class. Reach Fairview Capital Partners at 860-674-8066. Ohio PERS Awards $100M To Pathway Ohio Public Employees’ Retirement System has awarded a $100 million captive fund of funds to Pathway Capital Management LLC, a little more than a year after the pension fund issued a manager search. The mandate was part of $730 million in new private equity commitments Ohio Public Employees’ closed in 2004. The pension plan couldn’t be reached for comment. But when it launched the search back in 2003, Ohio Public Employees’ wanted an adviser to commit the $100 million to a mix of buyout funds, venture capital funds and other types of private equity funds. The mandate’s allocation would roughly reflect the allocation targets within the pension fund’s overall private equity portfolio; that is, up to 70% to buyout funds and up to 15% each to venture capital funds and special situation funds, including mezzanine and distressed debt funds. Ohio Public Employees’ opted to hire a discretionary adviser partly to help it gain entree with general partners that it might have difficulty accessing on its own, Senior Investment Officer Greg Uebele said in a 2003 interview. Pathway has relationships with a number of firms likely to have their pick of investors, including venture firms Austin Ventures, El Dorado Ventures and Menlo Ventures. All three firms are raising new funds this year or expect to begin fund-raising by year-end. In addition to the Pathway manApril 2005 Fairview Gets Mandate For Venture Fund Of Funds State of Connecticut Retirement & Trust Funds has agreed to give Fairview Capital Partners Inc. up to $200 million to commit to venture capital funds over the next few years, the second mandate that the Farmington, Conn.-based fund-of-funds manager has secured from the pension system in the past year. Fairview Capital plans to commit the money, which is expected to consist of an initial commitment of $150 million, to a group of venture capital funds managed largely by veteran firms, according to a source familiar with the effort. The firm may access an additional $50 million once it has committed the first tranche, the source added. Individual commitments are expected to average be- Lexington Partners Buys Merrill Lynch Portfolio In its second significant deal in as many months, secondary firm Lexington Partners has agreed to purchase a roughly 20-fund portfolio from Merrill Lynch & Co., according to people familiar with the matter. 10 Private Equity Analyst NEWS Terms of the deal were not disclosed. The portfolio consists of roughly $200 million in commitments that Merrill Lynch made from its own balance sheet during the late 1990s and 2000, sources said. It consists mostly of U.S. buyout funds and a few venture capital funds. The commitments were not part of any focused program within the investment bank, but were part of a larger portfolio amassed for strategic reasons – in order to cement relationships with the bank’s private equity clients. Merrill Lynch sold positions in the 20 or so partnerships in part to be able to recycle the money into fresh commitments, sources said. A Merrill Lynch spokeswoman declined to comment for this story. All told, Merrill Lynch had roughly $367 million in commitments to private equity partnerships as of September 2004, according to filings with the Securities & Exchange Commission. Merrill Lynch also has an active fund of funds program, which has raised more than $2 billion from clients and institutional investors. The majority of the capital used to purchase the portfolio came from Lexington Capital Partners V LP, a $2 billion secondary fund raised between 2001 and 2003. A portion of the capital also came from Lexington Middle Market Investors, a fund that New York-based Lexington Partners is raising to buy secondary interests in younger, mid-market buyout funds. Earlier this year, Lexington Partners acquired a portfolio of 46 buyout funds from publicly traded utility company DPL Inc. for $850 million, and assumed some $200 million in future capital calls, in what was one of the largest secondary deals ever. This deal would be one of the last April 2005 in Lexington Capital Partners V. Over the next month or so, Lexington Partners is expected to formally start raising money for its next secondary partnership, Lexington Capital Partners VI LP. Reach Lexington Partners at 212-754-0411; Merrill Lynch at 212-449-1000. Dresdner Bank Sells PE Portfolio To AIG In a surprise move, Dresdner Bank has sold a $1.1 billion private equity fund portfolio to AIG Global Investment Group. The decision comes more than two years after Dresdner Bank started exploring several options – including securitization – to reduce its exposure to the asset class. Terms of the transaction were not disclosed; the bank received a “full and fair price” for the portfolio, said Jan E. Kvarnström, the CEO of Dresdner Bank’s Institutional Restructuring Unit. The bank sold the portfolio through an auction, added Dresdner Bank spokeswoman Katerina Piro. Other bidders for the portfolio included New York-based secondary buyer Lexington Partners and Boston- based fund-of-funds manager HarbourVest Partners LLC, according to sources familiar with the matter. AIG Global Investment Group hasn’t traditionally been a bidder for large fund portfolios, although it does have a small allocation to secondary deals through its roughly $1 billion fund-of-funds program. Through its three funds of funds raised in 2000, 2002 and 2004, AIG Global Investment Group has invested a combined total of $10 million in secondary deals. The Dresdner portfolio acquisition will add 150 partnership interests to the 75-plus funds that it already has interests in. It will also provide AIG Global Investment Group with an “expanded window on both new fund and continuing co-investment opportunities,” according to a statement. The statement also said that the acquisition has been made on behalf of certain clients of AIG Global Investment Group. Executives at the firm were not available to comment further. The funds in the Dresdner portfolio span a range of vintage years, dating back as far as the early 1990s. But like most portfolios put together by banks, the bulk of the funds date to the mid to late 1990s. Roughly two-thirds of the portfolio consists of interests in U.S. partnerships; the portfolio also includes commitments to European and Asian funds. The new portfolio will be housed in the New York-based AIG Global Investment Group’s $15.7 billion private equity unit, which includes the $1 billion funds-of-funds arm and the $14 billion-plus direct investment portfolio. Leading that group is Managing Director David B. Pinkerton. With the sale of the portfolio to AIG Global Investment Group, Dresdner Bank has unloaded the last vestiges of its private equity portfolio. The bank has been considering reducing its exposure to private equity since 2002, when it was acquired by German financial services giant Allianz Group. At the time, the bank vowed to pare down its exposure to what it called “non-core” activities, such as private equity investing. Like a host of other financial services companies, the bank was also looking to reduce balance sheet volatility. In early 2003, Dresdner Bank set up a dedicated unit, called the institutional restructuring unit, to sell off a €35 billion ($46 billion) portfolio of 12 Private Equity Analyst NEWS non-core assets, including the $1 billion plus private equity portfolio and more than €30 billion in non-strategic loans and restructuring assets. Reach AIG Global Investment Group at 212-458-2000; reach Dresdner Bank at 49-69-2631-2631. earmarked for a similar strategy that the treasury awarded it in 2001. As of September 2004, general partners that Grove Street backed through the $250 million Northwest Emerging Ventures had only returned about $15.6 million of the $72.6 million they had called, according to data posted on Oregon’s Web site. The remaining portfolio was valued at $48.5 million. Like the new mandate, the initial commitment was earmarked for smaller, newer funds, particularly venture capital funds, but including some LBO funds. The Grove Street program got off to a slow start partly due to bad timing; the slow-down in the pace of venture investing between 2001 and 2003 meant the firm took longer than anticipated to commit the capital, according to a source familiar with the effort. A similar mandate that the Oregon State Treasury awarded Pathway Capital Management LLC in 2001 got off to an even slower start. General partners Pathway backed had returned a little less than $1 million of the $30 million they’d invested of Oregon’s $250 million initial commitment, according to Oregon’s Web site. Pathway started making commitments from its pool about six months later than Grove Street did and has taken longer to commit the capital, according to Senior Equity Investment Officer John Fewel, who added that the state treasury extended the commitment period for the Pathway mandate until July 2006. Grove Street has now nearly fully committed the first mandate and expects to begin deploying the Oregon Gives Grove Street 2nd Captive Mandate Oregon State Treasury has given Grove Street Advisors LLC $300 million to build a second captive fund of funds, earmarked generally for funds of $500 million or less. The commitment shows the pension plan’s faith in Grove Street, as the Wellesley, Mass.-based firm has yet to show much in the way of returns from a $250 million mandate April 2005 14 Private Equity Analyst NEWS second pool within the next several months, the source said. At least one fund in the first portfolio is Genstar Capital Partners IV LP, a $475 million buyout fund raised in 2004. In addition to the Grove Street mandate, Oregon State Treasury also approved commitments of $100 million each to Paloman European Equity Fund II LP, a European mid-market buyout fund featuring an estimated €650 million ($852 million) target, and Oak Hill Capital Partners II LP, a U.S. buyout fund expected to close soon at around $2.5 billion. Reach Oregon State Treasury at 503-378-4000. Reach Grove Street Advisors at 781-263-6100. from its parent to form a new money management firm. The team will own 51% of the new Performance Capital Management firm, while GM will retain a 49% stake. Performance Capital, which will maintain offices in New York and Greenwich, Conn., is expected to begin rolling out its first offering, most likely a co-investment fund, within the next year, according to a source outside of the firm. The team raised a debut co-investment fund, the $400 million GM Capital Partners LP, in 2001 from outside investors, which it invested alongside a $300 million GM co-investment mandate. It also raised nearly $300 million for its first co-mingled fund of funds last year. The team will also continue to manage the roughly $6 billion to $7 billion private equity portfolio of GM. The former GM Asset Management team, which includes 10 investment professionals, began forming the joint venture last year. The team includes Partners Jeffrey Barman, John S. Clark, Charles Froland, Marcia Haydel, Jeffrey A. Reals and S. Lawrence Rusoff. Performance Capital is in the process of becoming a registered investment adviser with the Securities & Exchange Commission and plans to add a number of junior professionals to its staff over the next year. General Motors Asset Management decided to form the venture to allow its private markets team a larger share in the gains from their investments, according to Froland, who has headed the team since 1998. “If we’re going to raise 10-year funds, we need to make sure that everyone stays around,” Froland said. He declined to discuss any of the firm’s current fundraising plans. Reach General Motors Asset Management at 212-418-6100. SEND PRESS RELEASES TO NEWS@PRIVATEEQUITYANALYST.COM GM Asset Management Team Spins Out The roughly 20-member private markets team of General Motors Asset Management is spinning off Comings and Goings » California Public Employees’ Retirement System has elected a new chair and vice-chair to lead its investment committee, which helps determine how the pension system invests its roughly $183 billion in assets. Charles Valdes, an attorney with the California Department of Transportation, will serve as the committee’s new chair, replacing Rob Feckner. Valdes has been a member of the CalPERS’ board since 1984 and is a former president of the California State Employees’ Retirement Association. George Diehr has been elected as the committee’s new vice-chair, replacing Priya Mathur. Diehr, a professor of management science at California State University in San Marcos, was elected to CalPERS’ board by state employees in 2003. Both Feckner and Mathur remain members of the investment committee, which also includes Ronald Alvarado, State Treasurer Phil Angelides, Marjorie Berte, Willie Brown Jr., Robert Carlson, Michael Navarro, Mike Quevedo Jr., Kurato Shimada and State Controller Steve Westly. Reach CalPERS at 916-795-3400. » MetLife Inc. has tapped Steven A. Kandarian, a former general partner, to take charge of its $240 billion investment portfolio. The insurance giant has named Kandarian as its new chief investment officer, replacing Leland C. Launer Jr., who has been named president of MetLife’s institutional business organization. Before joining MetLife, Kandarian was executive director of the Pension Benefit Guaranty Corp., a government corporation that provides insurance for the nation’s defined benefit plans. Before that he was founder and managing director of Orion Partners LP, a Wellesley, Mass.-based small buyout firm. His experience also includes a stint as a managing director of Lee Capital Holdings, a Boston-based firm specializing in seedstage investments. Reach MetLife at 212-578-8532. April 2005 16 Private Equity Analyst NEWS GP Management Update ILPA Plans GP Trade Show M By David M. Toll ention the Institutional Limited Partners Association, or ILPA, to a group of general partners, and you’ll probably elicit a scowl or two. Isn’t that the organization that holds secret meetings, dedicated – no matter what it may say publicly – to making partnership terms and conditions more onerous for fund managers? There’s little doubt that ILPA provides networking opportunities that have led to a more unified set of opponents at the negotiating table. But if turning the screws to fund managers on terms was the main purpose of ILPA, you’d have to admit it has been one of the least effective associations ever formed; partnership terms, anchored by the 20% profit-share, remain among the most generous in the history of asset management. In fact, since its beginnings in the early 1990s as a club with fewer than two dozen members, ILPA has remained dedicated principally to networking, information sharing and education. From my perspective as a reporter, the organization has been less than forthcoming about what happens at its twice-yearly meetings – a characteristic that perhaps feeds industry suspicions about its charter. But my chat with Arlett Tygesen, who became ILPA’s first full-time executive director last year, suggests that the association is becoming more open, and more energized, in a way that should benefit fund managers. Here are some of ILPA’s main initiatives in the months ahead, according to Tygesen: • Developing a general partner trade show. Most fund managers would agree that the road show is an inefficient way to raise money. But put yourself in the shoes of investment officers for a moment and you’ll realize that road shows and annual meetings spread over the course of many months aren’t the most efficient way to meet the general partner community, either. At its meeting in Austin last month, hosted by Teachers’ Retirement System of Texas and University of Texas Investment Management Co., board members endorsed the idea of sponsoring one or two-day trade shows, and charging general partners a fee to sit down with limited partners in a variety of forums. • Launching the ILPA University. The board has also endorsed the idea of creating a university designed to get members, their trustees and others up to speed on industry basics. Tygesen says she is figuring out an appropriate structure and syllabus. She says the most pressing need is for introductorylevel courses (Due Diligence 101, Terms and Conditions 101, Cash Flow Modeling 101), as opposed to more advanced courses. For its past two meetings, ILPA has devoted a day of its two-day meetings to educational workshops; those early efforts are likely to help form the foundation of the university. • Expanding membership. The association, whose membership has grown from fewer than 100 three years ago to 135 today, remains steadfast in not letting non-LPs become members. It even limits membership to organizations in which no more than 10% of private equity assets are managed for third parties, effectively excluding advisors and managers of funds of funds. That still leaves, by Tygesen’s estimates, at least a couple of thousand potential members worldwide. Together with Joncarlo Mark, an investment officer at California Public Employees’ Retirement System, Tygesen is concentrating this year on building membership in Asia and Europe. • Taking over management of the valuation and reporting guidelines developed by the Private Equity Industry Guidelines Group. For more information about ILPA, including its governance and membership fees, visit its Web site at www.ilpa.org. Reach Tygesen at atygesen@ilpa.org. ILPA Initiatives » Creation of a GP trade show » Launch of a university » Expanding membership » Promoting valuation and reporting guidelines Source: Institutional Limited Partners Association 19 April 2005 Private Equity Analyst L I M I T E D PA RT N E R P R O F I L E WestAM Trumpets Efficient Frontier For PE By David M. Toll A re you a limited partner trying to figure out how much your private equity portfolio will produce in distributions this year? If so, you can find any number of advisers and consultants willing to help you model cash flow projections. But what if you want to know how to achieve a higher level of return in your portfolio, while taking on only a modest level of additional risk? Well, now we’re talking about efficient frontier modeling. It’s a common enough tool in conventional asset management. But it’s hard to find private equity advisers or consultants that offer it as part of their portfolio of services. Why that is is a matter of debate. One investment adviser says his firm remains skeptical that the asset class really lends itself to such modeling, given the great variety of results achieved by fund managers pursuing similar investment strategies. Others question whether the industry has generated enough performance data to support such a model. Donald W. Phillips, the outgoing chief investment officer at WestAM Private Equity Group, a Chicago advisory firm that offers both cash flow projection and efficient frontier models, thinks otherwise. (At press time, we learned that Phillips and another executive had resigned from the firm.) He believes that many advisory professionals simply aren’t familiar enough with efficient frontier modeling to offer it as a service. That’s not an issue at WestAM, where several of the principals cut their teeth managing stock and bond portfolios. Phillips himself was chief investment officer of Ameritech Corp. for six years earlier in his career. In pitching separate account programs, and marketing funds of funds, Phillips and his colleagues know how to talk the language of chief investment officers and trustees – and that means cash flow projections, and efficient frontiers. On the frontier Once a new client is landed, says Phillips, WestAM will sit down with them to find out where they’d like to sit along the efficient frontier curve – in other words, how much return is sought in light of how much risk can be tolerated. WestAM then compares the investor’s private equity portfolio with the right mix of sub-asset classes – small, medium and big buyout funds; early-stage, late-stage and multi-stage venture funds – needed to produce the desired return and risk. From there WestAM suggests what kinds of funds must be added to get there. It’s easy to imagine the intellectual appeal of this approach to investment officers grounded in traditional asset management. Many believe that, given how much trouble active money managers have beating index funds, setting and sticking to asset allocation targets is the single most important factor in determining returns in their overall portfolios. In private equity, no one doubts top fund managers have an easier time trouncing (and falling well short of) median returns. Nevertheless, WestAM believes that you can still manage your return and risk simply by shifting your sub-asset allocation targets, sticking to them, and picking fund managers that, on the whole, achieve median returns. WestAM clients no longer have to feel like they must consider every opportunity that comes along, or that they have to consistently pick top-quartile managers. They can pro-actively seek the kinds of funds they need to achieve their stated goals. At a Glance WestAM Private Equity Group Assets: Altogether has discretion over $2.8 billion, $1.9 billion through separate accounts and the balance through funds of funds. Of its 28 clients, some 85% are corporate pension funds, and most of the balance are public pensions. Has closed on $131 million so far for Special Private Equity Partners II LP, a fund of funds in the market with a $300 million target. Investment Strategy: The firm plans to invest Special Private Equity Partners II in smaller venture capital and buyout funds, including first-time funds, and in a small number of co-investments. Later this year the firm plans to roll out another fund in its COREPlus family, targeting both small and large venture and buyout funds, and co-investments. Principals: L.B. (Tom) Thompson, Director; David C. Turner, Director Select commitments: Crosslink Crossover Fund IV LP; RoundTable Health Care Partners II LP; KRG Capital Fund Partners III LP. Phone: 312-279-9300 April 2005 20 Private Equity Analyst PEOPLE PROFILE Morelli Applies Lessons Of Restructuring Career By Giada Cardoletti A fter two decades of fixing broken companies, Vincenzo Morelli has learned to sniff out the scent of cash from under piles of IOUs – a key ability, since cash is king when a business is in trouble. Texas Pacific Group’s new head of European portfolio operations says that finding the cash on a sick company’s balance sheet is the first in a three-step approach he takes to right struggling companies. Also a part of his strategy: trying to tame creditors’ and stakeholders’ unrealistic expectations and developing a compelling vision for the turnaround team to embrace. This three-pronged approach is the best way to stay focused in a turnaround situation, says Morelli, who began his restructuring career in 1985, running a troubled division of General Electric Co., and has since gone on to stints at global turnaround firm Alvarez & Marsal LLC and buyout shop Clayton Dubilier & Rice Inc. Moreover, Morelli believes the experience he has gained from restructuring seven companies in six countries will come in handy at Texas Pacific. “When you have been at the bedside of an emergency room patient you have fewer qualms about applying aggressive preventive medicine to the healthy ones,” says Morelli. At Texas Pacific – which has never shied away from investing in troubled companies – Morelli will oversee a European portfolio that will shortly contain 12 companies in a number of different sectors, with revenue ranging Brief Stats Education: BA from Oxford; MBA from Stanford Business School Career Path: Morelli started his career at the Boston Consulting Group in 1975 and took on his first restructuring challenge as the CEO of GE’s European Medical Systems Division. He also served as the CEO of the $3.5 billion agricultural equipment business of Fiat Vincenzo Morelli Group and as a senior adviser at Clayton Dubilier & Rice. More recently, Morelli was a managing director at global turnaround firm Alvarez & Marsal. Personal: Avid skier and golfer, lives in London. between $300 million and $3 billion. At least two companies in the portfolio are ailing businesses; Morelli’s nose for cash will likely be an asset to them. “There hasn’t been a time when I haven’t found cash trapped in a balance sheet,” Morelli says. “It’s just an area where you can always find money. And receivables, inventory and payables are your quickest levers to find the cash you need to survive and restructure.” As an example, Morelli cites his experience as chief executive of Fantuzzi SpA in 2004. Morelli was able to convince bondholders and banks to restructure €350 million worth of debt, but only after finding enough cash to stabilize the business. The Italian maker of container handling equipment had a number of long-term historical contracts that customers were disputing. Resolving the disputes was critical in helping to generate €40 million of cash flow. The experience with Fantuzzi also demonstrates Morelli’s steady hand in handling creditors. “You are dealing with people who are highly stressed and whose expectations are just not reconcilable with reality,” he says. Morelli also worked with creditors as chief restructuring officer of Schulte GmbH, a German wholesaler of plumbing and heating material. After a seven-year decline in its markets, the company was sinking under a heavy debt load and was only weeks away from filing for bankruptcy. His team realized that by scaling down the group’s geographic presence to only a few regions in Germany, Schulte could be saved. The creditors, previously unwilling to make any concessions, trusted the team’s homework, and agreed to slice the debt as a better alternative to losing everything in a bankruptcy filing. Both Schulte and Fantuzzi serve as examples of the third prong of Morelli’s strategy – explaining a company’s mission. At Schulte, Morelli’s vision was to give the group a narrower geographic focus. At Fantuzzi, transferring more production to Chinese plants helped the company to survive. In both cases, Morelli said convincing the turnaround team was his toughest challenge; it’s a challenge that applies to every significant team project. “You need to win the hearts and minds of your people,” he says. “No matter how brilliant your strategy, how deep your pockets, the people around you are going to be the ones to execute it and you need to deliver them a message they will believe in and rally around.” April 2005 22 Private Equity Analyst RETURNS ROUNDUP Returns Are Strong For Firms Out Raising Money By Sree Vidya Bhaktavatsalam A record run of profits promises to give a number of LBO firms a nice boost on the fund-raising trail when they set out to raise money later this year. Prospects look especially bright for managers of multi-billion-dollar pools, who as a category have been extraordinarily successful in returning loads of money to their investors of late. Among them are New York-based firms Kohlberg Kravis Roberts & Co., which plans to raise €3.5 billion for a Europe-focused fund; Blackstone Group, which has been talking to investors about possibly raising the industry’s first $10 billion fund; and Warburg Pincus LLC, which is raising a $7.8 billion fund. Red-hot debt markets, combined with growth in mergers and acquisition activity and a widening window for public market exits, have kept the distributions flowing this past year. The one-year pooled net mean return generated by U.S. private equity funds was 19.3% as of last September, according to data from Cambridge Associates. That compares to a 13% one-year return on the same basis a year earlier, and a minus 9.2% one-year return as of September 2002. All told, U.S. private equity firms distributed some $36 billion to their investors during the first nine months of 2004 alone, according to estimates by London-based data provider Private Equity Intelligence. The most prolific distributor of profits that we have come across is KKR. From its $6 billion 1996 fund, the buyout shop distributed more than $4.6 billion to its investors in the year ended Sept. 30, 2004, according to our calculations. The firm has distributed more than $7 billion from that fund in all; KKR has said separately that it distributed $6 billion back to investors in 2004 from all funds. Warburg Pincus, in the same one-year period, distributed upwards of $1.5 billion from a $5 billion fund raised in 1998, according to our estimates. The firm had, as of last September, returned nearly $3 billion total from that fund to its limited partners. Blackstone Group has also been active on the realizations front. In the same one-year period, Blackstone distributed roughly $1.5 billion from its fourth fund, a $6.45 billion fund raised in 2002, according to our calculations based on data from California Public Employees’ Retirement System. All told, Blackstone had distributed some $3.7 billion from that fund as of Sept. 30, 2004. While the bulk of the money returned this past year has been by managers of mega-funds, a number of mid-market LBO firms have also scored nice exits. They include Fenway Partners, New York, which soon plans to raise a successor to a $900 million raised in 1999. The buyout shop distributed some $390 million for the year ended Sept. 30, 2004, based on our calculations. In all, the buyout shop has distributed nearly half of the invested capital from that fund. Buyout Funds Enjoy Strong Run Of Distributions1 Fund (September 2004)/Vintage Year Name of LP KKR 1996 Fund 1996 Washington State KKR 1993 Fund 1993 Washington State Warburg Pincus Equity Partners 1998 Washington State Fortress Investment Fund 2000 Washington State Clayton Dubilier & Rice Fund VI 1998 Washington State Green Equity Investors III LP 1999 CalPERS Fenway Partners Capital Fund II LP 1998 CalPERS KKR Millennium Fund 2001-2004 Washington State Welsh Carson Anderson & Stowe IX 2000 Washington State Capital Committed $850,650,000 $350,000,000 $400,000,000 $200,000,000 $200,000,000 $125,000,000 $150,000,000 $1,500,000,000 $300,000,000 Cash In $1,133,172,269 $434,224,667 $400,000,000 $239,509,581 $178,069,023 $112,297,320 $134,574,730 $535,390,334 $216,000,000 Cash Out As of 9/30/04 $1,321,750,087 $641,344,249 $233,172,144 $151,681,567 $73,673,443 $105,405,356 $66,672,741 $56,935,693 $75,765,186 Cash Out As of 9/30/03 $536,947,666 $548,873,828 $140,880,468 $68,050,351 $0 $39,676,884 $8,361,737 $110,030 $23,202,604 Distributions Net IRR 9/03 to 9/042 As of 9/043 $784,802,421 $92,470,421 $92,291,676 $83,631,216 $73,673,443 $65,728,472 $58,311,004 $56,825,663 $52,562,582 13.30% 16.20% 4.80% 23.50% -5.40% 21.00% 5.10% 6.20% 7.80% Net IRR As of 9/03 11.90% 16.30% 3.50% 12.20% -20.30% 17.02% -5.53% Not Meaningful -5.70% Continued at top of next page > April 2005 24 Private Equity Analyst RETURNS ROUNDUP Fund (September 2004)/Vintage Year Name of LP Apollo Investment Fund III LP 1995 CalPERS Blackstone Capital Partners III LP 1997 CalPERS Fenway Partners Capital Fund LP 1996 CalPERS Carlyle Partners III LP 2000 CalPERS Clayton Dubilier & Rice Fund V 1995 Washington State Apollo Investment Fund V LP 2001 CalPERS Fortress Investment Fund II 2002 Washington State Madison Dearborn Capital Partners III 1999 Washington State First Reserve Fund IX 2001 Washington State Carlyle Partners II LP 1996 CalPERS Madison Dearborn IV 2000 Washington State William E. Simon & Sons II LP 2001 CalPERS Code Hennessy & Simmons IV 1999 Washington State Thomas H. Lee Equity Fund IV LP 1998 CalPERS Doyle & Boissiere Fund I LP 1997 CalPERS ABS Capital Partners III LP 1999 CalPERS Madison Dearborn Capital Partners II LP 1997 CalPERS Silver Lake Partners 1999 Washington State TPG Partners III 2000 CalPERS Apollo Investment Fund IV LP 1998 CalPERS Banc Fund IV Trust 1996 Washington State Levine Leichtman Capital Partners II LP 1998 CalPERS Thomas Weisel Capital Partners 2000 Washington State Welsh Carson Anderson & Stowe IX LP 2000 CalPERS Blackstone Mezzanine Partners 1999 CalPERS First Reserve Fund VIII 1998 Washington State TPG Partners III 2000 Washington State Blackstone Communications I 2000 CalPERS Silver Lake Partners 1999 CalPERS Welsh Carson Anderson & Stowe VII 1995 Washington State Capital Committed $150,000,000 $200,000,000 $100,000,000 $150,000,000 $40,000,000 $250,000,000 $100,000,000 $109,900,000 $100,000,000 $80,000,000 $300,000,000 $25,000,000 $125,000,000 $140,000,000 $75,000,000 $75,000,000 $60,000,000 $60,000,000 $150,000,000 $150,000,000 $20,000,000 $150,000,000 $125,000,000 $125,000,000 $100,000,000 $50,000,000 $82,000,000 $100,000,000 $65,000,000 $40,000,000 Cash In $135,858,147 $212,462,335 $101,141,192 $124,381,295 $42,093,372 $132,737,929 $84,650,667 $109,536,210 $92,805,297 $85,078,093 $158,492,239 $25,000,000 $105,595,490 $124,378,055 $71,660,769 $63,633,000 $59,918,516 $59,415,048 $110,955,363 $144,401,271 $20,000,000 $166,924,448 $132,191,495 $90,000,000 $66,693,169 $53,897,561 $66,041,044 $41,823,724 $58,032,450 $40,000,000 Cash Out As of 9/30/04 $168,309,671 $120,840,692 $101,277,534 $40,081,718 $42,429,350 $67,434,911 $35,245,023 $48,718,017 $30,273,629 $145,707,911 $53,844,142 $28,226,843 $28,489,190 $33,583,496 $32,232,480 $33,394,018 $88,709,172 $46,189,827 $55,081,273 $53,297,848 $45,203,334 $90,116,261 $27,123,105 $31,638,014 $35,915,908 $41,995,087 $35,403,165 $23,228,084 $43,704,161 $71,512,495 Cash Out As of 9/30/03 $118,999,030 $71,840,865 $56,019,789 $408,442 $3,788,201 $31,951,204 $154,803 $14,293,863 $0 $115,764,307 $25,001,160 $0 $441,245 $5,912,719 $5,054,389 $6,903,963 $62,391,626 $20,113,594 $29,181,189 $27,683,077 $20,606,573 $65,612,687 $4,328,025 $9,669,487 $14,809,743 $22,113,488 $15,877,626 $4,562,526 $25,279,291 $54,171,251 Distributions Net IRR 9/03 to 9/042 As of 9/043 $49,310,641 $48,999,827 $45,257,745 $39,673,276 $38,641,149 $35,483,707 $35,090,220 $34,424,154 $30,273,629 $29,943,604 $28,842,982 $28,226,843 $28,047,945 $27,670,777 $27,178,091 $26,490,055 $26,317,546 $26,076,233 $25,900,084 $25,614,771 $24,596,761 $24,503,574 $22,795,080 $21,968,527 $21,106,165 $19,881,599 $19,525,539 $18,665,558 $18,424,870 $17,341,244 11.90% 10.00% 1.70% 19.60% 5.20% 22.80% 60.20% 6.40% 12.30% 25.80% 1.10% 6.10% 5.70% -2.30% -0.10% -8.90% 22.90% 20.00% 15.80% 7.70% 15.50% 9.40% -19.90% 8.00% 6.30% 10.80% 15.70% 5.00% 20.00% 17.70% Net IRR As of 9/03 10.78% 7.52% -1.86% 1.90% -5.70% 23.66% Not Meaningful -10.00% -4.60% 26.39% 4.20% 5.65% -1.50% -5.11% -0.87% -15.51% 22.40% 30.20% 26.07% 5.81% 13.60% 9.28% -23.60% -5.78% 0.77% 12.10% 26.00% -6.16% 30.21% 17.20% (1) Includes buyout funds that have distributed the most capital to the respective LP over the given time period. (2) Calculated by The Private Equity Analyst; using the data provided by the public pension funds. (3) The pension funds released disclaimers with the data, saying that IRRs do not accurately reflect the expected future returns of the partnership, and may vary depending on how they are calculated. The pension funds also said that the comparison of IRRs is difficult because the industry does not have standard valuation methods. Finally, the pension funds said that IRRs are not especially meaningful in the early years of a fund’s life, and that their IRR calculations have not been approved by general partners. 25 April 2005 Private Equity Analyst DEAL OF THE MONTH Nano-Tex Applies Nanotech Promises – Now By Rizal Tupaz T iny robots that can repair broken DNA. Supercomputers no bigger than the head of a pin. Building materials 150 times as strong as steel. These are among the promises of nanotechnology – promises that have led venture capitalists to pour more than $2.1 billion into U.S. nanotechnology start-ups since 2000, according to research from VentureOne. But many of these promises, if they are to be realized at all, are still 10 years or more away from reality – not ideal for a VC on a shorter timeline for returning money to investors. Perhaps it’s no surprise, then, that one of the biggest recent rounds in the field has gone to a company that already has products, customers and has even been profitable at times. In March, venture investors gave $35 million in Series A funds to Nano-Tex LLC, which develops nanotechnologybased textile treatments. WL Ross & Co. led the round with an investment of around $11 million. The firm, which is better known as a distressed debt investor, got involved with Nano-Tex after it purchased textile producer Burlington Industries Inc. in a $614 million buyout in 2003. Burlington had previously provided Nano-Tex, which was founded in 1998 and is based in Emeryville, Calif., with $5 million in seed funding. Nano-Tex Chief Executive Donn Tice declined to give the company’s valuation. Jeff Crowe of Norwest Venture Partners, which also invested in the Series A round, says his firm found that many of the nanotech start-ups it has looked at are still “in At a Glance The company: Nano-Tex LLC develops a chemical that, when applied to fabric, transforms the molecular structure of the fibers to make clothing spill-resistant or cling-free, for example. The deal: The company received $35 million in Series A funding from lead investor WL Ross. Other investors included Norwest Venture Partners, Howard Hughes Medical Institute, Masters Capital and Firelake Capital Management. The performance: Nano-Tex has been profitable in the past, but isn’t currently, due to its growth rate. It hopes to hit profitability again in 2007. the science project stage.” Norwest “got excited about Nano-Tex as it has real customers, serving a real market; it is very much a real business.” By definition, nanotechnology involves manipulating matter smaller than 100 nanometers and taking advantages of properties present only at that level. A nanometer is one billionth of a meter, which is the width of about three to five atoms. Nano-Tex develops a chemical which, when applied during the production of fabrics, binds permanently at the molecular level, transforming the molecular structure of the fibers. Nano-Tex’s treatments are used, for example, to make khaki pants spill-resistant, to make police uniforms wick away perspiration, and to keep dresses from clinging on a dry winter day. WL Ross head Wilbur L. Ross explains that because Nano-Tex deals with such small nano-fibers, the treatments don’t change the look and feel of the garment. In comparison, competing products such as Teflon’s fabric protector, which is essentially a coating, gives the garment a “plastic” feeling, Ross says. Nano-Tex’s treatments are integrated into the fabric itself at such a small scale that enhancements don’t wash or wear off. Nano-Tex has some 38 scientists working on its technology, which is already being licensed by more than 100 customers – “more than anyone else in this space,” Ross says. CEO Tice says last year retailers such as The Gap, Eddie Bauer and Nordstrom’s sold more than 20 million garments with Nano-Tex enhancements. Retailers like the Nano-Tex technology because they can usually sell garments with it at prices approximately 15% higher than traditional apparel, he says. The company, which employs 100-odd workers, plans to use the new capital to fund new products and fuel its market development, distribution and service capabilities. In the past year, Nano-Tex has introduced three new fabric treatments; expanded its textile mill customer roster by 60%; quadrupled its research and development capabilities; and doubled the number of apparel and interior furnishings brands selling Nano-Tex-enhanced products. Ross says Nano-Tex, because of this growth, “had become very capital consumptive.” The company was profitable in 2002 and 2003, Tice says, but it isn’t now, as it has hiked spending on marketing and overseas expansion. Tice is projecting 30% to 40% annual revenue growth, and says the company expects to reach profitability again in 2007. April 2005 26 Private Equity Analyst DEAL TRENDS Venture Capital Leveraged Buyouts Clean Tech Charges Up VCs LBO Firms Like ASP Model By Scott Austin By Shasha Dai C lean technology has yet to energize the check books of most venture capitalists in a world where limited natural resources are still king. While it may be trendy for a fund to stick a solar energy company in its portfolio, many VCs remain cautious about investing in environmentally friendly companies. The sector is still in need of a sustainable and successful company to give VCs a reason to jump in. But better technology, coupled with political and economic changes and high natural-gas and oil prices, have made it an easier place to stomach an investment. Expansion Capital Partners recently staged a $20 million first close of its second fund targeting clean technology. The firm, which hopes the new fund will raise more than $50 million, says that the rapid growth of many clean technology sectors, combined with relative under-investment by the venture community, gives it an edge in timing. A few other funds and limited partners – SJF Ventures, Contango Capital Management and the California State Teachers’ Retirement System, for example – have recently begun earmarking millions for the sector. Contango just closed an $8.25 million fund focused solely on fuel cells, an area that seems to be sparking interest lately. Several companies working with fuel cells – which generate electricity through an electrochemical reaction using hydrogen and oxygen – have received funding, including Franklin Fuel Cells Inc. ($7.4 million Series A led by EnerTech Capital), INI Power Systems Inc. ($3 million Series A led by Morrissey Hawthorne Inc.) and ReliOn Inc. ($25 million Series B led by Oak Investment Partners). According to a report from research firm Clean Edge Inc., sales in the markets for solar, wind, fuel cell and energy technology nearly doubled from $9.5 billion in 2002 to more than $16 billion in 2004, and are expected to grow to more than $100 billion in the next 10 years. Venture capital investments in clean technology still make up a slim slice of the VC pie – about 3% of the $20 billion invested by venture capitalists in 2004 – but are at historically high levels for the energy-tech space, according to the study. Powered by T he proposed buyout of SunGard Data Systems Inc. is remarkable in a lot of ways, including the largest equity check – $3.5 billion – that will have been written to date by a buyout consortium. But the fact that the check is going to a software company buyout may be the most remarkable thing of all. LBO firms traditionally have shied away from software investments, deterred by sometimes unreliable revenue streams and few tangible assets. But many of these companies, like SunGard, have begun shifting towards a revenue-steadying application service provider, or ASP, model, and away from the more traditional license model. SunGard, Wayne, Pa., maintains a network into which its clients, including banks, mutual fund managers and securities brokers, tap to trade securities with one another. Clients pay monthly subscription fees, rather than paying fees to license the software. The result has been stable, predictable revenue and Ebitda that SunGard’s new owners can use to pay down debt. Almost 90% of SunGard’s $3.56 billion in revenue last year came from services, largely through multi-year contracts which make it hard for clients to shift suppliers. The stability of this model explains in part why lenders are willing to put in around $7.8 billion, or roughly 70% of the enterprise value, in the deal. The resulting debt/equity ratio is one of the highest for recent technology buyouts. It’s far easier to leverage acquisitions of software developers with ASP models than those whose revenue tends to depend heavily on licensing fees, according to a buyout executive who was involved in the deal. SunGard started making the transition to an ASP model more than a decade ago, well before many of its peers, according to the buyout executive, who added that as more software companies make this transition, there are likely to be more similar deals. The buyout group, led by Silver Lake Partners, includes Bain Capital Inc., Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts & Co., Providence Equity Partners and Texas Pacific Group. Reach Silver Lake Partners at 650-233-8120. April 2005 28 Private Equity Analyst DEAL-MAKERS Top March Venture Capitalists Venture Firm(s) / Most Significant Deals Reported in March by VentureWire* 1 2 3 4 5 6 8 9 CSK Venture Capital, Tokyo, 81-3-5771-6411 In one of the largest financing deals in life sciences this year, Perlegen Sciences Inc. raised $74 million in Series D funding led by CSK Venture Capital. The Mountain View, Calif.-based start-up now boasts more than $200 million in financing and analyzes millions of genetic variations of DNA samples to improve the effectiveness of prescription drugs. Latest fund: Not available WL Ross & Co., New York, 212-826-1100 For months IPO rumors have circulated around Nano-Tex, an Emeryville, Calif.-based start-up that uses nanotechnology, or manufacturing that involves ultra-small materials, to improve the quality of everyday fabrics. Although Nano-Tex is mum on any plans to go public, the company’s new $35 million Series A round led by WL Ross certainly could be a big step in that direction. Latest fund: Not available Advanced Equities, Chicago, 312-377-5300 With an ambitious plan to eventually unseat much larger rival Research in Motion – maker of the popular Blackberry device – as the top provider of corporate wireless e-mail, Good Technology Inc. scored $50 million in Series E funding led by investment bank Advanced Equities. The Santa Clara, Calif.-based start-up now has nearly $200 million in venture capital from a blue-chip syndicate. Latest fund: No fund Topspin Partners, Roslyn Heights, N.Y., 516-625-9400 Led a $25 million Series C round for Menlo Park, Calif.-based ArgiNOx Pharmaceuticals Inc., which is developing a treatment for cardiogenic shock, the leading cause of mortality in heart attack victims who arrive at the hospital alive. A Phase III study has been approved and is likely to begin during the first half of 2005. Latest fund: Closed $215M fund in 2001 Morgenthaler Ventures, Menlo Park, Calif., 650-388-7600 Existing investors of Menlo Park-based Xtent Inc. kept a $25 million Series C round led by Morgenthaler to themselves, as the start-up looks to tap into the multi-billion dollar drug-eluting stent market. Funds will support a plan to bring its first device to the European market late next year with a U.S. launch several years later. Latest fund: Closed $850M seventh fund in 2001 Three Arch Partners, Portola Valley, Calif., 650-529-8000 Cargill Ventures, San Mateo, Calif., 650-356-7060 Led a $27 million Series B round for Sirtris Pharmaceuticals Inc., which is targeting enzymes that may lead to the development of antiaging drugs that hamper the progression of diseases such as Alzheimer’s. The Waltham, Mass.-based start-up plans to use the funds to develop drugs in various therapeutic areas. Latest funds: TAP: Closed $454M fourth fund November 2003; CV: Closed first fund in 1999 Fidelity Ventures, Boston, 617-563-4159 Norcross, Ga.-based Netifice Communications Inc., which manages virtual private network systems for companies, raised $55 million in a Series E round led by Fidelity, using a large chunk of that funding to acquire the managed services business of Aventail Corp. The start-up says it is poised to expand offerings in remote access services and in voice-over-IP through acquisitions. Latest fund: Closed $250M fourth fund in 2004 Star Ventures, Munich, 49-89-419-4300 To support a sales drive involving its orthodontics business and the launch of its dental imaging technology, Cadent Holdings Inc. pocketed $25 million in Series E funding led by Star Ventures. The Carlstadt, N.J.-based start-up is preparing to launch early next year an electronic impression device designed to replace physical impressions for making dental crowns and bridges. Latest fund: Closed $400M ninth fund in 2001 BA Venture Partners, Foster City, Calif., 650-378-6000 San Diego-based Ascenta Therapeutics Inc. is looking to develop new medicines for cancer with help from a $30 million Series B round led by BA Venture Partners. Proceeds will be used in part to complete a Phase I trial of its lead compound that began in January after getting the nod from the Food and Drug Administration. Latest fund: Closed $400M seventh fund in 2005 Austin Ventures, Austin, Texas, 512-485-1900 Matrix Partners, Waltham, Mass., 781-890-2244 10 11 Founded to commercialize power conversion technology developed at an aerospace research lab in California, ColdWatt Inc. launched with $15.5 million in Series A funding led by Austin Ventures and Matrix Partners. The Austin, Texas-based start-up makes high-efficiency power supplies ideal for electronic equipment. Latest fund: AV: Closed $830M eighth fund in 2001; MP: Closed $1B seventh fund in 2001 Powered by *as judged by the editors of VentureWire Professional, a sister publication to Private Equity Analyst April 2005 30 Private Equity Analyst DEAL-MAKERS Top March Buyout Artists Buyout Firm(s) / Most Significant Deals Reported in March by LBOWire* 1 2 4 5 6 7 8 9 Silver Lake Partners, Menlo Park, Calif., 650-233-8120 The firm is leading the $10.8 billion buyout of Sungard Data Systems Inc., which, if it goes through, would be the largest buyout of a technology company by the largest consortium of LBO firms ever assembled, who would write the largest single check in a buyout, ever: $3.5 billion. The consortium also includes Bain Capital, Blackstone Group, Goldman Sachs Group Inc.’s buyout fund, Kohlberg Kravis Roberts & Co., Providence Equity Partners Inc. and Texas Pacific Group. Latest funds: Silver Lake Partners II LP saw first closing of $1.8B in 2004 Kohlberg Kravis Roberts & Co., New York, 212-750-8300 Bain Capital, Boston, 617-516-2000 Together with Vornado Realty Trust, the two firms have agreed to buy all of Wayne, N.J.-based Toys “R” Us Inc. for $6.6 billion, plus the assumption of debt. The firms are making a bet on U.S. real estate with the deal; for Bain, this also represents an expansion of its toy-selling strategy, as it is also a principal owner of KB Toys. Latest funds: KKR: $5.75B Millennium Fund LP; Bain: closed Fund VIII in 2004 with $3.5B Carlyle Group, Washington, D.C., 202-729-5626 Taking private cable operator Insight Communications Co. in a deal valued at $650 million, or about 9.5 times reported 2004 Ebitda. New York-based Insight serves 1.3 million cable customers in Illinois, Indiana, Ohio and Kentucky. Analysts expect further mergers in the industry, which is facing competition from telephone companies and satellite TV. Latest funds: Just closed Carlyle Partners IV LP Bear Stearns Merchant Banking, New York, 212-272-2000 The firm, which usually makes majority investments, agreed to buy a 50% stake in swanky blue jeans maker 7 for All Mankind for between $75 million and $100 million. The Los Angeles-based company generates $200 million in annual sales and is rapidly growing. Latest funds: $1.5B Bear Stearns Merchant Banking Partners II LP closed in 2001 WL Ross & Co., New York, 212-826-1100 Agrees to buy textile maker WestPoint Stevens Inc., West Point, Ga., and bring it out of bankruptcy in a deal that exchanges $480 million of the company’s senior secured debt for an equity stake and provides an additional $207.5 million in cash. Wilbur Ross said the recent elimination of global quotas on textiles has made the industry more appealing. Latest funds: $400M WLR Recovery Fund II LP raised in 2002 Golden Gate Capital, San Francisco, 415-627-4500 Plans to buy publicly traded Blue Martini Software Inc. for $54 million in cash. The firm will fold Blue Martini, San Mateo, Calif., into its portfolio company Multi-Channel Holdings Inc., whose software also helps retailers sell their products. Latest funds: Raised $1.8B Fund II in 2004 Champlain Capital Partners, San Francisco, 415-273-3518 Agrees to buy Totowa, N.J.-based Badanco Enterprises, a luxury suitcase maker with annual sales of about $65 million. The enterprise value of the deal wasn’t disclosed, but Champlain invested $10 million in equity. The luggage market, which took a hit after Sept. 11, looks to be picking up; this is the second deal by a PE firm in this market in the last month. Latest funds: Raised $140M debut partnership in 2002 Huron Capital, Detroit, 313-496-1050 Acquires a majority stake in for-profit vocational school Ross Learning, Southfield, Mich., for more than $20 million, its fifth investment in the sector. The deal – one of two announced in this area in the past month – shows that the for-profit educational sector remains hot. Latest funds: Last year closed on $90M for Huron II LP, which has a $150M target Imperial Capital Corp., Toronto, 416-362-3658 Acquiring a majority share of Montreal-based Procaps Encapsulation Inc., the world’s largest manufacturer of paintballs. The firm plans to make add-on acquisitions to the company. Procaps President and CEO Richmond Italia is the inventor of the X-Ball game, which incorporates aspects of hockey with paintball. Latest funds: $125M Imperial Capital Acquisition Fund III is roughly 50% invested Behrman Capital, New York, 212-980-6500 Makes its second acquisition of a defense-related company in six months, agreeing to buy Bea Maurer Inc., a Fairfield, Va.based maker of heavy-duty shelters used to house military personnel, for $80 million. Bea Maurer will be rolled into another Behrman portfolio company, Hunter Manufacturing, which makes air filters, heating systems and other products for the military sector. Latest funds: $1.2B third fund closed in 2001 Powered by *as judged by the editors of LBO Wire, a sister publication to Private Equity Analyst 10 11 31 April 2005 Private Equity Analyst THE ROUNDUP LBO/Corporate Finance ABRY PARTNERS LLC, BOSTON, sticks to its pledge to raise no more than $900 million for its fifth media buyout fund, despite a little more than $3.3 billion in investor demand. At the same time, the media buyout firm has joined an elite club of buyout firms – including Boston-based Bain Capital – which levy a 30% carried interest on their funds. Because demand was so strong, ABRY only accepted commitments to ABRY Partners V LP from investors that had backed at least one of the firm’s previous funds. Two confirmed investors are New York State Teachers’ Retirement System and Pennsylvania State Employees’ Retirement System. Fund V’s $900 million final close represents a modest increase over the $775 million that ABRY raised for its fourth buyout fund back in 2001. As it did with that vehicle, ABRY plans to invest between $30 million and $100 million in equity per deal in industries that include television and radio broadcasting, magazine publishing, trade shows, wireless communications, database management providers and advertising. Although Fund V’s 30% percent carried interest ranks it among the highest profit splits levied on a buyout fund, President and Co-Founder Royce Yudkoff said that overall the fund’s terms remain favorable to investors, compared to many other buyout funds. ABRY will not start taking its carry until it has returned all invested capital to limited partners net of fees plus a 9% preferred return. Only about 9% of buyout firms follow this practice, according to a 2003 survey conducted for the third edition of The Private Equity Partnership Terms and Conditions, a biennial research report published by Dow Jones & Co. The vast majority return only a portion of invested capital before taking their carry, according to the report. Yudkoff added that ABRY shares 100% of any transaction fees or consulting fee income the firm receives with its investors. Reach the firm at 617-859-2959. Fund-Raiser Highlights LBO/CORPORATE FINANCE ABRY Partners LLC 32 Carlyle Group 32 Edgewater Funds 32 Evergreen Pacific Partners 34 Flexpoint Partners LLC 34 Graham Partners 34 Jefferies Capital Partners 36 Leeds Weld & Co. 38 Lehman Brothers Merchant Banking Partners 38 Metalmark Capital LLC 38 Rosemont Investment Partners LLC 38 Sentinel Capital Partners 40 Shamrock Holdings 42 Spectrum Equity Investors 42 Sterling Capital Partners 42 Weston Presidio 42 MEZZANINE FUNDS Pine Street Capital Partners 45 VENTURE CAPITAL August Capital 45 Avalon Ventures 45 Celsius Capital 46 El Dorado Ventures 46 Leapfrog Ventures 46 Vector Capital 46 Venture Strategy Partners 47 FUNDS OF FUNDS Goldman Sachs Asset Management 47 Morgan Stanley Alternative Investment Partners 47 INTERNATIONAL CVC Capital Partners 49 CARLYLE GROUP, WASHINGTON, D.C., becomes the first firm to hit the $10 billion fund-raising mark. The firm has raised $7.85 billion for making U.S. investments and an additional $2.2 billion for European purchases, according to Carlyle officials. The U.S. fund is the largest buyout fund ever raised. Carlyle's co-founder and managing director, David Rubenstein, said the size of the newest funds means that a new group of large and well-known companies could be candidates for private equity buyers. "Nothing is off the table now," he said. The new launches by Carlyle come amid a fund-raising arms race among the world's largest private equity players, who are doing ever-larger deals. Finding the funding is no problem for the field's biggest names, as cash is streaming in from big pension funds, institutions and wealthy investors. Carlyle, in fact, turned away about $2 billion in prospective investments. While Carlyle's U.S. fund is the largest raised to date, it won't keep that title for long. Funds raised by Blackstone Group, Warburg Pincus and Goldman Sachs Group are expected to be as big or larger. Reach Carlyle at 202-347-2626. EDGEWATER FUNDS, CHICAGO, looks to raise up to $300 million for Edgewater Growth Capital Partners II, according to a regulatory filing. The firm has already received capital commitments from at least one backer, Teachers Retirement System of the State of Illinois, which has allocated $25 million for the fund. The fund would invest in profitable growth companies with revenue of $20 million to $500 million through minority and majority investments in such sectors as technology, consumer products, basic industries and business products and services. Reach Edgewater at 312-649-5666. 32 April 2005 Private Equity Analyst THE ROUNDUP EVERGREEN PACIFIC PARTNERS, SEATTLE, holds a final closing of its debut fund at $275 million, which it will invest in middle-market businesses in the Western U.S. and Canada. The LBO shop was founded two years ago by Thomas McGill, Timothy Bernardez and Michael Nibarger – former principals of buyout firm Northwest Capital Appreciation, also in Seattle. Limited partners in Evergreen Pacific Partners’ fund include WestAM Private Equity Group, Public School Employees’ Retirement System of Pennsylvania, The Duke Endowment and Massachusetts Mutual Life Insurance, McGill said. Other investors include 30 executives of companies mostly in the Western U.S. and Canada. Evergreen Pacific targets private manufacturing, distribution, packaging, media and consumer products companies that generate revenue of between $25 million and $250 million. It intends to make up to three investments per year, putting equity of $10 million to $40 million in each transaction. At that rate, the fund would last roughly three and a half years, according to McGill. Reach Evergreen at 206-689-2451. according to a source. Flexpoint was formed by three former principals from buyout shop GTCR Golder Rauner LLC – Donald J. Edwards, Ethan A. Budin and Charles E. Glew – and will focus on investments in health care and financial services. Gerald J. Ford, a financier who made his fortune in the banking industry, is providing the fledgling firm with an initial $50 million commitment, the source said. Ford Foundation, a charitable foundation unrelated to Gerald Ford, is also believed to be considering a commitment. Health care and financial services would seem a natural fit for Flexpoint, given the background of its founders. Edwards spent at least seven years at GTCR, where he worked on investments in such companies as American Medical Laboratories Inc., a provider of diagnostic testing sold to Quest Diagnostics in 2002, and Dynacare Inc., a provider of laboratory testing sold in 2002 to Laboratory Corp. of America Holdings. Budin, meanwhile, helped steer GTCR into its 2002 investment in Ovation Pharmaceuticals Inc. Both Budin and Glew joined GTCR in 1998 and were promoted to principal in 2001. Both appear to have left GTCR within the past 12 months. Reach Flexpoint Partners at 312-327-4520. FLEXPOINT PARTNERS LLC, CHICAGO, looks to raise between $150 million and $250 million for its debut fund, to be invested in smaller companies with estimated enterprise values of less than $150 million, GRAHAM PARTNERS, PHILADELPHIA, plans an April 8 close on its second fund with $465 million, ahead of its upwardly revised target of $350 million, a The Private Equity Market Monitor * M– anagers of debut funds are getting a warm reception from limited partners. So far this year, managers of 14 first-time funds including a mix of LBO, venture capital and mezzanine offerings – have garnered about $2 billion in closings. Among some of the debut funds that have closed on funds this year: Roark Capital, Atlanta, which recently raised $413 million for its maiden LBO fund; Evergreen Pacific Partners, Seattle, which closed on $275 million for its LBO fund; Shasta Ventures, Menlo Park, which held a $210 million final closing on its first venture fund; and Union Square Ventures, New York, which closed $125 million for its venture fund. How 2005 Stacks Up Against 2004 ($ in billions) 2005 Funds Through March ($ in millions) $100B $87.7 80 Type of Fund Number Amount Buyouts/Corporate Finance 60 40 20 0 17 21 5 3 46 $7,359.9 $4,708.1 $1,500.0 $146.0 $13,714.0 Copyright ©2005 Private Equity Analyst $59.5 Venture Capital Fund of Funds $13.7 Closed '04 (292 Funds) Closed '05 To Date (46 Funds) Still Being Sought (327 Funds) Mezzanine Total *For more market statistics, check out our subscription service at www.PrivateEquityInteractive.com. April 2005 34 Private Equity Analyst THE ROUNDUP person close to the firm said. Graham Partners Investments II LP saw a high level of interest from investors, who offered to commit over four times the firm’s initial target, the person said. Graham’s investment team committed $40 million to the fund. Other investors were primarily endowments and foundations. Graham invests in lower mid-market industrial companies with revenue of between $20 million and $250 million. The new fund will enable the firm to independently invest in larger deals and cut equity checks of as large as $150 million, rather than drawing on co-investments as was common with its predecessor. The firm’s first fund, Graham Partners Investments LP, raised $227 million in 1999. The fund has completed one exit from its nine investments so far and laid out a plan to harvest its remaining eight in the next three years. Graham Partners is an investment affiliate of the privately held Graham Group of York, Pa., an industrial and investment concern with global interests in plastics, packaging, machinery, building products and outsourced manufacturing. Reach Graham Partners at 610-408-0500. JEFFERIES CAPITAL PARTNERS, NEW YORK, the mid-market private equity arm of investment bank Jefferies & Co., is marketing its fourth fund with a target size of $400 million to $600 million, according to a document from the Pennsylvania Public Schools Employee Retirement System. In the memorandum, the pension plan’s investment staff recommends that the pension fund commit as much as $100 million to Jefferies Capital Partners IV LP, based on “the firm’s track record and experience.” Jefferies & Co. will also be an investor, according to the document. The group last raised a $400 million fund in 2000. Fund IV is to be invested in chunks of $10 million to $50 million at a time in 10 to 20 mid-sized companies with annual revenue between $50 million and $500 million. The group makes both late-stage venture capital investments and traditional buyout-style acquisitions in health care, media, transportation and financial services. Led by Brian Friedman and James Luikart, Jefferies Capital, formerly ING Furman Selz, will continue to lean on parent Jefferies & Co. for deal flow and April 2005 36 Private Equity Analyst THE ROUNDUP industry expertise, according to the document. Reach Jefferies Capital at 212-284-1700. on smaller companies than the bank’s financial sponsor clients do, the source said. Lehman Brothers Merchant Banking closed a $2 billion fund in 1997, with the parent bank supplying $650 million of that amount. Lehman Brothers Merchant Banking is led by Charles Ayres, the former North American head of New York- and London-based MidOcean Partners. It currently has more than 25 investment professionals. Reach Lehman at 212-526-7000. LEEDS WELD & CO., NEW YORK, closes its education-focused fund at over $450 million, more than two-and-a-half years after it began the fund-raising. The firm came in $50 million short of its originally stated $500 million target. Leeds Weld Equity Partners IV LP closed last fall, and is to be invested in about 10 education companies. The group will commit between $40 million and $60 million in equity per deal. It could potentially commit more, since it can draw on co-investments from its limited partners, which include Pennsylvania State Employees’ Retirement System, New Mexico State Investment Council and California Public Employees Retirement System. Fund VI kicked off fund-raising around April 2002, one of the slowest fund-raising years in recent memory. Leeds Weld held a $200 million first closing in April 2003, buoyed by an exit from its previous fund that quintupled its investment. The firm collected $100 million from the sale of Ross University to DeVry, after having invested $20 million. With Fund IV, the firm plans to continue its strategy of acquiring corporate training companies, for-profit schools and other education-related companies. Jeffrey Leeds founded Leeds Weld in 1995. Leeds, a former Lazard LLC investment banker, later brought on board former Massachusetts Governor William F. Weld as a partner. Leeds Weld executives couldn’t be reached for comment on why the fund missed its target. Reach Leeds Weld at 212-835-2000. LEHMAN BROTHERS MERCHANT BANKING PARTNERS, NEW YORK, the buyout arm of investment bank Lehman Brothers, expects to close on more than $1 billion for its third fund in April, according to sources familiar with the situation. The Teachers Retirement System of the State of Illinois has committed $50 million to Lehman Brothers Merchant Banking Partners III LP, which has a cap of $1.2 billion. Parent bank Lehman Brothers had planned to commit about $500 million to the fund as of mid-2003, although Lehman Brothers executives could not be reached for comment on possible changes to that plan. Unlike some of its competitors, the bank does not plan to establish an independent private equity unit, a source said. It believes its merchant banking group raises no potential conflicts of interest; the group doesn’t participate in auctions and focuses April 2005 38 METALMARK CAPITAL LLC, NEW YORK, the former buyout arm of Morgan Stanley, reins in about half of the $1.5 billion targeted for its first buyout fund since divorcing from the investment bank. The firm is planning to hold a first closing on the fund by the end of April and expects a final closing this summer, according to investors in the new fund. Metalmark Capital Partners LP will follow a strategy similar to that used by Morgan Stanley’s previous in-house buyout funds, investing with a focus on industrial, energy and health care companies. The firm plans to invest between $50 million and $250 million per deal and will have an exclusive focus on North America. The firm is interested in control investments and will not do “club deals,” in which several buyout groups team up to acquire a company. Metalmark’s 25-person investment team, led by Howard Hoffen, the former head of Morgan Stanley Capital Partners, has capped the new fund at $2 billion, according to sources. It is unclear how much Morgan Stanley will invest in the fund, but the bank is likely to commit much less than it has to previous funds. This is partly because Metalmark wants to maintain the option of using Morgan Stanley’s investment banking services to source deals and underwrite initial public offerings without worrying about conflicts of interest. The group manages two existing Morgan Stanley Capital Partners private equity funds, including a $3.3 billion pool raised in 1999 and a $1.8 billion fund raised in 1994. Among Metalmark’s current investors are General Motors and J.P. Morgan Chase & Co. Reach Metalmark at 212 823-1930. ROSEMONT INVESTMENT PARTNERS LLC, WEST CONSHOHOCKEN, PA., holds a final closing of its second fund at $130 million, above its $100 million target. Rosemont Partners II LP received commitments from new limited partners, including Australian-based Military Superannuation and Benefits Board of Trustees, Mayo Foundation, Private Equity Analyst THE ROUNDUP RBC Dain Rauscher, Parish Capital and Ewing Marion Kauffman Foundation. Previous investors that returned for the second fund include Keefe Bruyette & Woods Inc. and KBC Bank NV. Rosemont Partners II raised $51.6 million in two previous closings but hasn’t made any investments yet. The firm expects to close the first two deals from the new fund in the next few months. Rosemont was founded in 2000 by Chas Burkhart and David Silvera, who had come from Investment Counseling Inc., which advises asset managers. The firm typically makes minority investments of $3 million to $20 million of equity in asset management outfits or service providers to such companies. Reach Rosemont at 610-834-1370. the green light from investors to lift the $275 million cap it had initially set for Sentinel Capital Investors III LP, which featured a $225 million target, sources said. Investors in Fund III include AlpInvest Partners, Mayo Foundation, Citigroup, INVESCO Private Capital Markets Inc., New York City Metropolitan Museum of Art and RCP Advisors LLC. A spokesman for Sentinel Capital declined to comment on the fund-raising. Sentinel plans to stick with its strategy of backing small companies in consumer products and services, business services and outsourced manufacturing industries. The firm typically targets companies with at least $6 million in annual cash flow and enterprise values ranging from $25 million to $125 million, according to its Web site. Structured as a Canadian Income Fund, the C$203 million IPO of Spinrite returned nearly six times the firm’s $19 million investment from Sentinel Capital Partners II LP, a $126 million fund the firm closed in 1999. Managing Partner David S. Lobel and Senior Partner John F. McCormack co-founded Sentinel Capital in 1995, SENTINEL CAPITAL PARTNERS, NEW YORK, prepares to wrap up its third small buyout fund at well over $300 million, thanks partly to a flood of investor interest that followed the initial public offering of Canadian yarn maker Spinrite, according to sources familiar with the effort. The firm has gotten April 2005 40 Private Equity Analyst THE ROUNDUP after working for First Century Partners, a venture capital affiliate of Smith Barney. Reach Sentinel Capital at 212-688-3100. fund would make it smaller than the firm’s previous fund, which includes both a $1.75 billion predecessor raised in 2000 and a $250 million “top-off” pool assembled the following year. Investment bank Lazard LLC is helping the group with the fundraising, according to sources. Reach Spectrum at 415-464-4600. SHAMROCK HOLDINGS, BURBANK, CALIF., which manages investments on behalf of the Roy E. Disney family, gears up to market its second U.S. small buyout fund offered to outside investors, according to sources familiar with the effort. The firm is considering setting a target somewhere in the $250 million to $275 million range, said one source, who expects the fund to come to market within the next several months. Shamrock has been interviewing placement agents. Executives from Shamrock did not return calls seeking comment. Shamrock typically invests $15 million to $50 million in equity at a time in buyouts, growth financings or recapitalizations of media, entertainment and communications companies, usually with enterprise values of $25 million to $250 million. So far, the firm has invested, or committed to invest, more than 80% of Shamrock Growth Capital Fund I LP in eight companies, the source said. The fund closed at $161 million in 2002. The firm has already taken two of the companies – Netgear Inc. and PortalPlayer Inc. – public. Managing Directors Robert F. Perille, Stephen D. Royer and William J. Wynneperle run Shamrock’s six-member U.S. private equity team. They report to Stanley P. Gold, president of Shamrock Holdings, as well as to Chairman Roy E. Disney. Reach Shamrock at 818-845-4444. STERLING CAPITAL PARTNERS, NORTHBROOK, ILL., appears to have made progress towards raising its second buyout fund, which features a $400 million target and a $500 million cap. The firm had expected to hold a first closing on more than $200 million in February, according to one prospective investor, although it remains unclear whether the closing actually took place. Executives from the firm did not return calls seeking comment. Pennsylvania State Employees’ Retirement System, which committed $15 million to Sterling Capital’s previous buyout fund, is considering a commitment to the new one, according to the pension fund’s most recent board meeting agenda. Other investors in Sterling Capital Partners LP, which closed at $316 million in 2002, include CitiGroup, Pennsylvania Public School Employees’ Retirement System, New Mexico State Investment Council and WestAM Private Equity. Assuming it reaches its target, Sterling Capital plans to invest Sterling Capital Partners II LP in an estimated 15 to 25 companies, according to a second prospective investor. The firm typically backs companies with enterprise values between $20 million and $150 million each and favors broadcasting, direct marketing, education, specialty distribution, niche manufacturing and business services. Through its debut fund, Sterling has backed at least seven companies, which it has used as platforms for further acquisitions. Senior Managing Directors Steven M. Taslitz and Merrick M. Elfman oversee Sterling Capital’s investment team. Before raising its first institutional fund, Sterling’s partners spent 16 years investing on a deal-by-deal basis, using their own money and that of other private investors. Reach Sterling Capital Partners at 847480-4000. SPECTRUM EQUITY INVESTORS, MENLO PARK, CALIF., holds a $1 billion first closing on its fifth fund, sources said, after lowering its expectations at the request of limited partners. The group held the first closing on Feb. 17 and is hoping to close on an additional $500 million within the next three to six months, the sources said. The firm last fall opted to cut its $2 billion target at the request of some of its investors. Two LPs said at the time that the firm might have over-estimated demand among some LPs who did not approve of what was perceived as a shift in the firm’s strategy to larger buyouts. The firm set out to raise Spectrum Equity Investors V LP in April of 2004. It plans to sponsor buyouts and growth equity investments in media and communications companies. Its predecessor, Spectrum Equity Investors IV LP, had posted a gross IRR of 25.2% as of Dec. 31, according to a source close to the firm. The $1.5 billion target on Spectrum’s latest April 2005 42 WESTON PRESIDIO, BOSTON, will shortly close its fifth partnership at its $1 billion cap, according to a source. The fund, which according to the source recently held a first closing, has so far taken in $819.2 million from limited partners, according to a filing Private Equity Analyst THE ROUNDUP with the Securities and Exchange Commission. All the capital commitments came from returning investors, the source said. Massachusetts Pension Reserve Investment Management Board committed up to $50 million to the fund in February. Money from Weston Presidio Capital V LP will be used to pursue the same investment strategy as its predecessor fund, which closed at $1.3 billion in 2000. Weston Presidio invests $10 million to $100 million in growth capital, recapitalizations and buyouts of Internet infrastructure, e-commerce, telecom, specialty retailing, service businesses, manufacturing, health care and IT companies. Monument Group, Boston, which helped the firm raise its four previous funds, has been helping with Fund V as well. The predecessor fund, Weston Presidio Capital IV LP, had generated a net IRR of minus 4.9% as of June 2004 for the California Public Employees’ Retirement System, which committed $100 million to the fund. The IRR does not reflect recent exits. Recently, Weston Presidio got back some money from the $320 million recapitalization of guitar maker Fender Musical Instruments, Scottsdale, Ariz. It also recently sold portfolio company Hanna Andersson, a maker of children’s apparel, and recapitalized newspaper group Herald Media Inc. alongside Audax Group. Weston Presidio executives did not return phone calls seeking comment for this article. Reach Weston Presidio at 617-988-2500. Media Inc. McGinn Smith, which owns half of Pine Street, manages money for institutional and individual investors. The company also advises on mergers and acquisitions and private placements. Reach Pine Street at 518-449-5131. Venture Capital AUGUST CAPITAL, MENLO PARK, CALIF., receives $283 million in commitments for its fourth early-stage fund, according to a filing with the Securities and Exchange Commission. August Capital IV LP is the successor to the $455 million fund the firm closed in 2000. A representative from August Capital declined to comment on the fund. According to the filing, 32 investors have contributed to the fund thus far; the only one who was named was San Francisco-based firm Horsley Bridge Partners. Formed in 1995 by partners David Marquardt and John Johnston, the firm closed on its $455 million third fund in 2000 – more than double a $195 million second fund closed in 1999. Investments from August’s third fund have ranged in size from $500,000 in Technorati, a San Francisco operator of a Web site that monitors Internet content sources, to $130 million as part of the syndicate that took private disk-drive giant Seagate Technologies in 2000. August Capital’s six partners include Marquardt, Johnston, David Hornik, Vivek Mehra, Andy Rappaport and Mark Wilson. Reach August Capital at 650-234-9900. Mezzanine Funds PINE STREET CAPITAL PARTNERS, ALBANY, N.Y., an affiliate of upstate New York investment firm McGinn Smith & Co., closes on $25 million of commitments for a new mezzanine fund. The firm hopes to raise another $50 million for the fund in the next year, and plans to invest $1 million to $8 million per deal, primarily in small private companies in the Northeast and mid-Atlantic. The investments will primarily consist of subordinated loans that support leveraged buyouts, recapitalizations and growth of companies with a revenue base of between $10 million and $100 million. Pine Street was formed last year by Timothy Welles, a former chief financial officer of First Albany Corp. He was joined by David Smith of McGinn Smith, former FleetBoston Financial Corp. Director Michael Lasch and Tony Schmitz, a former technology officer for 24/7 Real 45 AVALON VENTURES, SAN DIEGO, raises $75 million for its seventh fund, earmarked for early-stage drug development and wireless companies. The fundraising began after Labor Day and took roughly five months. Avalon will make its first investment by the summer, said General Partner Kevin Kinsella. Invesco, Harvard University’s Harvard Management Co., Grove Street Advisors and Michigan State University are all limited partners in Avalon VII. Also among the 10 largest stakeholders in the fund are Paul Capital, Washington State University, Bowdoin College and a fund-of-funds raised by Darwin Ventures in San Francisco. Expect Avalon VII to be invested in 12 companies, with $5 million as a typical investment and with two-thirds of the investments going into early-stage companies. Reach Avalon at 858-546-2460. April 2005 Private Equity Analyst THE ROUNDUP CELSIUS CAPITAL, PALO ALTO, CALIF., a newly formed early stage venture firm, sets a target of $150 million for its inaugural fund, said Managing Director Bill Burnham. The firm, whose staff includes former Mobius Venture Capital professionals as well as the co-founder of Vonage Holdings Corp., plans a first close in the third quarter of this year, and hopes to hold a final close by the end of 2005. Celsius Capital will focus on information services and software in the U.S. and China, investing up to $15 million over the life of a company. Burnham said the firm would likely take three to five years to fully invest the fund. Celsius was formed in late 2004 as a spinout of New York-based boutique investment and advisory services firm 2b Holdings. 2b founder Carlos Bhola and Burnham met during prior stints working for Credit Suisse First Boston and partnered to begin the new firm. The firm’s headquarters are in Palo Alto, but it expects to have a number of investment professionals in Shanghai. Burnham and Bhola will serve as managing directors; principals include former 2b Holdings co-founder Woo Kim and former Mobius Venture investment professional Tony Lo. Burnham most recently worked as a managing director with Mobius Venture Capital, where he focused on early stage infrastructure software. After forming 2b Holdings in 2000, in 2001 Bhola co-founded Vonage Holdings Corp., a Voice-over-IP telephony service provider. LEAPFROG VENTURES, MENLO PARK, CALIF., closes its second fund with $102.8 million, according to a Securities and Exchange Commission filing, well under the $150 million the firm had said it was seeking. The firm added only about $2 million for the second close of early stage fund Leapfrog Ventures II LP, Fund Manager Peter Rip said. The first close in October contained “over $100 million,” a source close to Leapfrog Ventures had said at the time, anticipating a final close with a maximum of $150 million. A lot of investors were interested, but their due diligence cycle would have taken “us past our closing date on paper,” according to Rip. Rip said the firm could have delayed the closing date, but doing so would have meant additional time and marketing expenses for a firm with only three fund managers. The new fund has about a dozen limited partners, with over 95% of the capital coming from institutional investors. Limited partners in the second fund include fund managers Mark Dubovoy, Rip and Pete Sinclair, as well as Pantheon USA Fund IV LP and the Public Employees’ Retirement Association of Colorado. Leapfrog is a “generalist” early stage IT venture capital firm, Rip said, and typically puts $2 million to $4 million into each company. The new 10-year fund will invest in 12 to 15 companies. The fund is roughly the same size as the firm’s first fund, which closed in April 2000. That fund’s investments included wireless networking company Vivato Inc., local-loop switch company Maple Systems Inc. and global Web access company Netli Inc. Reach Leapfrog at 650-926-9900. EL DORADO VENTURES, MENLO PARK, CALIF., closes its $200 million seventh early-stage fund, El Dorado Ventures VII LP. Limited partners include the Massachusetts Pension Reserves Investment Management Board, which said it has contributed up to $20 million. Along with the fund closure, Scott Irwin, previously a principal at EDV, has been promoted to general partner. Gary Kalbach, who co-founded El Dorado Ventures in 1986, will not play an active role in investing the new fund, but will remain with the firm in an advisory capacity. EDV VII will invest in approximately 20 companies over the next three years. Irwin said that average investment sizes will be $1 million for seed stage deals, $5 million for first rounds and $10 million to $15 million over the life of a portfolio company. Like its predecessor fund, EDV VII will focus on information technology, specifically software services, semiconductors, systems and communications oriented companies. The new fund is smaller than the firm’s $250 million sixth fund raised in 2000. Reach El Dorado at 650-854-1200. April 2005 46 VECTOR CAPITAL, SAN FRANCISCO, closes its third fund, Vector Capital Partners III, with $337 million, according to a filing with the Securities and Exchange Commission. The fund closed in mid-February and won’t be taking any more limited partners, a source close to the firm said. The fund held a $176.5 million first close in May with investments from groups including First Plaza Group Trust, with J.P. Morgan Chase Bank as trustee, Stichting Pensionenfunds AB and ZAM Holdings LP, according to a filing at the time. Vector Capital executives declined to comment on the new fund. As of Sept. 30, Vector Capital’s predecessor fund, a $218 million fund raised in 1999, had generated a net IRR of 7.3%, according to the California Public Employees’ Retirement System. It wasn’t clear if CalPERS has committed to Vector III. Vector typi- Private Equity Analyst THE ROUNDUP cally invests in software and information technology services, looking for established companies with annual revenue of $10 million to $150 million. Reach Vector Capital at 415-293-5000. million target. Traditionally, buyout funds grab the largest share of the capital pool, or about 50%, followed by venture funds with 20%. Goldman Sachs recently also wrapped up fund-raising for two other funds: a secondary fund and a distressed debt fund. GS Vintage Fund III LP is the group’s third dedicated secondary fund earmarked to buy interests in already-raised private equity funds. It closed in December with $1.5 billion in commitments, ahead of its target of $1.1 billion, as previously reported in the January issue. GS Distressed Opportunities Fund II closed in May of last year at $386 million. The fund has already committed 72% of that sum to managers focusing both on distressed equity and distressed debt strategies. The departure last June of Geoffrey Clark and Elizabeth Varley Camp, both members of the private equity group, didn’t materially impact the fund-raising, the firm said. “Turnover is always going to be an issue for some investors. There is no question about that,” said Michael Miele, chairman and chief investment officer of Goldman Sachs Asset Management. “But ultimately turnover did not play a meaningful role in the success of the fund-raising.” Goldman Sachs Asset Management operates independently from Goldman Sachs Capital Partners, which makes direct private equity investments in companies. Reach Goldman Sachs at 212-902-0300. VENTURE STRATEGY PARTNERS, SAN FRANCISCO, an early-stage venture firm that invests in the consumer and enterprise technology markets, closes its third fund, VSP III, with $185 million. The firm also said that it is changing its name to VSP Capital. Joanna Rees-Gallanter, founder and managing partner of VSP, said the firm held the final and only closing of the fund in the fall but only finalized paperwork for the vehicle in the first quarter. She said VSP has also been approached by chief executives and key individuals for a parallel fund, VSP III affiliate, which will be “no more than $10 million,” and from which VSP will invest pro-rata in parallel with its $185 million fund. The firm was targeting $150 million and didn’t want to raise more than $200 million, based on the stage of financing it targets, the number of companies it plans to invest in and the number of partners it has. About 14 limited partners participated in the new fund, roughly half of them new investors. Only one corporate pension fund committed to VSP’s new fund, while no public pension funds invested. Participants in the new fund included returning investors Horsley Bridge Partners Inc. and the Wellcome Trust, and new investors the Duke Endowment and Adams Street Partners. Over the last year, VSP had two significant exits. Rees-Gallanter said VSP had a five-time return on its investment in Oddpost Inc., a Web mail service acquired by Yahoo Inc. last summer. Another of its portfolio companies, ZipRealty Inc., which provides real estate transaction services via the Internet, had a successful initial public offering last fall. Reach VSP at 415-558-8600. MORGAN STANLEY ALTERNATIVE INVESTMENT PARTNERS, WEST CONSHOHOCKEN, PA., the fund-of-funds division of investment bank Morgan Stanley, collects $500 million for its latest offering, the bulk of which is earmarked for small and mid-market buyout funds. Morgan Stanley Global Diversified Fund LP, which featured a $350 million target, is larger than the $313 million debut fund of funds that the firm raised in 2001. The new fund is 20% committed to about a dozen funds. Morgan Stanley Alternative Investment Partners plans to stick with the strategy it adopted with its debut fund of funds, allocating about 65% of the money raised to fund commitments and the remainder to secondary deals and co-investments. The firm expects about 60% of the fund commitments to wind up in buyout funds of $250 million to $600 million, according to Cory Pulfrey, co-head of the 10-member fund of funds investment team. It expects another 25% of the money to go to special situation funds, including mezzanine funds, dis47 April 2005 Funds of Funds GOLDMAN SACHS ASSET MANAGEMENT, NEW YORK, closes $1.2 billion for its seventh fund of funds, overcoming fund-raising challenges it experienced after the departure of two managing directors who had helped raise its previous funds. GS Private Equity Partners 2004, the group’s latest primary fund of funds, closed in February, ahead of what was believed to be a $500 million to $700 Private Equity Analyst THE ROUNDUP tressed debt funds, natural resources funds or drug royalty funds. The remaining 15% of the money is earmarked for venture funds. Morgan Stanley Alternative Investment Partners intends to commit about half of its latest effort to funds investing outside of the U.S., including Europe and Asia. So far, the firm has deployed about 80% of Fund I in more than 30 funds, including a handful that it acquired on the secondary market. Included in the portfolio is a debut buyout fund managed by Paris-based MBO Partenaires and a drug royalty fund managed by San Francisco-based Paul Capital Partners. The firm expects the capital remaining in Fund I to go to co-investments and secondary deals. The firm has completed about a dozen co-investments through Fund I, including ones in seed company Seminis alongside Foster City, Calif.-based buyout firm Fox Paine & Company LLC, and cell-phone tower company Global Signal Inc., formerly Pinnacle Towers Inc., alongside New York-based buyout shop Fortress Investment Group. Reach Morgan Stanley at 212-761-4000. International CVC CAPITAL PARTNERS, LONDON, starts marketing its fourth buyout fund with a target of €5 billion ($6.6 billion), building on the success of its prior funds, a person with knowledge of the matter said. According to data from the California Public Employees’ Retirement System, as of June 30, 2004, CVC’s last fund, CVC European Equity Partners III LP, has generated a net IRR, or internal rate of return, of 24.7%. CVC held a final closing for its last fund in June 2001 at €4.65 billion. The fund focused on buyouts of European companies that generate annual sales of $100 million or more. Other limited partners in the fund included wealthy individuals and institutional investors such as California State Teachers’ Retirement System, Oregon State Treasury, Massachusetts Pension Reserves Investment Trust, Colorado Public Employees’ Retirement Association and New York City Retirement Systems. Reach CVC at 44-207-420-4200. 49 April 2005 Private Equity Analyst Guide to Investor Consultants For a complete set of guides to advisers and service providers, visit our subscription Web service at www.PrivateEquityInteractive.com Alignment Capital Group LLC 6615 Vaught Ranch Road, Suite 101, Austin, TX 78730 Phone: 512-744-4458 | Fax 512-744-4496 www.alignmentcapital.com | info@alignmentcapital.com Contacts Branch Offices 4100 North Fairfax Drive, Suite 1300, Arlington, VA 22203-1664 Phone: 703-526-8500 | Fax: 703-526-8501 2730 Sand Hill Road, Suite 300, Menlo Park, CA 94025 Phone: 650-854-8400 | Fax: 650-854-8415 105 Wigmore St., London, England W1U 1QY Phone: 44-20-7659-1400 | Fax: 44-20-7659-1401 6 Battery Road, Suite 13-08, Singapore 049909 Phone: 65-6224-8688 | Fax: 65-6224-8788 Contacts Austin Long, Partner / along@alignmentcapital.com Craig Nickels, Partner / cnickels@alignmentcapital.com Year Founded 2000 Number of Private Equity Consultants on Staff 4 Number of Clients 3 Clients Assets Under Management $6 billion Services Offered Asset allocation reviews, cash flow forecasting, fund manager searches, risk management, portfolio monitoring, performance evaluation, education Pricing Retainer and project based fees Representative Clients Public Employees Retirement Association Deirdre Nectow, Director of Business Development dnectow@cambridgeassociates.com Katey Ford DeTraglia, Manager, Business Development kforddetraglia@cambridgeassociates.com Year Founded 1973 Number of Private Equity Consultants on Staff 26 specialist consultants and 7 research consultants Services Asset allocation reviews, fund manager searches, portfolio monitoring, performance evaluation, education, benchmark calculator, PE and VC Indices Pricing Basis point charge on commitments with a minimum annual fee of Colorado, State of Connecticut Callan Associates Inc. 101 California St., Suite 3500, San Francisco, CA 94111 Phone: 415-974-5060 | Fax: 415-291-4017 www.callan.com | robertson@callan.com Contact CRA RogersCasey One Parklands Drive, Darien, CT 06820 Phone: 203-656-5900 | Fax: 203-656-2236 www.crarogerscasey.com matthew.mccormick@crarogerscasey.com 800 South St., Suite 250, Waltham, MA 02453 Phone: 781-810-1517 | Fax: 781-893-6872 400 Galleria Pkwy., N.W., Suite 1440, Atlanta, GA 30339 Phone: 770-541-4848 | Fax: 770-541-4849 2911 Turtle Creek Blvd., Suite 300, Dallas, TX 75219 Phone: 214-523-9060 | Fax: 214-523-9061 121 S.W. Salmon St., 11th Floor, Portland, OR 97204 Phone: 503-471-1378 | Fax: 503-471-1372 780 E. Market St., Suite 270, West Chester, PA 19382 Phone: 610-701-9900 | Fax: 610-701-9929 Contacts Gary W. Robertson, Senior Vice President / robertson@callan.com Year Founded 1973 Number of Private Equity Consultants on Staff 4 Services Offered Asset allocation reviews, cash flow forecasting, fund manager searches, risk management, portfolio monitoring, performance evaluation, education Pricing Negotiated Representative Clients Utah Retirement Systems, Indiana State Teachers Retirement Fund, Hawaii Employees Retirement System, Illinois Teachers Retirement System Cambridge Associates LLC 100 Summer St., Boston, MA 02110-2112 Phone: 617-457-7500 | Fax: 617-457-7501 www.cambridgeassociates.com information@cambridgeassociates.com Alan Kosan, Managing Director / alan.kosan@crarogerscasey.com April 2005 50 Private Equity Analyst G U I D E TO I N V E S TO R C O N S U LTA N T S Timothy Barron, Managing Director timothy.barron@crarogerscasey.com Matthew McCormick, Director of Marketing matthew.mccormick@crarogerscasey.com Donna Rosequist, Associate / donna.rosequist@crarogerscasey.com Year Founded 1968 Clients Assets Under Management $225 million private equity Services Offered Asset allocation reviews, cash flow forecasting, Contacts Suzanne M. Bernard, CFA, Principal / s.bernard@ennisknupp.com Phillip Bennett, Associate / p.bennett@ennisknupp.com Lan Qian, CFA, Senior Investment Analyst / l.qian@ennisknupp.com David Russell, CFA, Principal / d.russell@ennisknupp.com Year Founded 1981 Services Offered Asset allocation reviews, cash flow forecasting, fund manager searches, risk management, portfolio monitoring, performance evaluation, education Geographic Preferences U.S., Europe, Asia, Australia Pricing Services are priced either on a retainer basis and/or a project fund manager searches, risk management, portfolio monitoring, performance evaluation, education Evaluation Associates 200 Connecticut Ave., Suite 700, Norwalk, CT 06854 Phone: 203-855-2200 | Fax: 203-855-2301 www.eval-assoc.com Contact basis. Ellwood Associates 104 S. Michigan Ave., Suite 1100, Chicago, IL 60603 Phone: 312-782-5432 | Fax: 312-782-7494 www.ellwoodassociates.com | tsurrey@ellwoodassociates.com Contacts Mr. Gene Murphy, Senior VP / gene@eval-assoc.com Year Founded 1976 Fund Evaluation Group 205 W. 4th St., Suite 810, Cincinnati, OH 45202 Phone: 513-977-4400 | Fax: 513-977-4430 www.feg.com Branch Offices Russell W. Hill, Chairman & CEO Susan B. Toth, President & COO Daniel R. George, CFA, Senior Consultant & Chief Investment Officer Bradley J. Levandoski, Chief Information Officer Kristi J. Bieber Gibbs, Senior Consultant Timothy R. Egan, Senior Consultant Diane J. Cook, Consultant Daniel E. Simon, Consultant Scott R. Meggenberg, Consultant Ellen E. Ogan, Consultant Matthew F. Winton, Consultant John D. Merritt, Consultant Year Founded 1977 Number of Clients 97 Clients Assets Under Management $100 million Services Offered Asset allocation reviews, cash flow forecasting, One Indiana Square, Suite 1525, Indianapolis, IN 46204 Phone: 317-615-7454 | Fax: 317-615-7455 3011 West Grand Blvd., Suite 2125, Detroit, MI 48202 Phone: 313-875-4300 | Fax: 313-875-4343 Contacts Susan Mahan Fasig , CFA , Senior Vice President / sfasig@feg.com J. David Stein, Managing Director / dstein@feg.com Alan Lenahan, Senior Alternatives Research Analyst alenahan@feg.com Greg Dowling, Senior Quantitative Analyst / gdowling@feg.com Nathan Werner, Research Analyst / Nwerner@feg.com Tom Porter, Senior Private Equity Advisor / tporter@feg.com Year Founded 1988 fund manager searches, portfolio monitoring, performance evaluation, education Geographic Preferences U.S. Pricing Ellwood Associates’ investment consulting fees are all-inclu- Hammond Associates 101 S. Hanley Road, 3rd Floor, St. Louis, MO 63105 Phone: 314-746-1600 | Fax: 314-746-1699 www.haifc.com Contacts sive, meaning that all related services are included in one fee. This includes all investment policy and asset allocation studies, manager searches, performance reporting, general consulting projects and travel. Representative Clients Sunkist Growers, Dr. Scholl Foundation, Fry Foundation, Westlake Health Foundation, Rush University Medical Center Ennis, Knupp + Associates 10 S. Riverside Plaza, Suite 1600, Chicago, IL 60606 Phone: 312-715-1700 | Fax: 312-715-1952 www.ennisknupp.com Michael Forestner, Director of Alternative Investments mforestner@haifc.com Grant Leslie, Research Analyst / gleslie@haifc.com Eric Rudy, Research Analyst / erudy@haifc.com Year Founded 1985 Number of Private Equity Consultants on Staff 3* 51 April 2005 Private Equity Analyst G U I D E TO I N V E S TO R C O N S U LTA N T S Number of Clients 44 Clients Assets Under Management $1.18 billion Services Offered Asset allocation reviews, fund manager searches, Itaventures IKE Via Le Corbusier 19, Ravenna, Italy 48100 Phone: 39-544-47-8973 | Fax: 39-544-47-6588 ike@investors.it Contacts risk management, portfolio monitoring, performance evaluation, education Geographic Preferences Domestic – regionally diversified Services offered Retainer *3 research specialists in private equity serve 13 generalist consultants and 44 clients with private equity programs. Dr. Alessandra Marossa, CEO Dr. Michele Gardelli, Managing Director – Institutional Investors Katia Mengozzi, CFO Private Equity Analysts Dr. Federico Ravaglia, VC & Private Equity Ing. Ferruccio Fronzoni, Industrial Ing. Roberto Guerrieri, High Tech Ing. Stefano Gramantieri, Hedge Funds Dr. Mauro Frascari, Real Estate Dr. Francesco Fronzoni, Commodities Year Founded 1997 Number of Private Equity Consultants on Staff 9 Services Offered Alternative Investments Advisory on VC & Private Hewitt Investment Group 100 Half Day Road, Lincolnshire, IL 60069 Phone: 847-295-5000 | Fax: 847-771-7960 www.hewittinvestmentgroup.com | higmbx@hewitt.com 45 Glover Ave., Norwalk, CT 06850 Phone: 203-852-1100 | Fax: 203-523-6750 3350 Riverwood Pkwy., Suite 80, Atlanta, GA 30339 Phone: 770-956-7777 | Fax: 770-690-7040 Contacts Equity, Real Estate, Hedge Funds, Commodities Geographic Preferences Italy Robert L. Penter, CFA, Practice Leader Ted J. Schwartzman, CFA, Northeast Manager Mark A. Klimek, Midwest/West Manager Matthew R. Clink, CFA, Research Director Michael Scotto, CFA, Director of Liquid Alternatives Weston Tompkins, CFA , Senior Investment Consultant Year Founded 1974 Number of Private Equity Consultants on Staff 3 Number of Clients 130 Services Offered Asset allocation reviews, fund manager searches, Mercer Investment Consulting 10 S. Wacker Drive, Suite 1700, Chicago, IL 60527 Phone: 312-902-7500 | Fax: 312-902-7817 www.merceric.com Contact Caroline Aboutar, Investment Consultant Services Offered Asset allocation reviews, cash flow forecasting, fund manager searches, risk management, portfolio monitoring, performance evaluation, education risk management, portfolio monitoring, performance evaluation, education Morris Anderson & Associates 1111 E. Touhy Ave., Suite 286, Des Plaines, IL 60018 Phone: 847-768-4400 | Fax: 847-768-4401 www.morris-anderson.com Branch Offices Holbein Associates Inc. 15770 N. Dallas Pkwy., Suite 901, Dallas, TX 75248 Phone: 972-934-9333 | Fax: 972-934-9389 Contacts Richard Holbein, President / rholbein@holbein.com Scott Cooprider, VP & Director, Research / scooprider@holbein.com Year Founded 1986 Services Offered Asset allocation reviews, cash flow forecasting, 1870 The Exchange, Suite 100, Atlanta, GA 30339 Phone: 770-984-3262 | Fax: 770-984-3279 51 E. 42nd St., Suite 700, New York, NY 10017 Phone: 212-867-6868 | Fax: 212-867-7831 Contacts fund manager searches, risk management, portfolio monitoring, performance evaluation, education Pricing Annual full retainer or project basis Alan Glazer, Principal Daniel Morris, Principal Baker Smith, President Year Founded 1980 April 2005 52 Private Equity Analyst G U I D E TO I N V E S TO R C O N S U LTA N T S New England Pension Consultants One Main St., 8th Floor, Cambridge, MA 02142 Phone: 617-374-1300 | Fax: 617-374-1313 www.nepc.com Contacts Peter Gerlings, gerlings@nepc.com Sean Gill, sgill@nepc.com Benjamin Simonds, bsimonds@nepc.com Year Founded 1986 Services Offered Asset allocation reviews, cash flow forecasting, fund manager searches, risk management, portfolio monitoring, performance evaluation, education Pricing Typically we receive an annual retainer fee, but we can also provide services for an asset-based fee or by the project. Pension Consulting Alliance 514 N.W. 11th Ave., Suite 203, Portland, OR 97209 Phone: 503-226-1050 | Fax: 503-226-7702 www.pensionconsulting.com rebeccawei@pensionconsulting.com Branch Office 15760 Venture Blvd., Suite 700 Encino, CA 91436 Phone: 818-995-8713 | Fax: 818-990-7403 Contacts Tad Fergusson, CFA, Principal / tfergusson@pensionconsulting.com Neil Rue, CFA, Principal / neilrue@pensionconsulting.com Sarah Bernstein, Ph.D., Principal / sarahbernstein@sbcglobal.net Allan Emkin, Managing Director / pensioncnslt@earthlink.net Year Founded 1988 Number of Private Equity Consultants on Staff 4 Number of Clients 6 Client Assets Under Management $1.5 billion Services Offered Asset allocation reviews, cash flow forecasting, fund manager searches, risk management, portfolio monitoring, performance evaluation, education Pricing Services provided on a retainer or project basis. Representative Clients City of Hartford, Houston Municipal Employees Pension System, Los Angeles City Employees Retirement System, Los Angeles Fire and Police Pension System Rocaton Investment Advisors LLC 601 Merritt 7, Norwalk, CT 06851 Phone: 203-621-1700 | Fax: 203-621-1799 www.rocaton.com Contacts David Katz, Partner / david.katz@rocaton.com Carla Haugen, Partner / carla.haugen@rocaton.com 53 April 2005 Private Equity Analyst G U I D E TO I N V E S TO R C O N S U LTA N T S Year Founded 2002 Services Offered Asset allocation reviews, cash flow forecasting, Geographic Preferences U.S. and Europe and to a lesser extent Emerging Markets Pricing Flat fees contingent upon number of funds monitored and fund manager searches, risk management, portfolio monitoring, performance evaluation, education, distribution management, hedge fund consulting Pricing Services provided on a retainer or project basis, fixed fee or dependent on depth of services provided. asset-based. Strategic Investment Solutions 333 Bush St., Suite 2000, San Francisco, CA 94104 Phone: 415-362-3484 | Fax: 415-362-2752 lmansbridge@sis-sf.com Contacts Segal Advisors 1 Park Ave., New York, NY 10016 Phone: 212-251-5900 | Fax: 212-251-5290 www.segaladvisors.com Contact Lance Mansbridge, VP & Senior Consultant / lmansbridge@sis-sf.com Steve Hempler, Vice President / shempler@sis-sf.com Year Founded 1994 Number of Private Equity Consultants on Staff 5 Client Assets Under Management $8 billion Pricing Each client engagement is unique Greg Moore, Director, Research / gmoore@segaladvisors.com Year Founded 1969 Pricing Fees are assessed on a project-to-project basis, on retainer or by hourly time charges. State Street Corp./ The PrivateEdge Group 1 Lincoln Street, Boston, MA 02111 Phone: 617-786-3000 www.statestreet.com | privateedge@statestreet.com Contact Summit Strategies Group 7700 Bonhomme Ave., Suite 300, St. Louis, MO 63105 Phone: 314-727-7211 | Fax: 314-727-6068 www.summitstrategies.com Contacts Michelle M Davidson, CPA, VP, Consulting Group Manager mmdavidson@statestreet.com Year Founded 1994 Services Offered Asset allocation reviews, cash flow forecasting, Bradley R. Morrow, CFA, Senior VP / b_morrow@summitstrategies.com Mark A. Caplinger, CFA, Senior VP / m_caplinger@summitstrategies.com Stephen P. Holmes, CFA, President / s_holmes@summitstrategies.com Year Founded 1995 Services Offered Asset allocation reviews, cash flow forecasting, fund manager searches, risk management, portfolio monitoring, performance evaluation, education, capital call administration, benchmarking Pricing Generally on a per fund/investment basis for portfolio moni- fund manager searches, portfolio monitoring, performance evaluation, education, customized alternative investment programs including investment policy and strategy development, implementation and monitoring toring or performance evaluation services, and on an as negotiated basis for other services. Yanni Partners Inc. 310 Grant St., Suite 3000, Pittsburgh, PA 15219-2302 Phone: 412-232-1000 | Fax: 412-232-1027 www.yannipartners.com Contact SCM Strategic Capital Management Dufourstrasse 20, 8702 Zollikon, Switzerland Phone: 41-43-499-49-49 | Fax: 41-43-499-49-50 www.scmag.com | scm@scmag.com Contacts David Hammerstein, Principal/Chief Strategist hammerstein@yannipartners.com Year Founded 1989 Number of Private Equity Consultants on Staff 4 Services Offered Asset allocation reviews, cash flow forecasting, Dr. Stefan Hepp, CEO / hepp@scmag.com Ralph Aerni, Head of Private Equity / aerni@scmag.com Jean-Claude Croset, CFO/COO / croset@scmag.com Christian Boehler, Senior Analyst Private Equity / boehler@scmag.com Year Founded 1996 Services Offered Asset allocation reviews, cash flow forecasting, fund manager searches, portfolio monitoring, performance evaluation, education fund manager searches, risk management, portfolio monitoring, performance evaluation, education, advisory board representation April 2005 54 Private Equity Analyst FROM THE FRONT No Free Ride Continued from page 1 Credit Suisse First Boston and Canadian Imperial Bank of Commerce, are expected to try to raise roughly $13.6 billion for new buyout and venture funds (see table, front page). During their road shows these firms will no doubt tout numerous advantages of being independent. These include the freedom to pursue a broader array of deals, since they previously may well have been asked not to compete for deals with client private equity firms. But the success of the new spinouts is uncertain, especially in an era when mega-funds are sucking up vast sums of institutional money and hedge fund managers appear to be taking aim at the buyout business. The history of bank spinouts showcases the challenges. Stonington Partners, which spun out of Merrill Lynch & Co. in 1993, is still managing the $1 billion buyout fund it raised a year after the separation. More than a decade later, the returns are essentially flat, according to data from the California Public Employees’ Retirement System. Stonington Managing Director James Burke says that the firm still intends to recover from past setbacks, and that it is now exploring public offerings or sales for at least two of its portfolio companies, including Lincoln Educational Services Corp., an operator of for-profit schools that recently filed for an IPO. If all goes well, the firm plans to raise another fund later this year, according to Burke. In early 2003, MidOcean Partners emerged from Deutsche Bank AG, purchasing the bank’s in-house private equity portfolio for $1.6 billion, a price many consid- ered cheap at the time. The new firm, under Deutsche Bank’s veteran dealmaker Ted Virtue, scored monstrous gains on some of its portfolio companies, including Japan’s Shinsei Bank Ltd. and consumer products company Prestige Brands International Inc. But a few months after spinning out, deal-maker Charles Ayres left to join Lehman Brothers’ merchant banking division. And, last year, the firm canceled plans to raise an $800 million buyout fund, instead joining forces with New York buyout shop Ripplewood Holdings in trying to raise a joint fund over the next 12 months. It’s unclear exactly why MidOcean canceled plans to raise a new fund, and Virtue did not return calls for comment. Losing key managers like Ayres in such a young firm does not sit well with institutional investors, according to placement agents and investors. And keeping a cohesive team of general partners together during the spinoff will be a priority for many firms as they attempt to raise institutional funds. Says Christian Oberbeck of Saratoga Partners, which spun out in 1998 from Dillon Read & Co., a predecessor Banks That Still Have Private Equity Arms Investment Bank CIBC World Markets Wachovia Merrill Lynch & Co. BNP Paribas Credit Suisse First Boston J.P. Morgan Chase & Co. Name of PE Arm CIBC Merchant Banking Group Wachovia Capital Partners Merrill Lynch Global Private Equity Private Capital Group DLJ Merchant Banking Partners One Equity Partners FBR Merchant Banking Current Fund Size $1.3B $200M$400M Not Disclosed Not Disclosed $5.3B $2B Not Disclosed $1B* $400M $600M* $875M $8.5B* $2.5B $1.5B Spinoffs From Banks Bank Merrill Lynch & Co. William Blair & Co. Lazard Ltd. J.P. Morgan Chase & Co. UBS AG Deutsche Bank AG Morgan Stanley & Co. CIBC World Markets *Target of New Fund Spinoff Group/Year Stonington Partners 1993 LFCM Holdings 2005 J.P. Morgan Partners 2006 Saratoga Partners 1998 MidOcean Partners 2003 Metalmark Capital 2004 Trimaran Capital 2000 Fund Size $1B $1B $4B* $1B-$2B* $250M $1.6B $1.5B-$2B* Friedman Billings Ramsey Lehman Brothers Jefferies Chicago Growth Partners 2004 $400M* Lehman Brothers Merchant Banking Group Jefferies Capital Partners Credit Suisse First Boston Avista Capital Partners 2005 Bank of America Corp. Banc of America Capital Partners Goldman Sachs & Co. Citigroup Bear Stearns *Target of New Fund Goldman Sachs Capital Partners Citigroup Venture Capital Bear Stearns Merchant Banking $1B April 2005 56 Private Equity Analyst FROM THE FRONT of UBS AG: “The fundamental question investors had was, how were we going to manage the transition to a completely new environment.” Recognizing some of the challenges of past bank spinouts, this next generation may well be more flexible with limited partners on fees and other terms of their new funds, says Josh Leuchtenburg, an attorney with Ropes & Gray LLP. “Before, they were going to market knowing that they had a huge deep pocket behind them, and they don’t have that anymore.” Merchant Banking Teams That Are Staying Put F New Spinouts The first of the new wave of bank offspring will emerge, with especially generous terms or not, over the next few months. A team led by Lawrence Schloss, former head of the merchant banking division of Credit Suisse First Boston, has been raising capital since November and, according to sources, has upped its fund target from $1 billion to $1.8 billion. Schloss left the unit last year with four senior partners to form a new private equity firm called Diamond Castle Holdings, which will focus on buyouts of energy, health care, telecom and media companies. As part of its fund-raising efforts, Diamond Castle is promoting independence from CSFB as one of its main selling points. “We were held hostage to the financial sponsors group,” Diamond Castle’s Michael Ranger told Private Equity Analyst sister publication The Wall Street Journal shortly after splitting from CSFB. Now the man who took over from Schloss, Thompson Dean, along with about 14 colleagues, has spun out to form Avista Capital Partners, with plans to begin raising capital by mid-year. The new group would like to raise between $1 billion and $2 billion for health care, energy and media deals, according to sources familiar with the new firm. An official at Avista declined to comment. Dean has over 20 years of private equity experience, and CSFB’s third fund, DLJ Merchant Banking Partners III LP, raised in 2000-2001, is off to a good start. What Avista doesn’t have is the full merchant banking team, given the earlier spinout and plans by several professionals to stay at CSFB to raise a new fund. Investors are notoriously nervous about changes to investment teams, and about how well principals will work together in an organization with a different hierarchy. Another big question, say investors, is how Avista will generate deals. Over the last 20 years, some two-thirds of DLJ Merchant Banking’s deal flow has come from the investment bank, according to Managing Director Susan Schnabel, who is one or those investors who still like the advantages of in-house merchant banking funds, there are plenty of banks holding onto their private equity units. “Merchant banking here is an important part of the franchise,” said Sam Molinaro, chief financial officer at Bear Stearns & Co., in the firm’s firstquarter earnings conference call. The firm is currently investing out of Bear Stearns Merchant Banking II, a $1.5 billion partnership raised in 2001. Similar sentiments have been expressed by executives at Friedman Billings Ramsey Group Inc., an active IPO underwriter, and Merrill Lynch, which says it invests alongside other financial sponsors, rather than competing against them in auctions. For now, J.P. Morgan says it plans to keep its middle market buyout unit, One Equity Partners, even as the group scrapped plans to raise a new $2 billion fund in conjunction with the J.P. Morgan Partners spinout. That Goldman Sachs & Co. is out raising a new $8.5 billion merchant banking fund and Lehman Brothers is expected to close a $1 billion fund shortly suggest they are in the business for the long haul. The continuing question for these banks is whether they will be able to manage the numerous conflicts that can arise. “With an affiliated buyout fund, both bankers and fund principals have had to deal with the issue of when companies ask themselves: Why hire an investment bank, if that bank is going to skim off all of the good opportunities for their own buyout fund?” said Andrew McCune of DLA Piper Rudnick Gray Cary LLP. “This is partly behind the trend towards spinouts and for those funds not being spun out, banks and their affiliated funds will have to continue to dispel that misconception.” of 30 investment professionals staying with CSFB. Sources close to Avista respond that, in the end, only 40% of the portfolio companies in the third fund were actually sourced by the bank. The remaining deals came through auctions or were sourced by the firm’s partners, these sources say. They point out that Avista’s partners will also continue to serve on the boards of their portfolio >Continued on page 58 57 April 2005 Private Equity Analyst FROM THE FRONT No Free Ride Continued from page 57 companies, and therefore will continue to receive deal ideas generated by executives at those companies, as well as by fellow board members. Meantime, the remaining merchant banking team at CSFB plans to start marketing a fourth buyout fund that would be used to co-invest alongside other LBO firms in large deals. The team also plans to lead transactions of between $400 million and $500 million. The new fund is expected to gather over $1 billion, including a significant contribution from the bank. The remaining team is sure to have to answer to investors who say their returns will be compromised because of conflict with its clients. “Big investors are not anxious to join with banks to pursue their co-investment strategies because they are worried that some of the deal decisions may be driven by investment banking fees,” says one institutional investor. In another significant spinoff, Jeffrey Walker, a 21- year veteran of J.P. Morgan’s private equity unit – J.P. Morgan Partners – and about 95 investment professionals are expected to break away from the bank sometime next year to try to raise a $4 billion buyout fund. The bank said it would contribute up to a quarter of the new fund. J.P. Morgan’s venture capital team also plans to spin out and raise a $400 million fund later this year for early-stage health care and life science investments. Although Walker reported to the head of the investment banking division, J.P. Morgan says its private equity group has never been part of the investment bank, and its relationship to the bankers, while close, has been more arms-length than at other firms. Trimaran Capital Partners, New York, which separated from Toronto-based CIBC in 2000, is in the early stages of raising a successor to the $1 billion buyout fund it raised after splitting from the bank, according to a source. CIBC, which contributed over $400 million to Trimaran’s current fund, is not expected to invest in the new fund, according to sources. These newly independent groups will no doubt try a April 2005 58 Private Equity Analyst FROM THE FRONT variety of persuasive tactics to overcome the concerns of skeptical investors. What Shakeout? Continued from page 1 Advantages One benefit they’re likely to trumpet is the ability to offer more competitive pay packages, enabling them to hire more and better investment professionals. Many bank-sponsored private equity units, for example, give a significant share of their carried interest to the parent bank. They’ll no doubt point out that many rival banks simply weren’t willing to show them investment opportunities. “When we were part of Merrill Lynch, we didn’t see a deal from a competitor bank until it had been shopped all over,” says Stonington’s Burke. Executives at these newly independent teams can talk ominously about the impact of recent state and federal investigations of Wall Street. As a result of investigations into conflicts between research analysts and investment bankers, for example, Morgan Stanley stopped writing research reports on public companies owned by its in-house buyout arms. Other banks decided not to underwrite initial public offerings of their portfolio companies. Metalmark Capital, which spun out of Morgan Stanley last summer, is emphasizing the benefits of independence as it prepares for a first close on its new $1.5 billion buyout fund. According to limited partners, the firm is touting an increase in deal flow and greater access to investment banking products. “When Morgan Stanley was financing or shopping a big deal, guess who couldn’t look at it?” says one investor in the new Metalmark fund. A Metalmark official declined to comment. Those same advantages were echoed by executives of the former William Blair Capital Partners when they spun out of the investment bank last October to form Chicago Growth Partners. At the time of the spinout, the former executives said they looked forward to getting better deal flow because they were free from conflicts with the bank. The firm is out raising a new fund with a $400 million target for buyouts and growth financings of health care, business services, consumer services, industrial growth and IT companies. It has already received a $50 million commitment from the Minnesota State Board of Investment. Whether or not these advantages will outweigh the loss of an investment bank umbrella remains to be seen. Many remain unconvinced. “We wouldn’t advise someone to invest in a first fund of a spin-off group until they can prove their success outside the bank,” says one pension fund advisor. ● whole Idealab! relationship,” says one investor in Clearstone Venture Partners II LP who passed on the firm’s latest fund. “At the end of the day, we just weren’t convinced that it was still a group with special access to deals.” But plenty of investors – including California Public Employees’ Retirement System and Pennsylvania State Employees’ Retirement System – remain confident in Clearstone’s ability to deliver strong returns. They and other investors so far have committed at least $185 million to Clearstone Venture Partners III LP. During the early part of the decade, institutional investors, venture capitalists and even this newsletter predicted that the collapse of the venture capital bubble would lead to a massive industry shakeout. Certainly, a number of firms – including Live Oak Equity Partners, Atlanta, and Venture Frogs, San Francisco – have scrapped plans to raise follow-on funds. More recently, Yankeetek Ventures, Cambridge, Mass., closed shop altogether, scrapping plans for a $150 million second fund. But a surprising number of firms remain. In 2004, there were some 523 U.S. venture firms, compared to 472 firms in 1999, according to data compiled by VentureOne, which like this newsletter is a division of Dow Jones & Co. (VentureOne only counts firms that have at least two investments, and omits corporate venture arm and merchant banks from this tally.) The data suggests that more firms are surviving than initially expected. Like Clearstone, a number of firms launched in the late 1990s have recently raised capital for follow-on funds, including Castile Ventures, Waltham, Mass., Leapfrog Ventures, Menlo Park, Calif., and San Francisco-based Aberdare Ventures, Vector Capital and VSP Capital (formerly Venture Strategy Partners). As others return to market with new funds over the next 18 months, investors predict that more firms than expected will live to invest another day. (See table, page 61.) Some firms have been able to attract more capital because their portfolios have managed to weather the market downturn relatively successfully. “It takes a while for companies to mature,” says T. Bondurant French, chief executive at Chicago-based fundof-funds manager Adams Street Partners LLC. “We see a number of funds that had bottomed out a year ago which are >Continued on page 60 59 April 2005 Private Equity Analyst FROM THE FRONT What Shakeout? Continued from page 59 now getting better.” But some say the reasons so many firms have survived may have more to do with the current glut of capital seeking access to the asset class. This, combined with a shortage of space in funds managed by many old-line firms, means some investors have rationalized placing money with less proven groups, they say. “There’s so much pressure to get exposure to this asset class that many new investors are failing to exercise discretion,” says C. Bradford Kelley, co-founder of Spur Capital Partners LLC, Bartlesville, Okla., which closed a $140 million venture capital fund of funds early last year. That so many firms in the classes of 1998 to 2000 are living to invest another day is good news for entrepreneurs, who will continue to have an abundance of potential funding sources. It also bodes well for placement agents, due diligence firms and other service providers that rely on their venture firm customers. But some venture capitalists and investors say that the survival of so many firms may not be such good news for returns, particularly given the fact that U.S. venture firms have $53.6 billion left to invest from funds raised since 1999, according to VentureOne data. “The big lie is that everything is fine now,” says Oliver Curme, general partner at Battery Ventures, Wellesley, Mass. “There’s way too much capital out there. Well more than half of the money going into venture capital today is not going to get any return.” Returns Looking Up Some of the freshman firms from the 1998 to 2000 period are attracting fresh capital thanks to big wins scored both before and after the bubble burst. Castile Ventures, an early-stage venture firm launched in 1998, has already returned all of the $50 million it raised in 1999 for Castile Ventures LP, thanks to an early initial public offering of voice-over-telephony company Sonus Networks and the 2003 sale of cable telephony software company Stargus, according to co-founder Nina F. Saberi. In February 2005, the firm also agreed to sell analytics company Quantiva Inc. Saberi adds that at least three other portfolio companies from Fund I are poised for exits in the next few years. Fund I’s solid performance relative to other 1999 vintage-year funds helped Castile secure a $15 million commitment from City of Philadelphia Board of Pensions & Investments for Castile Ventures III LP, according to Investment Officer Christopher McDonough, who manages the pension fund’s $228 million investment portfolio. Fund III features a $100 million target. “A 1999 fund that’s returned all of committed capital is pretty unusual,” McDonough says. VSP Capital, which raised its first two funds in 1999 and 2000, suffered its share of early setbacks. As of December 2004, the San Francisco-based firm had written off or significantly written down at least 10 of some 30 companies in Venture Strategy Partners II LP, a $185 million fund raised in 2000, according to one of the fund’s investors. But the firm has since begun gaining ground. In 2003, VSP Capital sold RentPort Inc., an online provider of rental data history to the mortgage industry, for roughly four times its initial investment, according to Founder Joanna Rees-Gallanter. In the summer of 2004, the firm sold Web mailing service Oddpost Inc., producing a five times return. Last fall, ZipRealty Inc., an online residential real estate brokerage, held a $59 million initial public offering, which Rees-Gallanter predicts will generate at least a five times return by the time VSP Capital exits it. Rees-Gallanter says that a number of potential home runs are lurking among the fund’s 15 remaining portfolio companies, including Danger Inc., which makes the Sidekick wireless assistant, and Quinstreet Inc., an online direct marketing company. VSP Capital’s recent successes have helped the firm wrap up its third fund at $185 million, ahead of a $150 million target, attracting capital from investors that included Adams Street Partners LLC, Duke Endowment, Horsley Bridge Partners Inc. and Parish Capital Advisors. Other firms that can’t yet point to solid returns are finding that some investors may be willing to overlook past performance problems if they’re convinced the next fund will do well for other reasons. The Benefit of the Doubt Take Redpoint Partners LLC, which was formed in 1999 by former partners from Los Angeles-based Brentwood Venture Capital and Menlo Park-based Institutional Venture Partners. Although the firm’s first two funds, raised in 1999 and 2000, respectively, have yet to return much in the way of distributions, at least four investors and fund-of-funds managers interviewed say they would likely back the firm’s third fund. “The team had a prior history before spinning out, so you know they can pull off successful deals,” says one Fund II backer. “They’ve also learned from their errors and aren’t doubling up on fund size or doing the same April 2005 60 Private Equity Analyst FROM THE FRONT kinds of investments.” He estimates that the target for the firm’s third fund will be somewhere between $300 million and $400 million, less than half the size of Redpoint Ventures II LP, which closed at $1.25 billion in 2000 and was later reduced to $750 million. As of September 2004, Fund II had produced a negative 15% net IRR, according to data from California Public Employees’ Retirement System. Redpoint’s $600 million debut fund has fared even worse, to date returning only about 40 cents on the dollar, according to one backer. At the same time, however, he points to a few promising companies that remain in the portfolio, including Calix, a San Mateo, Calif.-based producer of fiber optic equipment for telephone companies. To be sure, it remains to be seen how the two funds will ultimately perform. Redpoint may well be valuing its companies more conservatively than other firms, and its fund performance is consistent with that of many other funds raised at the same time. And as Menlo Park, Calif.based Sequoia Capital showed with Google Inc., just one home run can return an entire fund. In the meantime, however, Redpoint’s desire to redeem its reputation and its efforts to turn the funds around also help make it an attractive bet, says Kevin Campbell, a principal at Montagu Newhall Associates Inc., which manages more than $200 million across two venture capital funds of funds. “When a successful team has a black eye, they’re hungry to prove the skeptics wrong,” Campbell says. “These guys have made enough cash from their past investments that they don’t really need to do this anymore, but that’s not how they keep score. They’re saying ‘we’re not going to go out this way…we want to go out on a bang.’ We look at them and see great connections, great talent and great motivation.” ● Back For More Firm Name/Location Fund Name Target ($M) Closed So Far ($M) Previous Funds/Amt. ($M)/Year Raised Azure Capital Partners San Francisco Aberdare Ventures San Francisco Boston Millennia Partners Boston Castile Ventures Waltham, Mass. Clearstone Venture Partners Santa Monica, Calif. Columbia Capital LLC Alexandria, Va. Ironside Ventures LLC Waltham, Mass. Leapfrog Ventures Menlo Park, Calif. Origin Partners LP Bridgewater, N.J. Pacific Venture Group* Encino, Calif. Redpoint Ventures* Menlo Park, Calif. Sequel Venture Partners* Boulder, Colo. Vector Capital San Francisco Versant Ventures* Menlo Park, Calif. VSP Capital San Francisco Azure Capital Partners II LP Aberdare Ventures III LP Boston Millennia Partners III LP Castile Ventures III LP Clearstone Venture Partners III LP Columbia Capital Equity Partners IV LP Ironside Ventures II LP Leapfrog Ventures II LP Origin Partners II LP Pacific Venture Group III LP Redpoint Ventures III LP Sequel Limited Partnership IV LP $300 $125 $250 $100 $250 $500 $150 $150 $100 $200 n/a n/a n/a $113 n/a n/a $185 n/a n/a Azure Capital Partners I LP/$540/2000 Aberdare Ventures II LP/$50/2001; Aberdare Ventures LP/$50/1999 Boston Millennia Partners II LP/$410M/2000; Boston Millennia Partners LP/$175/1998 Castile Ventures II LP/$50/2001; Castile Ventures LP/$50/1999 Clearstone Venture Partners II LP/$350/2000; Clearstone Venture Partners I LP/$105/1999 Columbia Capital Equity Partners III LP/$855/2000; Columbia Capital Equity Partners II LP/$450/1999 Ironside Ventures LP/$25/1998 $102.8** Leapfrog Ventures LP/$100/2000 $33 n/a n/a n/a Origin Partners LP/$55/2000 Pacific Venture Group II LP/$110/2000; Pacific Venture Group I LP/$100/1999 Redpoint Ventures II LP/$750/2000; Redpoint Ventures I LP/$600/1999 Sequel Limited Partnership III LP/$185/2001; Sequel Limited Partnership II LP/$158/1999; Sequel Limited Partnership LP/$46/1997 Vector Capital II LP/$218/1999; Vector Capital LP/$40/1995 Versant Venture Capital II LP/$400/2001; Versant Venture Capital LP/$250/1999 Venture Strategy Partners II LP/$185/2000; Venture Strategy Partners I LP/$20/1999 Vector Capital III LP Versant Venture Capital III LP Venture Strategy Partners III LP $250 n/a $150 $337** n/a $185** *expected in the market by 2006 **indicates final close Source: Dow Jones Private Equity Analyst, Dow Jones VentureWire 61 April 2005 Private Equity Analyst L E A G U E TA B L E Placement Agent Rankings* Ranked by Amount of Capital Raised from Investors New to a Fund in 2004 For a complete set of industry rankings, check out our subscription Web site, www.PrivateEquityInteractive.com. Rank/Firm Name Location Phone Amount ($M) 1 Denning and Company LLC 2 Lehman Brothers 3 Probitas Partners 4 Monument Group 5 C.P. Eaton & Associates 6 Lazard Frères & Co. LLC 7 Guggenheim Partners 8 Chatsworth Securities LLC 9 Almeida Capital 10 Crane Capital Associates 11 Mallory Capital Group LLC 12 Arrow Investments Inc. 13 Veritage Group 14 Far Hills Group LLC 15 Cygnus Capital Limited 16 Rowe Capital Partners LLC 17 Alternative Investment Source LLC San Francisco New York San Francisco Boston Rowayton, Conn. New York New York Greenwich, Conn. London London Darien, Conn. Purchase, N.Y. Natick, Mass. New York London Salt Lake City Philadelphia 415-399-3939 212-526-1311 415-402-0700 617-423-4700 203-831-2970 212-632-1978 212-651-0867 203-629-2612 44-207-845-7575 44-208-846-3660 203-655-1571 914-251-1084 617-598-0808 212-840-7779 44-207-836-0384 801-466-3602 215-751-0544 $3,416.6 $3,000.0 $2,600.0 $2,245.0 $2,100.0 $1,600.0 $986.0 $650.0 $640.0 $615.0 $605.0 $500.0+ $340.0 $290.0 $155.0 $110.0 $65.0 *The rankings of placement agents are based on the amount of capital raised from investors new to a fund in 2004. We relied on placement firms to provide this data to us, and not all placement agents agreed to participate. April 2005 62