5 Questions for Cliff Friedman, Constellation Growth Capital

Constellation Ventures, a former affiliate of Bear Stearns Asset Management, today announced that it has become part of Highbridge Capital Management’s principal investment effort. It also has closed its third fund with $300 million, and renamed itself Constellation Growth Capital. So’ve got 5 Questions for Cliff Friedman, Constellation’s founding partner.

1. Bear Stearns collapsed while you were in the middle of fund-raising. Did you ever think that Constellation wasn’t going to be able to raise another fund?

No. First of all, we had great strength in our existing portfolio. Then, once the hedge funds blew up, we got a lot of inbound interest from secondary buyers wanting to do a lift-out of the firm. We went down the path of lining up a serious buyer, but then Todd Builione, COO of Highbridge, called me up and asked to sit down and talk about how Constellation could have a future at Highbridge.

To be on a platform like this with the diversity and financial raising capabilities and the deal-flow that they get… We’ve already begun to see much higher levels of deal-flow than we ever saw at Bear. Here we really are part of a team that can invest along the entire capital structure of a company… The goal was to find the best place to build a scalable business that can last. Bear Stearns was not going to grow the private equity side of its business.

2. Your original fund-raising target was $250 million, but you closed the fund at $200 million. Why?

We had lots of opportunities to raise more than $200 million, but just got to the point where we wanted to know what our number was going to be. What I mean is that there were interested investors, but I had to say that we couldn’t wait anymore, so we made a decision to close it, invest the capital over 18 to 24 months and then bring them back in for the next fund.

But one of the great things about this place is that we give our LPs direct co-investor rights, which means the fund is a lot larger than $200 million. $50 million was not going to make or break us.

Plus, fund-raising meant that we couldn’t talk to you Dan, or anyone else, so I felt now was a great opportune time to let the community at large know that we’re rolling out a fresh fund. We also have the opportunity to scale and write larger checks, if needed, with Highbridge and JPMorgan, so why hold back on rolling out our machine for $50 million? We made a business decision to roll out our machine, rather than hold to some arbitrary number.

3. Is Constellation’s investment strategy moving farther downstream?

We’ve always been what we’ve called stage-agnostic and industry-specific. If you’ve looked at some of the investments in our last fund – like an ActiveHealth or College Sports TV – we were very early-stage. But we also did a company like Savvis that already had major revenue.

We will invest if we really feel that we can add value to the company, irrespective of its size, so long as it’s within the three legs of the stool we invest in. We’ve always invested along the capital structure.

4. Then why change the firm’s name from Constellation Ventures to Constellation Growth Capital?

Because I think we wanted to make people understand that we have a broad focus, with the ability to do both early-stage and late-stage. The key name is “Constellation,” while the second name is more derivative.

5. Most of your historical deals have been in the U.S., but this fund is around one-third allocated to international investments.

We had the capability to invest up to one-third of the last fund internationally, but were very careful. We usually look for a great management team, a local partner and a company that fits our investment themes. If we do international, we’ll make one investment to make sure it works.

For example, out of the last fund we made an investment called Net Insight, a $4 million revenue business in Sweden that worked out very well… That company has grown to close to a $40 million run-rate business since we invested, and it’s won most of the major national DDTV rollouts in Europe. That gives us the comfort to invest in other Swedish companies, and have done both OnePhone and AirplusTV.