A $5 Billion Venture Fund? –

It’s no secret that venture funds have gotten bigger in recent years, but the $5 billion Warburg, Pincus Equity Partners, L.P. far exceeds the norm – and raises questions about whether the vehicle really is a venture fund, and, if so, how one firm will put that much capital to work. Under Warburg Pincus’ deployment strategy, the firm will have to search for some 167 deals in the next six years.

Managing Director Bowman Cutter knows Warburg Pincus’ hefty vehicles are difficult to label, but the description “venture capital funds” comes closest, he says.

About one-third of the firm’s money goes into “pure, absolute, raw venture stuff,” he explains. Another third goes into growth capital, and the remaining third is invested in mature companies. The firm has a general understanding with its limited partners that it will not invest much more than 30% of the new vehicle outside the United States. Warburg Pincus does, however, have offices in London, Hong Kong and Tokyo. Rarely does the firm invest in public companies domestically, and – despite the firm’s reputation – Warburg Pincus almost never engages in leveraged buyouts, Mr. Cutter says.

Warburg Pincus raises 12-year funds and plans for a six-year investment period. However, Mr. Cutter expects the new vehicle likely will be invested more quickly, as was its predecessor, 1994’s $2 billion Warburg, Pincus Ventures, L.P., which is posting returns of about 27% net, he adds.

Warburg Pincus set out to raise between $3 billion and $4 billion in 1998 but, with the advisory board’s permission, allowed the fund to reach $5 billion.

About 70% of the capital came from existing limited partners, many of which are corporate pensions. In adding investors, the firm made a dedicated effort to attract public pension capital this time around, Mr. Cutter says.

Warburg, Pincus Equity Partners, L.P. features a 1.5% management fee and a 20% carried interest split.

To expedite deals, senior members of the firm – Warburg Pincus boasts 37 managing directors – initially review investment opportunities quickly rejecting more than half. The remainder are forwarded to less senior investment professionals who undertake due diligence.

Given its considerable capital, Warburg Pincus makes larger investments and rarely syndicates deals. “We tend not to be part of the clubs,” Mr. Cutter says.

The firm’s typical deal size, for all stage investments, is around $40 million. True venture deals are probably half that, Mr. Cutter roughly estimates.

That doesn’t necessarily translate into all late-stage deals, however. The firm takes considerable stakes in companies, generally becoming the single largest shareholder. Although the firm tries not to bigfoot company management, Warburg Pincus is not a passive investor. The firm intends to provide all the capital a company will need, freeing its management to concentrate on the business of the enterprise.

Mr. Cutter acknowledges that giving so much control to one party – an investor – is a trade-off for entrepreneurs, but he says companies that require a long investment period and carry significant execution risk do not want to expend their resources chasing additional rounds of capital from new backers.

Warburg Pincus makes venture investments in information technology and health care, including biotechnology and medical devices. The firm also invests in energy, financial services, media and communications and retail companies, although those tend to be larger, less venture-like deals.