As mentioned in the previous article, more corporations, banks and even general partners are looking into selling their direct investment portfolios. Most recently, Coller Capital bought an 80% stake in the direct portfolio of Lucent Technologies, and similar deals are currently in the works.
This type of transaction was introduced back in 1999 when Landmark Partners Inc., a Simsbury, Conn.-based alternative investment firm, structured the spinout of a group of venture capital assets from Pioneer Corp. Since then, the deal’s structure has been replicated several times successfully and shows that secondaries have much more flexibility built into them than initially thought.
In this instance, Landmark used a secondary to become the sole limited partner in an entirely new company called Ascent Venture Partners, to offer follow-on financing to Ascent’s portfolio companies, and to become a seed investor in Ascent’s subsequent fund raising campaign.
“No one had really done a spinout like we did with the Pioneer Corporation, which held a captive venture capital group,” says Anthony Roscigno, partner with Landmark. The corporation, he explains, decided their venture assets were no longer a core part of the business of their portfolio. They approached Landmark in 1999 about buying out all the direct investments held by Pioneer and spinning the venture capital team out with the assets.
In six weeks of due diligence, Landmark met with the management teams of all 15 companies in the Pioneer portfolio. All were late-stage venture companies across a broad range of sectors, including drug discovery tools, network management and enterprise software.
“The general partners wanted to get real comfortable with us, being their sole limited partner. They wanted to know what our motivations were,” he says. The GPs were extremely particular because they were also looking for an LP that could also function as an investor in subsequent funds. “They were looking for someone to not only spin them out by the assets, but someone to be a long term limited partner,” he adds.
And at the time Landmark was looking for a situation that presented the investor with much more control over assets than the typical secondary offers. In a deal worth $40 million, Landmark bought the assets and the venture capital investments and packaged the principles with the assets to form Ascent, an independent firm based in Boston. The all-equity transaction was financed by Landmark’s $400 million Fund VIII. Of that $40 million, Landmark committed $12 million as follow-on financing for some of the companies in the portfolio. Landmark also holds a seat on Ascent’s advisory board.
“This was really the first time that a secondary firm went out and bought direct assets from a captive organization. It took the principals with it, spun them out and restructured into an independent firm. So we were kind of creative with the definition of a secondary, and the transaction worked out great for both parties.” Roscigno says.
One of the key factors in the deal’s completion was Pioneer’s familiarity with James McConnell, Roscigno’s partner, as well as its participation in a similar deal Landmark had been a part of two years prior, where it took a publicly traded Canadian venture capital company private.
Since the close of the deal in 1999, Landmark has replicated a similar structure in four other secondary deals, including one with Oak Venture Partners that was subsequent to Ascent’s. However, it’s a niche strategy Roscigno states and there’s not a lot of places where such a secondary structure would work. (At the end of the day, Landmark anticipates a four times return on the Pioneer deal, and its ROI is going to be 80% net to Landmark, he says.)
“In situations like it did with Ascent, it worked because it was a portfolio in a corporation that was no longer core to their business, and we’re starting to see more of those. You can go out and do an active solicitation of these types of opportunities and I’ll bet you’d come up with maybe five or six good ones, so it’s pretty opportunistic,” Roscigno says.
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