PALO ALTO, Calif./NEW YORK – Accel Partners joined forces with buyout giant Kohlberg Kravis Roberts & Co. in February to form the first partnership of its kind to back companies that merge traditional brick and mortar operations with online opportunities.
Accel-KKR Internet Co. represents what both private equity firms believe to be a new hybrid investment strategy that brings together the online and offline retail world, said Marc Lipschultz, an executive at KKR in charge of technology investing.
The premise is to leverage a brick and mortar’s supply chain, customer base, knowledge of suppliers and brand purchasing power with the accessibility of the Internet. The new company will have the opportunity to tap the combined network and rolodexes of the two firms, and will make investments of over $50 million to $100 million per company, said Accel Managing Partner Jim Breyer.
Leveraging the Internet
The underlying reason for the partnership is the realization that the Internet eventually will affect all businesses, Lipschultz said. By forming this new venture, KKR can seize the convergence of on and offline operations, a market that it believes will represent the next business landscape.
Following the recent attraction of buyout firms to technology deals, KKR had been looking since 1999 to take advantage of the high returns found in venture-backed Internet start-ups.
The buyout firm contemplated forming partnerships or hiring a team of experienced Internet investors, but the best solution in the end was to create a joint company with Accel, Lipschultz said. Accel’s recent investment in online retailer Wal-Mart.com and its retail outfit is a clear example of the type of deal in which Accel-KKR Internet will invest. The enterprise will have the combined benefit of the buyout firm’s experience in forming traditional physical companies and the venture firm’s expertise in technology and the Internet.
The Next Generation
Accel, a backer of early-stage Internet companies, started receiving calls last summer from a number of buyout firms seeking to form partnerships. “As we thought through where the next generation of Internet companies would be, the intersection of online and offline markets was the answer,” Breyer said. KKR, also believers in the next generation of integration, collaborated with Accel because the firms “shared a common vision,” he added.
“Why Accel? We think they are the best in the business,” Lipschultz said, referring to the firm’s track record of investments and a business culture that focuses on seed- to late-stage Internet, software and communications companies.
KKR and Accel have agreed to provide Accel-KKR Internet with equal amounts of capital, although the precise figure has not yet been released. Accel has not disclosed whether its capital will come from its most recent fund, the $600 million Accel VII, or directly from the firm’s coffers.
KKR partners have decided to invest the firm’s capital, rather than dip into its two active funds – the $6 billion KKR 1996 Fund and the nearly $3 billion KKR European Fund – to support the new enterprise because those vehicles were set up solely to make large buyouts and growth equity investments, Lipschultz said.
KKR limited partners include a variety of state pensions, corporate funds and university endowments.
The new entity is open for business and already has a number of deals in the pipeline, although details were kept confidential. An active search is underway by both firms to recruit a traditional set of seasoned executives to run the new entity, which will run under a company-like structure. Both KKR and Accel have named three representatives to the company’s board of directors: Accel’s Arthur Patterson, Theresia Ranzetta and Breyer, and KKR’s Henry Kravis, George Roberts and Lipschultz.
The new company will have duel headquarters in New York and Silicon Valley, as well as an office in London.