Corning Innovation Ventures, Deutsche Bank, Intel Capital, Viventures Partners. It seems there has been nothing but bad news coming out of corporate venture programs of late, whether it’s layoffs, more big write-downs or plans to get out of the private equity game altogether. It would be easy to conclude that corporate venturing has no future, save for a few giants and die-hards. But a second look reveals that not all corporate venture capitalists were deep pockets and dumb money, and they have more staying power today than they did in past downturns.
One corporate venture capitalist who expects to see layoffs in his unit before the end of the first quarter says that corporate venture programs have righted themselves for the most part. “I think what has happened is that the people who are serious about corporate venture capital are still there and the others have drifted away,” he says. “The market has a way of cleansing itself.”
Corporate venture capital groups were essentially hit twice by downturns in the public market. Portfolios were stung by a marketplace that quickly chewed up companies it had formerly put on the IPO fast track, and then corporate VC units found themselves dealing with parent companies increasingly desperate for cash and refocusing on their core businesses.
These factors have thinned the ranks of corporate VCs dramatically. About 233 companies have venture programs today, down from a high of 488 in 2000, according to Venture Economics (publisher of VCJ). The absolute number of corporate venture units is still far larger than it was in the past. During the last corporate VC downturn, the number of corporate VC units plummeted from 133 in 1985 to 52 in 1990. However, Ken Rind, who formed a group to buy corporate VC portfolios, says he expects that the amount of investing by corporations will drop by 80%, just like it did during the last downturn.
The shakeout is providing amazing deals to guys like Rind. He’s a general partner with the Israel Infinity Venture Capital Fund and the founder of 2-year-old PEI Corporate Ventures, which partners with Private Equity Investors to buy the portfolios (or parts of portfolios) of corporate venture capital programs. While the firm has seen more than $1.2 billion in deals, it has closed only a handful so far.
“There have been very few sales at prices that people are willing to talk about, because prices have been disastrously low,” Rind says. “Many companies have pulled back their portfolios when they see the kinds of discounts that have been necessary to get a sale.” Pity the venture program at PSINet. Rind says the bankrupt company had invested about $150 million in 44 deals. When it tried to sell, “the highest offer was $2 million,” he says. “I took a look at it and I’m not even sure there was $2 million worth of value in it.”
Rind points out that many of the corporate VCs are sound, but they have succumbed to pressures from their parent companies. “In many cases it’s not the venture capital programs that were at fault; it was the companies running into cash crunches,” he says. “Like what has happened before, many of the corporations got caught up in the frenzy, and they thought they could make investments without a venture capitalist on their team. The first thing they should do, if they can’t attract a real venture capitalist, is they should invest in venture capital funds and not make direct investments.”
In the area of direct investments, corporate venture capital groups mirror traditional VCs, according to data from Venture Economics. For example, corporate VCs put 13% of their money into medical and life sciences deals last year, compared to 15% for traditional VCs. Geographically, corporate venture capitalists invested almost exactly like pure venture firms last year, although they were 2% more likely to invest in Southern California.
A number of announcements of late may have created some confusion about just exactly which corporate venture program is winding down and which one still considers private equity a strategic business. Here, then, is a recap of what’s going on at the venture units of some major corporations.
The venture capital and private equity groups in large financial institutions have suffered many of the same setbacks that have pained traditional corporate VCs. With large financial institutions, venture units were pushed into earlier stage investing by the IPO market at the same time that their parent corporations were juggling large mergers and other organizational pressures.
Deutsche Bank At the end of January, Deutsche Bank laid off the Chicago-based investment staff of the Scudder Venture Partnership Fund and started running its operations exclusively from New York. The move is the latest from the German banking giant, which has been seeking to reduce its private equity holdings. The Chicago staff had come aboard as Deutsche Bank acquired New York-based Zurich Scudder Investments. Zurich Scudder closed the Scudder Venture Partnership Fund with approximately $160 million in January 2001.
Deutsche Bank has been seeking buyers for the direct investments part of its $6 billion private equity portfolio. Deutsche Bank will not put any new funding into the direct investment business, while the $2 billion fund-of-funds business, which represents approximately 30% of the business, is expected to remain with Deutsche Bank. In mid-2002 Deutsche Bank Chairman Josef Ackermann said the bank planned to cut $2 billion from its operating costs by restructuring its retail and private banking businesses and reducing its $6 billion private equity portfolio.
J.P. Morgan Chase & Co. Despite 10 consecutive quarters of losses, banking giant J.P. Morgan Chase & Co. says it has no plans to abandon private equity entirely. Private equity arm JPMorgan Partners wrote down $91 million from the value of its $24 billion private equity portfolio in the fourth quarter. The group suffered losses totaling $789 million in 2002. That’s actually an improvement over 2001, when it posted private equity losses totaling $1.18 billion. To lessen the losses, J.P. Morgan Chief Financial Officer Dina Dublon has said the bank will “continue to decrease our exposure to the asset class.” The bank has also said it plans to spin out its Asia Pacific private equity unit in a management buyout.
Arnold L. Chavkin, an executive partner with JPMorgan Partners, says that his group was caught in the same strange investing environment that snagged many corporate VCs. “In 1999 and 2000 people were forced into early-stage investing primarily because the public markets were taking the place of the later stage of venture capital,” he says. “We did more early-stage investing than we have traditionally done.” He remains confident, however, that the group is on better footing with an adjusted investment policy. “In the current environment, we don’t need to do early-stage investing, and it fits our model to do later-stage investing. That’s what our natural investment strength is.”
Corning The glass/optical fiber company may sell Corning Innovation Ventures. The venture unit wrote down $47 million in the fourth quarter. It has invested $50 million in optical networking companies, a sector that was once hot but has fallen out of favor. “That area has taken a lot of hits, but we still believe in it very strongly and we think it’s going to come back,” says Greg Smith, president of Corning Innovation Ventures. He is quick to point out that Corning is considering many options in dealing with its ailing venture unit. The venture group, which had to lay off some of its staff, is considering diversifying its areas of investment to include life sciences and advanced materials.
Smith says that while his portfolio suffered a lot of losses, it is well structured, having been staffed from within Corning’s business units and it is completely in line with its goals and strategies. What did the most damage was its lack of diversity. “We probably should have looked at diversification sooner. We always planned to diversify later; the goal was to become strong and branch out. It was hard to get strong when the market was declining as it was,” says Smith. Though it has stopped doing new deals, Corning Innovation Ventures may do new deals by the second quarter if it is given a new lease on life by its parent company in the form of diversification.
General Electric The company that Jack rebuilt started winding down its venture unit, $3 billion GE Equity, last October. Since that time, attrition has reduced staffing, with looming layoffs promising to whittle down even more. GE Equity quit making new investments last year and will only make investments in portfolio companies that it expects will bring it a return. The company says its exit from private equity will happen over several years. GE took a $592 million earnings hit last year.
Vivendi Universal Net A debt-stricken parent company can wreak havoc even when a venture capital group has the buffer of outside limited partners. Vivendi called it quits when it missed a capital call in Viventures Partners’ Viventures II fund. Jumping ship cost the $683 million fund 20% of its value. Vivendi started negotiations to sell its stake in late January to another limited partner in the Viventures II fund, most notably Belgian investor Albert Frere, who is leading the effort to manage the venture capital group. Vivendi has good reason for exiting the corporate VC game: The company is about $14 billion in debt.
Intel Despite taking some big knocks from venture deals, Intel shows no signs of bailing on private equity. Intel Capital wrote down $372 million off the value of its $1.1 billion investment portfolio last year, following a $469 million write-down in 2001. Despite the consistency of bad news, Intel is talking about ramping up (