Little by little, public LPs are getting squeezed out of brand-name funds. First Sequoia Capital kicked out two universites that were longtime LPs. Then Charles Charles River Ventures held a final close on its 12th fund in February without including any public institutional investors. Past public backers who didn’t get into the $250 million fund include the City of Lowell, Mass., the Rhode Island State Treasury, and the Massachusetts Pension Reserve Investment Management Board (MassPRIM).
Bruce Sachs, a general partner with Waltham, Mass.-based CRV, says that the decision to exclude public LPs was difficult but necessary. The firm has valued its longstanding relationships, but is concerned that the current trend toward private market transparency could compel its investors to release sensitive fund information. Public LPs in states like California, Michigan and Texas already have disclosed fund performance data on their general partners, and CRV is particularly concerned that a release of underlying asset information – such as portfolio company valuations – could be next.
The firm hinted at its eventual path when former CRV general partner Ted Dintersmith sat down for a Q&A interview with VCJ in December 2002. He said at that time that CRV was a supporter of disclosure when it concerned a possible conflict of interest, but that anything further “seems a bit like an invasion of privacy.”
He also noted that VCs would be afforded greater selectivity when it came to choosing future LPs, due to the trend toward smaller fund sizes: “You’d hope that the people petitioning for this information would have the intention of benefiting the pension funds, but I think they’ll actually just cause a lot of problems for the funds. You have an environment where fund sizes are shrinking, so top-tier firms are going to have to decide which LPs they keep and which just don’t make sense anymore.”
CRV’s standing as a top-tier firm is debatable, but everyone would agree that the firm was well positioned to slash its LP roster. The target for CRV XII represents just 21% of the $1.2 billion raised for its 11th fund in 2001, and was still oversubscribed despite the public LP snub.
“We had some LPs who are used to putting $15 million to $20 million or more into a fund, but the most we could give anyone was $12.5 million,” Sachs explains. “Then there were others who we could only offer $2 million to, but that wouldn’t be meaningful to them, whereas we could add that to someone else’s commitment and bring it up to $5 million, which would be meaningful.”
CRV is the first venture firm to exclude public LPs when raising a new fund. The closest comparison is Sequoia Capital, which allowed both the University of Michigan and University of California into its $395 million Fund XI last spring, only to subsequently send them eviction notices citing disclosure concerns.
Wayne Smith, a senior investment officer in charge of alternative investments for MassPRIM, acknowledged that his organization had been shut out of CRV XII, but he declined to comment further on the matter.