Direct Investments Increase as Portfolios Mature –

The venture investors in a startup’s follow-on round normally includes familiar faces. But lately, some traditional venture capitalists are finding a new co-investor joining them when funding follow-on rounds.

Direct secondary venture buyers are lately taking a more noticeable role in primary investments. In fact, two recent deals featured direct secondary buyers and highlight the growing confidence that these buyers have in the values of their portfolios.

San Francisco-based Industry Ventures was among the investors in the $9.5 million Series B-1 round of financing for CollabNet, which was announced in early September. Industry Ventures became an investor in the Brisbane, Calif.-based company in 2003 when it purchased a venture portfolio from Bowman Capital that included CollabNet, a provider of on-demand software. Other previous backers that funded the recent round include Benchmark, Intel, Norwest Venture Partners and WR Hambrecht.

Also, in late August, direct venture secondary buyer Saints Capital made a primary investment in NextWeb, a Fremont, Calif.-based fixed-wireless Internet services provider. San Francisco-based Saints Capital co-led the $3.5 million Series E round with previous investor Kaiser Permanente National Ventures.

An increase in the rate that secondary buyers are doing primary deals would be good for the market, says Colin McGrady, a managing director with secondary advisor Cogent Partners. “To the extent they are participating in primary investments, it’s a good thing for the secondary funds,” McGrady says. “It demonstrates that the assets they purchased are viewed positively by the market.”

He says that such an increase is the logical result of the kind of assets that secondary buyers have been buying more of lately. Many secondary deals that have been done lately have been of corporate portfolios, in which investments were made in the early stages of the portfolio. These portfolio companies typically require additional rounds of financing.

A few months ago, New York-based W Capital Partners made a primary venture investment in a portfolio company from one of its secondary buys. Torrance, Calif.-based Primarion, which provides mixed signal integrated circuits, raised more than $22 million in a Series D round of venture funding from W Capital. Previous investors Accel Partners, APV Technology Partners, Lehman Bros. and Intersil Corp also participated.

In all, W Capital has made more than 10 primary investments in companies that it acquired through its direct secondary portfolio buys.

For Saints, its deal marks the first primary direct investment that the firm made in NextWeb since acquiring a stake in the company last year in a direct secondary transaction. Saints bought the NextWeb position along with nine other company stakes in the Tenet Healthcare Corp. (NYSE: THC) venture portfolio for an undisclosed sum last year.

Saints and Kaiser each invested $1.75 million in the round. NextWeb’s venture backing now totals approximately $10 million. Saints’ Vice President Ghia Griarte manages the NextWeb investment and sits on the company’s board of advisors. Griarte says that Saints is an active investor and that the firm was very comfortable making a primary investment in NextWeb, in part due to her own background working with many telecom service providers as an associate with Centennial Ventures and as a consultant with Gemini Consulting. She says that the firm functions like a traditional VC firm in many respects.

NextWeb, founded in 1999, is using the funding to make strategic acquisitions. At the end of August the company announced it acquired the assets of 1st Universe, a Huntington Beach, Calif.-based fixed-wireless service provider. A NextWeb spokesman says that more acquisitions will likely be announced before the end of the year.

Saints’ Tenet portfolio is primarily focused on health care information and includes San Francisco-based Broadlane, which provides expense management services to health care companies; the Extended Care Information Network, a Northbrook, Illinois Internet-based health care communications company; Minneapolis-based clinical software developer ProVation Medical; and Zonare Medical Systems, a Mountain View, Calif.-based developer of small ultrasound devices. One more company remains in Tenet’s ownership but is managed by Saints.

Saints limited partner HarbourVest Partners funded the Tenet portfolio purchase in conjunction with Saints. Tenet said that the transaction completely liquidated its venture portfolio, which had not made a new investment since 2002. A spokesperson told VCJ that the portfolio equity stakes were small-running between 1% and 12%-and that the proceeds from that transaction and two others was $8.4 million with a net gain of $2.7 million.

Cipio Adds Partner,

Opens U.S. Office

European secondary buyer Cipio Partners has opened an office in San Jose, Calif., to help it pursue more U.S.-based deals.

The secondary direct venture specialist has acquired the services of former Agilent Ventures Managing Director Maximilian Schroeck to run the new office. Schroeck has managed Agilent Technologies; venture group since early 2001. Prior to that, he worked with consulting firm A.T. Kearney, where he helped run the EDS/A.T.Kearney Venture Fund.

With the addition of Schroeck, Cipio now has four managing directors and 11 total investment professionals. He says he plans to add two more professionals to help him run the San Jose office, but will otherwise keep the investment team lean.

About half of Cipio’s 60 portfolio companies are based in the United States, but the firm had been eager to have a base in the Unites States to pursue more U.S. deals. “The opportunities we see both in Europe and the U.S. have been there before, but we couldn’t aggressively move on those in the U.S. before,” says Schroeck.

Schroeck says that while corporate venture portfolios currently dominate Cipio’s pipeline, the firm is interested in buying from a broad array of sellers. He says that he has been in contact with traditional venture firms interested in discussing the sale of “tail end” assets. “There are certainly some VCs who say it’s their job to manage [all their portfolio companies] to the end,” he says, “but there is a dynamic of LPs wanting us to put out fresh money. It’s a mixed picture and I’m not sure there’s a clear strategy yet, but we’re seeing opportunities, and we’re interested in partnering with venture funds to work on those opportunities.”

To date, Cipio has purchased four venture portfolios, including the portfolio of Infineon Ventures, the corporate venture arm of German semiconductor company Infineon Technologies; the holdings of DaimlerChrysler Venture, the VC unit of German automaker DaimlerChrysler; and the portfolio of T-Venture Holding, the venture capital arm of Deutsche Telekom.

Cipio Partners was founded in 2003. It is headquartered in Munich and has an office in London.

Lexington Taps Growing Interest in Middle Market

Interest in middle-market funds has reached over to the secondary market, where buyers of LP interests are preparing to see more assets for sale in the white-hot sector. Secondary buyer Lexington Partners has held a final close on Lexington Middle Market Investors, a $550 million fund to purchase limited partner interests in middle-market buyout funds, according to documents filed with the Securities and Exchange Commission.

The fund listed its target as $500 million when it held a first close last year with a $150 million investment from the New York State Teachers’ Retirement System (NYSTRS). The minimum investment was $10 million, according to the SEC filing.

The latest filing states that the firm closed with $550 million and 20 accredited investors. Other limited partners in the fund include the California Public Employees’ Retirement System (CalPERS), which invested $50 million, and the San Bernadino County Employees’ Retirement Association, which invested $25 million.

New York-based Lexington will use the fund to acquire LP stakes in younger funds, with younger funds being defined as those that have invested less than 50% of their committed capital. Lexington General Partner Duncan Chapman told VCJ last year that the previous three years has not provided much opportunity for secondary investment in high-quality funds and that the new fund addresses the lack of middle-market deal flow.

Lexington Partners is also raising two other funds. Lexington Partners VI, a dedicated secondary fund, has a target between $2 billion and $2.5 billion. The firm hopes to hold a final close on that fund by the end of 2005. Lexington is also raising Lexington Co-Investment Partners II, a joint co-investment fund with NYSTRS and the Florida State Board of Administration. Lexington will raise the fund in two tranches of $500 million each and the fund will invest $1 billion over the next five years.

Headway Adds CFO

London-based secondary firm Headway Capital Partners has appointed David Toon as its chief financial officer.

Toon most recently served as the financial controller of Granville Baird Capital Partners and as a taxation manager for its parent firm, Robert W. Baird Group. He worked for Credit Lyonnais Securities and PricewaterhouseCoopers before joining Baird.

Headway Capital Partners raised $62 million for its inaugural fund, Headway Investment Partners. The group of founding partners-Sebastian Junoy, Christiaan de Lint and Laura Shen-spun out of Coller Capital early last year.

Probitas Expands Team

Probitas Partners has appointed Ellen Antrim and Patrick Deem as associates on its project management team. The two new associates will work on Probitas Partners’ fund placement and liquidity management business.

Antrim has served as a health care representative for Pfizer Pharmaceuticals and worked as an analyst with Bank of America. Deem previously served as an analyst for Banc of America Securities in its financial sponsor group.

Probitas Partners was founded in 2001. It is headquartered in San Francisco and has offices in New York and London. It is a private equity and secondary advisor, as well as a placement agent.

Email: Matthew.Sheahan@Thomson.com