Two top-tier venture capital firms cut their funds in January. Mohr, Davidow Ventures (MDV), and Redpoint Ventures collectively reduced their funds by a total of 387.5 million.
MDV cut its MDV VII by another $200 million, making the fund’s total capital $450 million. MDV was one of the first firms to trim its vintage 2000 fund, reducing $848 million MDV VII to $650 million in January 2002. Its seventh fund has now been reduced by a total of 47%.
Meanwhile, Redpoint received permission from its limited partners in December to make a second cut in Redpoint II by another $127.5 million, effective Jan. 1. The fund now sits at $750 million, down 40% from its initial size when it was raised in 2000.
Nancy Schoendorf, co-managing director of MDV for the last five years, says the cut doesn’t signal a change in strategy for the firm. She points out that the new fund size is closer to the “historical sweet spot for early-stage investments – the $300 million to $500 million range.” With valuations for portfolio companies continuing to come down, the actual amount of ownership by early-stage firms such as MDV will remain relatively constant.
Since MDV announced its first fund cut last year, it has scaled back somewhat. In January it said it would close its Seattle office, leaving Venture Partner Bill Gossman and Entrepreneur-in-Residence Rowan Chapman out of work. Seattle partner Bill Ericson is moving to the Bay area, “due to the demands on Bill’s time and his desire to spend more time with his family, which is moving to this area,” says Schoendorf. “Bill will continue to pursue investments for the firm in the Pacific Northwest, and the firm remains interested in that region.”
MDV is also closing the small office that it opened during boom times in Reston, Va. However, Michael Sheridan, the firm’s East Coast partner, will continue with the firm.
At the same time MDV is moving from its longtime headquarters at 2775 Sand Hill Road into larger offices in Building No. 3 at 3000 Sand Hill Road, where its neighbors include Redpoint, Sequoia Capital and Sierra Ventures.
MDV lost one general partner, George Zachary, through resignation in early 2002, but today the firm is in recruitment mode. Schoendorf says the firm is seeking a new general partner to help seek out the kind of lesser-known technology investments for which the firm is best known.
More CalSTRS Data
The California State Teachers’ Retirement System (CalSTRS), the nation’s fourth-largest private equity investor, has released IRRs for all but 10 of the private equity funds it holds in its $4.4 billion portfolio. As of Feb. 5, the pension fund was still negotiating with funds that had declined to waive confidentiality agreements, including Austin Ventures and Mayfield.
In December CalSTRS released IRRs for about half of the funds in which is has invested in. Since then, it has released additional performance data as various firms have agreed to waive confidentiality agreements. As of Feb. 5, it had released performance data for about 140 funds (as distinct from firms).
The performance data released by CalSTRS as of Feb. 5 referred to the period ended June 30, 2002. It plans to update the numbers with performance data as of Sept. 30, 2002, on March 5.
CalPERS Didn’t Reveal All
When the California Public Employees’ Retirement System (CalPERS) settled a lawsuit brought by the San Jose Mercury News over disclosure of private equity performance data, most observers concluded that the newspaper had won the battle. But a upon closer inspection one finds that the juiciest fund performance data won’t see the light of day any time in the near feature.
As part of the settlement, CalPERS reluctantly agreed to release internal rates of return and cash-in/cash-out data for all 189 active private equity partnerships within its Alternative Investment Management program (AIM). However, the settlement did not reveal the returns of funds invested in by placement firm Grove Street Advisors (GSA) on behalf of CalPERS.
The vast majority of the funds that AIM invested in without (GSA) are buyout shops like Blackstone Group and Hicks, Muse, Tate & Furst.
Missing from the CalPERS data was individual IRRs and names of the nearly 100 venture capital partnerships that CalPERS had invested through funds managed by Grove Street. The firm, based in Wellesley, Mass., was hired by CalPERS in 1998 with a $350 million mandate. Funds within the Grove Street portfolio include offerings from such venture firms as Austin Ventures, Battery Ventures, Jerusalem Venture Partners, Mayfield and New Enterprise Associates.
There seem to be two related explanations for why the Grove Street numbers were excluded from the disclosure settlement. The first is that Grove Street was prepared to take aggressive legal action separate from CalPERS in order to maintain confidentiality agreements with its limited partners, according to a source. Secondly, a judge’s ruling in the case may have worked in Grove Street’s favor. While the firm’s aggregate portfolio valuation is fair game (and was released by CalPERS), individual IRRs of Grove Street funds could be argued to be best categorized as underlying asset valuations, which the judge ruled were off limits.
The information released by CalPERS on three “California Emerging Ventures” funds managed by Grove Street include an IRR of -15.28% for its 1999 fund, -25.64% for its 2000 fund and -71.96% for its 2002 fund.
SBIC-Backed VCs Get Help
There’s good news for struggling SBIC-backed venture funds. The federal government’s Small Business Investment Co. program is exploring ways to lessen penalties for SBIC-backed firms with distressed portfolios.
The potential move was signaled by Jeffrey Pierson, new head of the U.S. Small Business Administration Investment Division at the January meeting of the Northeast Regional Association of Small Business Investment Companies.
Pierson did not offer details of the new measures, but he said his division’s analysis is sharper and more attuned to the broad range of factors that determine portfolio performance. As it stands now, the penalties for an SBIC-backed fund with a portfolio that’s underwater can range from being put on a watch list to being liquidated.
Some of the options on the table to give struggling funds some breathing room include giving them forbearances and being more lenient in judging their valuations. As part of the program to ease up on struggling SBIC-backed funds, Pierson created a new portfolio risk assessment and valuation branch and placed equity SBIC analysts in the same division. Additionally, the U.S. Congress has authorized the SBIC to put $7 billion into venture capital in 2003, a dramatic increase from last year, when the SBIC pumped about $2 billion into venture funds.
Greylock Targets Europe, Israel
Greylock intensified its focus on European and Israeli investments with the promotion of Moshe Mor to general partner. Mor, the former CEO of software company SPL WorldGroup, joined Greylock as a CEO-in-residence in December of 2000 and was made a venture partner in September 2001.
Of the 13 new deals Greylock did in the past 18 months ending in January, three were in Israel and one was in Europe. “We used the last 18 months as a trial run,” says Mor, who is based in Greylock’s San Mateo, Calif. office. He spends one week out of five in Israel, focusing on the Israeli tech sector located within a 15-mile radius of Tel Aviv.
“We came up with a strategy of how we want to go about it,” Mor says. “We have decided not to establish an office there but to establish partnerships.”
Greylock’s strategy involves partnering with local firms in Israel and Europe, co-leading deals and then bringing those companies to the United States.
While Israeli companies “have very strong technology, entrepreneurs and staying power, their No. 1 challenge is building the business and marketing skills to take their technology to the market,” Mor says. “What I’m mostly busy with is recruiting executives and setting up headquarters here” in the United States.
Greylock will remain more active in the Israeli technology scene than it does in Europe’s. Most of the European companies Greylock is looking at are in Ireland and the United Kingdom.
Quaker Sows Oats
When Philadelphia’s Quaker BioVentures set out to raise its first venture fund in January 2002, it seemed as if the firm needed only to hang its shingle and investors would come flocking. It had a team of experienced partners and the firm itself was linked to a family of funds with long-standing ties to the Mid-Atlantic’s largest public pension funds. It was targeting the life sciences sector in a region with major universities, lots of pharmaceutical companies and only a handful of active venture capitalists.
But it has taken 12 months for the firm to get past the halfway mark. It held a first close on $170 million in January. It will keep the fund open for 10 more months, hoping to reach its $300 million target.
Quaker BioVentures Fund I has secured commitments from Pennsylvania State Employees’ Retirement System (PennSERS), capital earmarked by the State of Pennsylvania for biotechnology, a university endowment and a family trust. The firm will continue to target institutional investors until the clock runs out on the fund next January.
Quaker BioVentures is an offshoot of Lubert-Adler Partners LP, a Philadelphia family of real estate and private equity funds with $2.3 billion under management. Ira Lubert, a principal in Lubert-Adler Partners and founder of Quaker BioVentures, is a founding partner of LLR Equity Partners, Radnor Venture Partners and TL Ventures. PennSERS is a long-standing limited partner in Lubert-Adler funds and has taken home a 25% chunk of previous Lubert-Adler funds.
The fund is targeting a broad range of health care and life sciences technologies in the mid-Atlantic region from New York to North Carolina-biopharmaceuticals, biotech products and platforms, medical devices, pharmaceutical services and health care IT. It is not limited by stage and it will invest up to $10 million, or up to 15% of its committed capital, in each portfolio company.
Deutsche Slashes Staff
Deutsche Bank has laid off the Chicago-based investment staff of the Scudder Venture Partnership Fund and will now run its operations from New York. The German banking giant has been seeking to reduce its private equity holdings.
The Chicago staff joined Deutsche Bank when it acquired New York-based Zurich Scudder Investments. Zurich Scudder raised the $160 million Scudder Venture Partnership Fund in January 2001. The fund-of-funds was expected to invest in 20 to 25 venture funds over three or four years. Its investments include Adams Capital Management, Alloy Ventures and Highland Capital Partners.
In December Deutsche Bank entered into negotiations with the management team of DB Capital Partners to carry out a management buyout of its late-stage direct private equity portfolio, valued at $1.5 billion.
Deutsche Bank is seeking buyers for its direct investments, which have a book value of between $3.5 billion and $4 billion. Deutsche Bank will not put any new funding into the direct investment business. Its $2 billion fund-of-funds business, however, is expected to continue.
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.
Penn Funds Under Fire
Pennsylvania Auditor General Robert Casey has asked the Pennsylvania Commonwealth Court to declare that his office has the authority to audit the Pennsylvania Public School Employees’ Retirement System (PSERS) and the Pennsylvania State Employees’ Retirement System (PennSERS). The move is the latest in a heated battle between the auditor general and the two funds over the proposed audit, with both sides trading accusations and claiming to be on the right side of the law.
Casey initially sought to conduct an audit last August over the retirement systems’ use of outside consultants and investment advisors that have cost more than $250 million and over the heavy losses suffered by both PSERS and PennSERS. The funds, which manage a combined $61 billion in assets, have lost approximately $20 billion over the last two years. The losses led to the PSERS board voting to raise its subsidy from individual school districts to make up for the losses. This increase may lead to higher property taxes in some school districts.
PSERS and PennSERS have usually hired outside auditors to conduct audits every year, and they jointly announced in November that they would hire their own auditors again. Casey request documents from the pension funds by the Dec. 27. After the two retirement systems did not comply, Casey issued subpoenas to both demanding they release requested documents on Jan. 9. PSERS and PennSERS refused and issued a statement on Jan. 17 claiming that the Casey lacked the authority and was using the audit request to pursue political objectives. The two retirement systems call the proposed audit “duplicative.”
“Retirement assets are being used to stop an audit,” says Casey. “That’s about as disturbing as it gets.” Casey went on to say that “continued obstruction” by both funds will erode the confidence of taxpayers and retirees. “The question I keep asking is: What are they trying to hide?'” he says. “Now I’m very suspicious.”
PennSERS chairman Nick Maiale says that both funds have offered to allow Casey to observe the process of selecting the independent auditor and grant him full access to that auditor’s final report and papers compiled in the audit process.
JAFCO Spins Out VC Unit
JAFCO Ventures has operated under the corporate umbrella of Japan’s JAFCO Group since it was launched in 1994, but the firm’s management has now declared its independence by reorganizing itself as Globespan Capital Partners. Boston-based Globespan, which boasts $750 million under management, describes the spin-off as part of the firm’s “natural evolution.”
Globespan will continue to have ties to JAFCO. The largest venture capital firm in Japan, JAFCO has already signed on as a limited partner in a new fund being offered by Globespan, while the newly independent shop will continue to manage JAFCO portfolio companies and funds.
“This process really started two years ago when we raised our third fund,” says Andrew Goldfarb, executive managing director with Globespan.
JAFCO America Technology Fund III (JATF III) closed in 2000 with $425 million and, for the first time in firm history, with limited partners from outside Japan. The new fund, named Globespan Capital Partners IV, aims to keep expanding the diversity of its investor base. “We want to make sure the sun never sets on a Globespan limited partner,” Goldfarb says.
Pantheon Closes F-of-F
Pantheon Ventures has held a final close on Pantheon Europe Fund III, its latest European fund-of-funds. The $505 million Europe Fund III, which has limited partners from Europe, North America, Asia and Australia, expects to be fully invested by the end of 2004.
While the fund-of-funds collected capital from all over, 65% of the LPs are from Europe and 25% are from North American. About 60% of the LPs are pensions.
“It took us 12 months to raise this fund, but it has closed above its target,” says Colin Wimsett, a partner in Pantheon’s London office.
The fund will invest in 25 to 30 funds. “There are not many sector funds in Europe,” Wimsett says. “The funds here are more opportunistic, so we will invest this by region.”
Roughly 35% of the capital will go to U.K. funds, 20% will be invested in German funds, 12% will go to funds in France and Italy and the remainder will be invested in funds based in Spain and Luxembourg.
About 75% of Europe Fund III will go into buyouts and the remaining 25% will be invested in venture funds. “Of the buyout funds about 60% will go to mid-market buyouts and the rest to large-market buyouts,” Wimsett says. “We do think the large-buyout market is attractive, but the middle market is less competitive and offers a good return.”
NY Fund Gets New Chief
A former vice president in Salomon Smith Barney’s investment banking division has taken charge of New York State Common Retirement Fund’s $6.5 billion private equity portfolio. David Loglisci replaced Paula Chester as director of private equity investment Jan. 2.
Loglisci hasn’t announced changes to the fund’s investment strategy or made any new commitments on behalf of the fund. Before taking the post with the $111 billion public pension fund, Loglisci spent four years at Salomon Smith Barney, finishing his career as vice president in its investment banking division. He also served as chief of staff for New York State Sen. Martin Connor’s from 1992 until 1994. A 1998 graduate of Notre Dame University’s law school and its school of business, Loglisci was an All-American football player during his undergraduate days at Georgetown University.
New York’s Common Fund has more than 130 private equity funds in its portfolio. It holds a mix of buyout, fund-of-funds, special situation and venture capital funds. It has been shying away from new commitments to venture capital funds since technology stocks began to fall in 1999. Its private equity program posted losses of 11.9% for the fiscal year ending in June 2002.
Ohio Targets VC
Ohio Gov. Bob Taft signed into law in January a bill that establishes the Ohio Venture Capital (OVC) program, which will invest up to $100 million in seed and venture capital funds through a fund-of-funds. The state also established the Ohio Venture Capital Authority to administer the OVC program and establish policies and guidelines.
The program will receive loans and investments from institutions such as banks and insurance companies for the fund-of-funds, which will invest in early-stage venture capital firms. About 75% of the funds must be invested in Ohio-based companies.
The legislation allows the Ohio Venture Capital Authority to grant lenders and investors of the OVC program a total of $100 million in refundable tax credits. It is prohibited from granting more than $20 million in tax credits in any one fiscal year and from granting a credit that may be claimed during the first four years of the OVC Program or after July 1, 2026.
Returns earned by the OVC program’s fund-of-funds will be used to repay the financial institutions that provided its initial capital. If earnings from the fund-of-funds aren’t sufficient to repay those loans, the financial institutions that lent the money will be entitled to take a credit against their Ohio taxes.
The advisory board will designate one or two private for-profit investment firms to serve as the program’s administrator. One strong candidate to be a fund administrator is Cincinnati-based Fort Washington Capital Partners, the private equity arm of Fort Washington Investment Advisors, which manages more than $680 million.
Austin Alters Team
When Austin Ventures reduced the size of its eighth fund in May 2002, it told investors that more changes would soon come down the pike. Well, it wasn’t soon, but there certainly have been some changes.
During the fourth quarter, Austin altered its general partnership by demoting two general partners to the position of venture partner-Rob Adams and Stephen Strauss.
“It’s overstating things to say that we restructured,” says John Thornton, a general partner with the firm. “This was really a matter of division of labor and transitioning some people out of fund and firm management so that they can concentrate on investing.”
Adams was originally hired in 1999 to launch a semi-independent incubator program named AV Labs. But the program moved in-house last summer. Adams was previously with TL Ventures.
Strauss joined Austin Ventures as a Kauffman Fellow in 1996. He quickly climbed the VC ladder, getting promoted to principal and then getting named a general partner focused on semiconductors in January 2000.
Yale Cuts PE
Bucking a trend that has pulled nearly $1 billion from new limited partners into the private equity arena, Yale University’s $10.5 billion endowment has scaled back its private equity allocation by $800 million to $1.8 billion.
After two years of write-downs and only a handful of commitments to new funds, the 30-year old private equity program has reduced its private equity allocation target from 25% of the university’s investment portfolio to 17.5% of the portfolio’s total assets. Still, only 14% of Yale’s assets are currently committed to private equity funds, leaving the endowment $370 million short of its targeted cut, which means it has room to invest in new funds.
“Yale has been pruning the roster for high performance going forward,” says one source familiar with Yale’s private equity portfolio. The source adds that the university would continue to actively seek new investments but would not re-up its commitments to under-performing funds. Yale Chief Investment Officer David Swensen declined to comment.
Yale is an investor with at least 40 private equity firms in its portfolio, with an even mix of buyout and venture capital funds. It is a limited partner in funds managed by Benchmark Capital, Clayton, Dubilier & Rice, Crosspoint Venture Partners, Draper Fisher Jurvetson, Kleiner Perkins Caufield & Byers, Madison Dearborn Partners, Oak Investment Partners, Sequoia Capital, and Venrock Associates .
In recent years the performance of Yale’s private equity portfolio has sagged below its historical average, although the endowment has not disclosed its 2001 or 2002 returns. Since inception in 1973, the portfolio has returned 31.4% annually, but fund performance has deteriorated industry wide since 1999, according to Venture Economics (publisher of VCJ). Yale’s endowment has set a 12% return target for the private equity portfolio going forward.
LACERS Ups PE
Los Angeles City Employees’ Retirement System (LACERS) will invest up to $483 million in private equity funds to meet the requirements of a new asset allocation mix the public pension fund adopted in mid-December.
The $6.9 billion pension fund’s investment committee has upped its private equity allocation to 7% from a 5% target that it had maintained since 1997.
Although this is not LACERS’ first foray into private equity, its new private equity target could double the amount it invests in private equity funds. Since 1997, LACERS has committed about $230 million to 25 buyout and venture capital funds-short of the $345 million that the 5% allocation allowed. LACERS has not said how it will invest the capital, nor has it set a time frame for deploying it.
LACERS is already a limited partner in funds managed by Blackstone Group, Kohlberg, Kravis & Roberts, Madison Dearborn Partners, Welsh, Carson, Anderson & Stowe, InterWest Partners, Menlo Ventures, New Enterprise Associates, Oak Investment Partners and Summit Partners.
LACERS’ renewed interest in private equity highlights a trend that has been unfolding over the last 12 months: At least six other public pension funds have made first-time allocations to private equity funds or upped their alternative asset allocations. About $1 billion of new investment capital is expected to pour into the market over the next several years as the pension funds outline investment strategies and make their first commitments.
The list of new investors, or investors that have upped their private equity allocations, includes Indiana State Teachers’ Retirement System, Missouri Public School Employees’ Retirement System, San Bernardino County Employees’ Retirement System and the State of Illinois.
Atlas Chops Again
Atlas Venture in December chopped its sixth investment fund a second time, cutting it from $850 million to $600 million. Unlike what happened during a smaller cut in June 2002, however, the Atlas woodshed is now also home to some of the firm’s own investment professionals and satellite offices.
Atlas raised $967 million for Fund VI in April 2001, but falling company valuations and dampened burn rates meant that the firm soon had more money than it knew what to do with. Compounding this over-affluence was more than $100 million in uncommitted capital from a fifth fund raised in 2000. In an attempt to rectify both situations, Atlas received limited partner approval for a plan that reduced the size of Fund VI and permitted Fund V to co-invest in Fund VI deals for up to 18 months. That didn’t solve the problem, so the firm had to cut again.
Atlas also decided to trim its staff and offices. It scrapped its West Coast presence, including two satellite offices and nine employees. The firm shuttered its Menlo Park, Calif. and Seattle offices at the end of January.
The employees laid off as part of the office closures include principals Laura Jennings (Seattle) and Jay Shively (Menlo Park), each of whom will maintain a carried interest in Fund VI and continue their responsibility for certain portfolio investments. Other West Coast layoffs include venture principal Bill Bryant (Seattle), an associate, an analyst and four members of the firm’s administrative support staff. In addition, Atlas plans to lay off three European officers, with one pink slip going to each of its London, Munich and Paris offices.
Atlas’ limited partners include Alliance Private Equity Partners, Commonfund Capital, Grove Street Advisors, Pennsylvania State Employees’ Retirement System, Virginia Retirement System and the University of Texas Investment Management Co. (UTIMCO). According to the information released by UTIMCO, Fund VI had an internal rate of return of -39.46% as of Sept. 30, 2002. Fund VI is still young, with just 15 portfolio companies under its belt, but its performance is below the Venture Economics vintage year benchmark of 20.6% for venture funds closed in 2000.
Beringea Heads Out
It probably won’t be the largest fund of 2003, but it may be one that’s worth paying attention too. Beringea, a Michigan-based venture firm formed in 2002 by GMA Capital’s acquisition of ProVen Private Equity, is readying its second health care fund. With so much money flooding into health care investments, it remains to be seen if LPs will still have an appetite for another health care fund this year.
Beringea plans to start raising the planned $150 million Investcare II in early spring. Its previous fund, Investcare I, was a $65 million vehicle raised in February 1999. It is 70% invested and has made about 15 investments in 11 companies. It plans to make about three more investments before it closes. The fund has had two exits-Crothall, which was sold to Compass Group (and returned 3 1/2 times Beringea’s money) and consumer health company Healthetech, which went public, according to Malcom Moss, a founder and senior managing director at Beringea.
Investcare II plans to invest in 25 to 30 companies. “We will be investing in companies that we can get an exit from in three to seven years,” Moss says. “We would never look at biotech or pharma because those types of companies have such a long gestation period. We really like mature revenue companies that are pre-regulatory approval.”
The focus of Investcare II hasn’t been finely tuned yet, but it will likely focus primarily on medical devices and technology and some “self-health care” companies. Beringea expects the new fund to be more geographically expansive than Investcare, which only invested in the United States. Investcare II is expected to be a cross-boarder fund, investing in the United States, United Kingdom and Europe.
Beringea’s list of LPs includes wealthy investors, Cable and Wireless, Essex County Investment Board, Edinburgh Counsel and three hospitals that Beringea works with: OakWood Healthcare Inc., Accension Healthcare and a third one that asked to remain anonymous.
Publisher’s VC Unit Expands
Reed Elsevier Ventures, the investment arm of U.K. publisher Reed Elsevier PLC, has extended its reach into the United States by opening a Silicon Valley office. Its West Coast practice, which opened in February, will be headed by newly appointed partner Rakesh Sood and will make investments from the firm’s $100 million fund.
“We’ve moved out here to take advantage of the current environment, and we’re starting afresh to take advantage of more reasonable valuations,” Sood says.
He left Sprout Group last summer after 2 1/2 years of managing enterprise software and software investments.
Reed, which has four companies in its portfolio, plans to make three or four investments this year. It will focus on business process management, risk management and search capabilities. Those areas include fraud detection, anti-identity theft programs and disaster recovery services.
Reed favors later-stage deals and typically invests $1 million to $10 million.
Reporting by Danielle Fugazy, Carlina Braunschweig, Jerry Borrell, Matthew Sheahan and Dan Primack
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