Fund Note$ –

Private equity returns slipped again in the fourth quarter, but they will likely turn up in the second half of this year.

So says Jesse Reyes, vice president of Thomson Venture Economics, which just completed a quarterly survey of returns along with the National Venture Capital Association.

The VE/NVCA survey shows that annual private equity returns were in the red for the eighth quarter in a row. Venture capital funds, in particular, were the hardest hit, with back-to-back losses of 20% or more in the past two years. Even with the downturn, investors in private equity haven’t been battered as badly as their counterparts in public equity.

“The private equity markets are mirroring what’s happening in the public equity markets, as they have for the past four years,” Reyes says. “Any improvement in performance will be predicated on an improvement in liquidity events, whether it’s IPOs or M&A.”

Adds Reyes: “The downturn is totally attributable right now to the decrease in valuations of fund portfolios, which have fallen more than 60% since the [public] market peak in the spring of 2000.”

With virtually no exits in the fourth quarter, it is understandable that returns went down, since they had to be based on the declining valuations of companies in venture funds’ portfolios. There has been a slight increase in venture-backed M&A in the first quarter and it will probably increase more in the second quarter, as the IPO window remains shut, Reyes says.

“Many firms will feel pressure to improve their returns in the next couple of quarters, if they plan to raise new funds in 2004,” Reyes notes. “They want to be able to show some positive news to potential limited partners,” he says. –Lawrence Aragon

Canadian VC Holds First Close

Yaletown Venture Partners knows that seed-stage technology companies in Western Canada have been historically hamstrung when looking for capital. Now, after more than a year of fund-raising, the Vancouver-based firm is almost ready to lend a hand.

Yaletown recently closed on $21.9 million for its inaugural fund, and hopes to add another $7 million to $15 million by November.

More than 80% of the capital comes from four major institutional LPs, including British Columbia Investment Management Corp. and the Canada Pension Plan (via Toronto-based fund-of-funds manager EdgeStone Capital Partners).

The rest came from firm management and affiliated individuals like Glenn Bindley, CEO of Redlen Technologies, and Haig Farris, president of Fractal Capital.

Yaletown has been combing over about 100 possible investments. It expects to close its first deal by the end of September. The firm hopes to back companies in both the information technology and energy technology space. The former is defined broadly, and includes everything from security technologies to wireless and pervasive computing. -Dan Primack

ARCH Eyes First Close

Chicago’s ARCH Development Partners, which was founded as an independent venture capital firm in 2001, has raised $27.5 million for its inaugural fund. With leverage from the Small Business Investment Corp., the partners plan to have between $50 million and $75 million by third or fourth quarter.

ARCH invests in seed- and early-stage research-based technology companies in biotechnology, life sciences, wireless, software and technology infrastructure. The firm’s geographic preference is the Midwest with a particular focus on Illinois, Indiana, Michigan and Ohio. It expects to invest between $500,000 and $1 million initially and then an additional $1 million to $1.5 million into each portfolio company.

Limited partners in the new fund include Caterpillar, Citibank, Dow Foundation, Kalamazoo Community Foundation, Purdue University, University of Chicago, University of Cincinnati and Silicon Valley Bank.

ARCH spun out of the University of Chicago in 2001. The University is also the birthplace of ARCH Venture Partners, but the two firms aren’t affiliated.

The structure of the fund is a 20% carried interest and 2.5% in management fees. –Matthew Sheahan

A New Social Venture

Matching financial motivation with socially responsible investing in a business school classroom, the New Markets Growth Fund (NMGF) has closed its debut fund with $20 million.

Partnering with the University of Maryland’s Robert H. Smith School of Business, the fund aims to spur business development in economically depressed areas in Baltimore, Northern Virginia and Washington, D.C. It will invest in established businesses housed and operated in low-income neighborhoods and also find office space for new startups in those same neighborhoods.

NMGF has a two-pronged investment strategy: Part of the fund will invest in early-stage technology plays that are still too young for traditional venture firms to fund. Those will be sourced through the university and the region’s research centers. NMGF will make an initial investment of $500,000, incubate the company and its management team, secure grant money to fund research and product development, and then bring on a partner to lead the company’s first institutional round of financing. The rest of the fund will be invested in later-stage companies in traditional industries as subordinated debt. Although debt instruments won’t generate the type of returns that venture capital can, they’re less risky and can be used to balance the fund’s returns. It will invest up to $1 million in a single company through debt financing.

The fund’s reach stretches beyond the confines of the classroom with ties to the region’s banking and venture capital communities. Limited partners in the fund include the Mid-Atlantic region’s Capital One, Chevy Chase Bank, MBNA Corp. and National Cooperative Bank. Jack Biddle, Novak Biddle’s founder and managing partner, sits on the fund’s investment committee alongside Jonathan Silver, Core Capital’s founder and managing director.

The bankers and venture capitalists will review and validate the investments and possibly provide additional capital to the startups. -Carolina Braunschweig

Altira Comes Up Short

Altira Group closed its Altira Technology Fund IV LP in May with $64 million in commitments, $36 million shy of its goal. Its goal was to raise $100 million by October 2002. Nonetheless, the new fund is Altira’s largest and it managed to attract interest from institutional investors, unlike its previous funds.

New institutional LPs in the fund were not disclosed.

Altira’s first three funds raised a total of $36 million.

“We decided to stop fund-raising because we wanted to start investing,” says Dirk McDermott, a founder and managing partner with the firm. “Our previous funds were raised every 18 months. We were founded in 1996 and we had to build a track record so we kept raising new funds. But with this fund we should now be good for three years.”

McDermott says Altira’s third fund will likely be fully committed by July.

Fund IV will invest in technology opportunities in oil and gas; information technology for the energy industry; power generation; transmission and distribution; and renewable energy.

Altira’s previous funds focused on oil and gas. The new fund will put more than half the capital to work in oil and gas and allocate 10% to 15% to alternative energy, with the remainder going to technology related to energy.

The firm, which has headquarters in Denver and an office in Albuquerque, N.M., will continue to focus on deals in all of North America and will invest $1 million to $3 million into each deal’s seed or first round. Altira will invest in follow-on rounds if the company needs additional capital and is attractive enough to warrant it. -Danielle Fugazy

NewSchools To Raise $20M

NewSchools Venture Fund, a San Francisco-based venture philanthropy firm, is raising a $20 million venture capital fund to better train teachers and to develop assessment tools to gauge students’ progress inside the classroom.

After a year of research, and two months of active fund-raising, it expects to close the Performance Accelerator Fund within five months. It will be NewsSchools’ second fund since its founding in 1998 by Brook Byers and John Doerr, general partners at Kleiner Perkins Caufield & Byers, and Kim Smith, CEO of NewSchools.

All three sit on the board of the nonprofit organization. Two other VCs sit on the board: Joanna Gallanter, founder and managing partner of Venture Strategy Partners, and David Whorton, a partner at TPG Ventures.

So far, NewSchools has invested $20 million in 10 organizations. It plans to to more than double the size of its investments in each organization to $5 million with the new fund.

It’s taking an early-stage investment model, steering the management team and strategy of every portfolio company, but eliminating the pressure of turning a profit. That way, it can make investments in both for-profit and not-for-profit endeavors. Not-for-profit groups in the fund’s portfolio, like New York’s Teach For America, receive grants from NewSchools, while the fund will take an equity position in education startups like Teachscape of New York.

NewSchools’ Performance Accelerator Fund will invest in teacher training projects like New Leaders For New Schools. It will also invest in classroom assessment tools, so teachers can make data-based decisions about how they work in the classroom, and in after-school and special education programs.

Like any venture investment, each organization in NewSchools’ portfolio will be subject to extensive due diligence. The fund will demand strong management teams and invest only organizations with the capability to build and scale their projects.

The fund’s success will be measured by its impact inside the classroom, an ambiguous standard that does not easily translate into dollars. Profits are secondary: Investments in the fund are made as charitable donations and any profit the fund makes will be reinvested in the fund. -Carolina Braunschweig

Legacy’s Charitable Ventures

Talk about having strong moral commitments. Legacy Venture brings the meaning to a whole new level. The Palo Alto, Calif.-based fund-of-funds, which has raised a $60 million second fund, only takes money from individuals, small foundations and non-profits that donate their returns to charity.

“We’ve sort of been in stealth mode until now,” says Chris Eyre, a managing director with Legacy. “But our model is pretty simple. We encourage individuals to be more generous. We put these people with the best VCs and get them returns that they can then donate.”

For its first fund, which closed with $40 million, Legacy invested in Accel Partners, August Capital, Charles River Ventures, Clearstone Venture Partners, Foundation Capital, Greylock, Mayfield, Mohr Davidow Ventures, New Enterprise Associates, Redpoint Ventures and Sequoia Capital.

For its new fund it plans to target the same group in addition to some new venture firms. “These are the firms we currently have relationships with, but we will be looking for other premium firms to invest in,” Eyre says.

The new fund is expected to been committed in three years with about $5 million going into 10 to 15 venture firms. The biggest difference between Legacy’s last fund and the new one is that its last fund was entirely made up of individuals. This time around Eyre says Legacy got a warm reception from non-profits and small foundations. “We really have a nice mix in this fund,” he says.

LPs in the fund were not disclosed.

While Legacy cares about how its investors spend their returns, the firm isn’t overly concerned with what the venture firms invest in. “Legacy’s model supports these firms in what they do best-invest in promising companies to capture stellar returns-while at the same time creating a superior learning environment for peers to engage in the philanthropic distribution of those returns,” says Jim Anderson, creator of the Legacy concept.

Legacy has done a good job solidifying its relationships in the VC community. “Legacy is a significant addition to the venture capital industry,” says Bill Elmore, a general partner with Foundation Capital. “Not only is the team a knowledgeable and steady limited partner, they provide an opportunity for the venture industry to advance philanthropic innovation and effectiveness in a very capital efficient way.”

In addition to making investments, Legacy has launched a learning community that brings philanthropic leaders to a series of forums, luncheons and other venues to discuss charitable causes. “Much learning and growth derives from members sharing insights and causes with each other,” Eyre says. “Through its extensive network in the non-profit world, Legacy is able to provide customized suggestions and contacts to support a member’s particular areas of interest.” -Danielle Fugazy

Carlyle Lowers Defenses With Web Site

The Carlyle Group knows that it will never be able to silence all its critics. But it wouldn’t mind giving them one less thing to criticize. To that end, the Washington-based private equity giant in May removed a few layers of its famous secrecy by unveiling a newly expanded Web site (www.carlyle.com). Among the approximately 1,500 Web pages is detailed information on the firm’s portfolio companies, fund strategies and investment professionals. The site also includes case studies of more than 30 portfolio companies and an extensive FAQ that covers everything from Carlyle’s political contributions (there are none) to the role of former President George H.W. Bush (he gives speeches).

“Some people have said that we’re too secretive and we hope this site will change that perception,” says firm spokesman Chris Ullman.

Ullman realizes that some of the information on the new site-especially in the FAQ-may come off as corporate spin, but he believes that such accusations are unavoidable. “Conspiracy theorists will never be happy, no matter what we do,” he laments.

Those “conspiracy theorists” have gained some significant traction in recent months, thanks largely to a recent book by Dan Briody called “The Iron Triangle” and news of an upcoming documentary by Michael Moore called “Fahrenheit 911.” The new Carlyle site addresses neither the book nor the upcoming film, but it does say that “some Web sites may imply that Carlyle’s success is linked to connections its former government officials bring to the table.” It goes on to dismiss those claims.

Some market watchers suggest that the primary reason for the friendly approach with the Web site is that Carlyle is planning an IPO. David Rubenstein, a founding partner and managing director of Carlyle, has previously said that while he believes that a private equity firm going public is inevitable, Carlyle has no current or future plans to do so. -Dan Primack

Banyan Is Halfway There With $13M

Almost halfway to its goal, Miami-based Banyan Capital Advisors last week made a $13 million first close on its debut investment fund, Banyan Mezzanine Fund.

Expecting to raise $30 million in commitments from the region’s banks, pension funds and high-net-worth individuals, the year-old firm plans to leverage the Small Business Investment Company’s (SBIC) two-to-one match to bring its investment power up to $90 million. Fund-raising will continue through the summer.

Although Banyan Capital is Florida’s fifth SBIC fund, it is the states first SBIC-sponsored middle-market mezzanine fund. It’s trying to fill a gap in the Southeast between commercial lenders and venture capitalists. Last year, 29 Florida-based companies raised $103 million in late-stage private equity financing, according to Thomson Venture Economics (publisher of PE Week). Those late-stage deals – including expansion, growth capital, buyouts and recapitalizations – accounted for 58% of the state’s private equity activity last year, which totaled $175 million.

“The fund is to provide mezzanine capital to companies that are growing, but not growing fast enough and have outstripped their bank borrowing capabilities, or not in an industry of interest to venture capitalists,” says Jim Davidson, a managing partner with the firm. “In Florida alone, 14,000 businesses fit those criteria.”

Banyan Capital will finance middle-market companies with annual revenue between $5 million and $100 million with investments of up to $5 million to finance expansion, acquisitions, buyouts or recapitalizations. It will use a mix of subordinated debt and warrants to fund companies throughout the Southeast, stretching from Florida north to South Carolina.

It has not yet financed a single deal, but it sorting through a list of possibilities in after-market auto parts, business services, health care services, manufacturers and distributors. Davidson predicts the first will close its first deal within the next two months.

Davidson, a former investment banker with Goldman, Sachs & Co. in Miami before joining South Atlantic Venture Funds as a managing director, will manage the fund alongside two Bank of America veterans, John Miller and Richard Starke, and Stephen Smith, founder of an ISP sold to Earthlink in 2000 for $400 million. –Carolina Braunschweig

Montagu Newhall Readies Its Second Fund

In 2001, Rupert Montagu and Ashton Newhall set out to raise a $25 million fund-of-funds. The firm, aptly named Montagu Newhall, ended up with $52 million. The extra capital the firm garnered is easier to explain than one might initially think. Ashton Newhall is the son of New Enterprise Associates (NEA) founder Charles Newhall. Individual investors the firm counts among its LPs are NEA’s Dick Kramlich and Accel Partners’ Jim Swartz.

Now with a proven track record of its own, Montagu Newhall is starting to raise a second fund with a target of $50 million. The firm plans to close on about $25 million of new capital by September.

Montagu Newhall is based in Owings Mills, Md., and has an office in London. It invests 80% of its money in venture capital and private equity funds and 20% directly into companies. It allocates 80% to 85% of its PE commitments to established funds, with the remaining capital going into new funds. Its current fund is largely committed and 35% of it has been drawn. The firm expects to make three more direct investments and one more investment in a fund and reserve the rest for follow-ons.

The only difference between Fund I and Fund II is that Montagu Newhall expects to do fewer deals in Europe than it had originally sought to do in its first fund. It had expected to invest 20% of its capital in Europe but only ended up investing 10%. It plans to keep that percentage the same in the second fund.

The firm caters to small and mid-size institutional investors who can invest a minimum of $1 million. Other than Kramlich and Swartz, LPs in Montagu Newhall’s first fund include the Maryland Historical Society, the Max Foundation, the Medical Mutual Insurance Co., the ProThera Foundation and T. Rowe Price, where Newhall once worked.

In addition to NEA and Domain, Montagu Newhall’s portfolio includes funds run by NEA, Domain Associates, Abingworth Management Ltd., Accel Europe, Atlas Venture, Aurora Funds, Boulder Ventures, North Bridge Venture Partners, Oak Investment Partners and Polaris Venture Partners.

Among the companies that Montagu Newhall has invested in are Myogen, a Colorado-based biopharmaceutical company; Proxima Therapeutics, a medical device company that develops site-specific cancer treatment systems; and Xcel Pharmaceuticals, a supply company focused on the neurology market. -Matthew Sheahan