Fund Notes: U2 Frontman Bono Lifts Elevation Partners –

Rock n’ roll is good for business. Just ask Roger McNamee, co-founder of venture firm Integral Capital Partners and buyout shop Silver Lake Partners and lead guitarist for the Flying Other Brothers.

McNamee has a new gig-a media and entertainment private equity firm called Elevation Partners-that recently added U2 lead singer Bono to its roster of managing partners.

Although no official announcement was made, Venture Capital Journal confirmed that the 44-year-old Bono will join Elevation Partners, which plans to raise $1 billion.

Bono-who’s given name is Paul David Hewson-came to the fund through McNamee, who has known him for a couple of years. As part of the Flying Other Brothers, which started out as a Grateful Dead tribute band, he has been involved with the entertainment industry for years. Bono once sought McNamee’s advice on a deal, according to a source familiar with the fund.

Elevation Partners will largely do buyouts, but it will also have the flexibility to infuse capital into distressed public companies and buy catalogues of music and videos, according to a source familiar with the fund’s plans. It has no plans to do venture capital deals. “The basic thesis is that the entertainment business is big and growing, but it’s being attacked by technology,” the source says. “Most of the entertainment managers are afraid of technology and have taken a defensive position.”

Elevation expects to hold a first close by the end of summer and raise the bulk of its money by the end of the year. It has hired Merrill Lynch to act as its placement agent.

The firm was started earlier this year by McNamee and John Riccitiello, former president of video game maker Electronic Arts. They were later joined by Fred Anderson, former CFO of Apple Computer, Mark Bodnick, a founding principal of Silver Lake, and Bret Pearlman, former senior managing director of buyout shop The Blackstone Group. Bono will be a managing director along with McNamee and the others and will have an equal share of the carry, the source says.

Bono may seem like a strange addition to the group of managing partners, but the source says he will be a good fit. With his deep ties to the entertainment industry, the rock n’ roller will be called on to source deals, do due diligence on people, companies and entertainment properties, recruit talent and impart his overall vision about the industry. He will also advise management and talent of entertainment companies that Elevation Partners becomes involved with. Bono has already brought “several” potential deals to the table the partners are looking at, the source says.

It is unlikely that Bono will show up for traditional Monday morning partnership meetings. However, “he will be kept apprised of things that they’re working on, and as a member of the investment committee he’ll vote on any potential investments with the rest of the team,” the source says. – Lawrence Aragon

Advent Gets Pharma Injection

Having relationships with big pharmaceutical companies is often the key to success for life science startups. Boston-based private equity giant Advent International recently showed those relationships can help at the fund raising level as well.

Advent has closed its Health Care & Life Sciences III (HCLS III) fund with $125 million, attracting more than half the capital from pharmaceutical company AstraZeneca (NYSE: AZN), which invested $75 million, according to documents filed with the U.S. Securities and Exchange Commission. The Young Men’s Christian Association Retirement Fund invested $10 million, while the remainder came from several U.S. and European institutional investors, Advent said.

Advent’s aggregate offering price was listed as $275 million and $290 million on two of its SEC filings. The firm says its initial target was significantly below those figures but did not disclose how much it initially set out to raise. The firm’s last dedicated health care fund, Health Care & Life Sciences II, closed in 1999 with $100 million.

Limited partners in past Advent funds include Aetna Insurance Group, BancBoston Investments, Duke Management Co., Harvard Management Co., RJR Nabisco, the University of Michigan and Yale University.

The fund is focused on early stage investments in biotechnology, pharmaceuticals and medical technology. HCLS III has led two investments so far: AlgoRx Pharmaceuticals’ $65 million Series C funding and Millimed Holdings’ $22 million Series A financing. AlgoRx develops drugs that treat pain and Millimed develops technologies for minimally-invasive vascular surgery. – Matthew Sheahan

Sevin Rosen Is Hot Ticket

Sevin Rosen Funds has closed its ninth venture capital fund with $300 million in limited partner commitments. But if limited partners had their way, the fund would have been two to three times larger.

John Jaggers, a general partner with Sevin Rosen since 1988, says that he never before has seen such intense interest from new investors. “There is so much money out there right now that it’s getting scary. It almost makes me feel that we could be heading into another cycle like we saw a few years ago.”

The firm received more than $600 million in requested commitments from returning LPs alone. Rather than succumbing to LP pressure, Sevin Rosen stuck to its original target. It cut out all public and fund-of-funds money and then “spread the pain” among returning investors. Among those not re-invited were the California Public Employees’ Retirement System (CalPERS), Knightsbridge Advisors, the Los Angeles County Employees’ Retirement System (LACERS),and Pomona Capital.

Joining Jaggers as general partners on the new fund are firm veterans Al Scheule, Steve Dominik, Jackie Kimzey, Steve Dow, John Bayless, Dave Shrigley and Nick Sturiale (recently promoted to GP). John Oxaal and Dave McLean also will serve as general partners, after having joined the firm earlier this year. The new fund also features partners Ram Veldi and Amra Tareen.

Sevin Rosen-which has offices in Dallas, Austin, Menlo Park and San Diego-plans to maintain its investment strategy of early-stage funding for information technology companies. It also does the spare life sciences deal, such as Cytokinetics Inc. (Nasdaq: CYTK), which went public in April and was trading up 9.2% as of market close last Wednesday. Its other recent exits include the February acquisition of Trulogica Inc. by Hewlett-Packard & Co. (NYSE: HPQ), and the January acquisition of Cicada Semiconductor Inc. by Vitesse Semiconductor Corp. (Nasdaq: VTSS).

Sevin Rosen will not start investing the new fund until this fall, as SRF VIII still has enough dry powder to make a small handful of new investments.

SRF VIII was an $875 million fund when it was raised in 2000, but the firm later told investors that it would not call down the final $275 million.

According to a CalPERS portfolio performance report, SRF VIII had a net IRR of -28.5% as of Dec. 31, 2003. –Dan Primack

Shasta Emerges From Clouds

A trio of VC castaways emerged from stealth mode in June to announce the formation of Shasta Ventures. The Menlo Park, Calif.-based firm is looking to raise an inaugural fund of between $175 million and $200 million, according to a source familiar with the new fund.

The venture fund will be managed by Rob Coneybeer, a former general partner with New Enterprise Associates (NEA); Tod Francis, a former general partner with Trinity Ventures; and Ravi Mohan, a former general partner with Battery Ventures.

Each of Shasta’s managing directors left his previous firm for a different reason, but one common denominator was that the firms themselves were changing. All three were downsizing their general partner ranks, and both NEA and Battery were moving toward expansion-stage and later-stage investment strategies that didn’t mesh with early stage investors like Coneybeer and Mohan. Francis also parted due to investment strategy changes.

“We are going to focus on early stage information technology companies,” Francis says. “This is a good time to build a small manageable firm.” He adds that the firm plans to add some associates and other support staff as it ramps up. Shasta is not yet ready to begin investing, but has been meeting with companies to remain active.

Once the fund is raised, or a first close is held, Shasta will focus on infrastructure, software, and technology-enabled service companies that target both the business and consumer sectors. Francis declined to discuss any aspect of his firm’s fund-raising effort. – Dan Primack

Vector on Straight Path

Vector Capital is a couple of months away from closing its third fund. The San Francisco-based firm began soliciting limited partner commitments earlier this year, and expects to bust its $250 million target, according to a source familiar with the fund.

Vector held a first close in May of just over $175 million, and recently held a second close that pushed the total amount of committed capital over $200 million. Investors in the first close included First Plaza Group Trust (with JPMorgan Chase Bank as trustee), Stichting Pensioenfonds AB and ZAM Holdings LP.

The California Public Employees’ Retirement System (CalPERS) chose not to re-up for Fund III. It committed $5 million to Vector’s $175 million second fund in 1999. One sticking point could be the departure of firm co-founder and former managing director Val Vaden, who co-founded Benchmark Capital. As VCJ previously reported, Vaden would take a senior advisory role with the new fund, leaving Alex Slusky as Vector’s only managing partner. Sources close to the firm, however, say that Vaden’s lack of participation has not harmed fund-raising in any way, and that the blow was softened by the recent promotion of Chris Nicholson from principal to partner.

The firm’s most notable deal of the past year came in the summer, when Vector bought out Corel Corp., a publicly traded software provider, for approximately $63 million. Corel ceased trading on the Nasdaq, following the acquisition.

According to information published on CalPERS’ Web site, Vector Capital II had not returned any capital to LPs as of Sept. 30, 2003, despite having called down 80% of committed capital. But unlike most vintage 1999 funds, Vector reported a positive internal rate of return (IRR).

Slusky and Vaden co-founded the firm as an independent entity in 1997 after absorbing Ziff Brothers Investments. The initial fund was capped at $40 million with the Ziff family as its sole limited partner.

Fund II investors included CalPERS, CSFB, GE Equity, J.P. Morgan, Perot Investments, MIT, The MacArthur Foundation and Vulcan Ventures. – Dan Primack

HK Fund Reaches $150M

The increased interest in China’s emerging private equity market apparently hasn’t hurt more mature Asian markets. Witness the $150 million raised by 9-month-old Longreach Group of Hong Kong. The fund’s goal is to raise $500 million to spin out non-core assets from Japan’s technology conglomerates and financial institutions.

The private equity firm plans to keep fund-raising for another year, but it intends to fund its first investment within the next six months, says Mark Chiba, chairman of Longreach. The fund has a number of deals in the pipeline, with enterprise values of between $400 million and $1 billion, Chiba says.

Longreach will invest up to $300 million in equity capital to take a controlling position in each portfolio company and then leverage the deal with as much debt as the deal requires.

“Real opportunity is building in Japan,” Chiba says. “The challenge is to build a firm with strong relationships locally, but also operate as a global firm and deliver returns.”

Chiba is the former president and CEO of UBS Securities in Japan, and the former head of its Japanese investment banking division. Chiba, in Hong Kong, will manage the fund alongside two partners in Tokyo. One of them, Yasuyuki Miyoshi, was most recently the head of Merrill Lynch’s Japanese restructuring practice, while Masamichi Yoshizawa, Longreach’s third managing director, led Morgan Stanley’s technology investment banking group in Japan.

Thus far, institutions that will likely co-invest in deals with Longreach have bought into the fund. The remainder of the fund’s capital is expected to come from institutional investors in the United States, Japan and throughout Asia. – Carolina Braunschweig

Wells Fargo Backs Norwest

The mezzanine market may be overcapitalized, but that has not stopped new funds from getting raised. In June, Norwest Mezzanine Partners closed its second fund with $400 million from sole limited partner Wells Fargo & Co. (NYSE: WFC), which is $150 million more than Norwest raised for its first mezzanine fund in 2000.

The Minneapolis-based firm features a satellite office in Boston, and will continue to invest up to $40 million in middle-market buyout, recapitalization and growth-stage transactions. It also is willing to participate in second-lien transactions, even though a rapid increase in such structures is largely blamed for driving down overall mezzanine yields.

“We did one second-lien deal in the first fund, and we have the flexibility to do so again so long as the pricing and risk is right,” says Tim DeVries, a general partner with Norwest Mezzanine Partners. He says Wells Fargo is aware of lowered return expectations, but remains comfortable with the mezzanine asset class. – Dan Primack