Funds In Review –

The U.S. Army wants to transform the technology it uses, and it has turned to a unique joint venture-the Rosettex Technology and Ventures Group-to help it accomplish the task. Rosettex is a joint venture between SRI International, a Menlo Park, Calif.,-based non-profit R&D lab, and Sarnoff Corp., a wholly owned SRI subsidiary based in Princeton, N.J.

Rosettex offers the Army a deep technological background that can assess the military’s needs and come up with a plan to satisfy those needs. A portion of the fees derived from providing the military with the whiz-bang technology is being placed into a venture fund to seed promising startups developing technology that can be used by our soldiers of the future. The goal of the Rosettex fund is to raise $50 million over 10 years, says John Prausa, vice president of the Engineering and Systems Division at SRI, and the research lab’s emissary to the joint venture. Rosettex was formed in February of this year.

Rosettex just won a five-year contract from the U.S. Army Communications-Electronics Command (CECOM) at Fort Monmouth, N.J., to develop and prototype advanced technologies and systems in military communications, command and control, intelligence, surveillance and reconnaissance applications.

“The model provided under this contract allows the U.S. Army CECOM to leverage science and technology dollars through the use of venture capital,” says Robert Doto, director of the Research, Development and Engineering Center at CECOM. “In this way, we can accelerate the development and fielding of information technologies for the war fighter.” -M.V.C.

Coller Buttons Up 4th Fund

Coller Capital held a final close on its new Coller International Partners IV (CIP IV) secondaries fund, raising $2.5 billion. That easily outpaced its $1 billion target and surpassed all other global secondary funds.

The fund is structured with a 10-year life, a five-year investment period and has a 10% carried interest split, which is traditional in the secondaries market, says Jeremy Coller, Coller’s CEO. He adds that the new fund will carry an 8% hurdle rate.

Coller began fund-raising for CIP IV at the end of 2001, as its older funds started to go dry. The fund held its first close in May of 2002 with $724 million and a second close in July with $1.3 billion.

CIP IV is modeled after Coller’s three previous funds, and it will actively seek out and acquire positions in existing private equity partnerships and portfolios of direct investments. The firm has not set any boundaries in regard to the size or geography of its investments, and as with every other fund of Coller, it will allow for co-investments.

CIP IV counts CalPERS, the State of Michigan, General Motors and Barings among its returning limited partners. Canadian Pension Plan and Barclays Pension Fund represent some of the more notable new LPs signing on. Of the fund’s commitments, 47% come from North America, 38% from Europe and 15% from other parts of the world. -K.M.

Messier Mum on New Venture

For a man that once posed for a photo spread skating in New York’s Central Park and referred to himself as the “master of the world,” ousted Vivendi Universal chairman and CEO Jean-Marie Messier is being very coy about his latest venture-a private equity shop called Messier Partners.

An upcoming Wharton conference in Europe, at which Messier is a keynote speaker, lists the private equity firm (recently incorporated in Delaware ) as Messier’s current occupation but little else. The French magazine Liberation called it a hedge fund, while the Los Angeles Times quotes Messier describing it as a “boutique investment bank.”

The establishment of Messier Partners is a return to Messier’s roots at Lazard, where he started and managed the French investment bank’s leveraged buyouts group in the late 1980s. It was one of the first LBO funds in Europe. -M.V.C.

Burrill Closes on $67M

Despite the rain that’s dampened the plans of several funds, Burrill & Co. is flush with cash. The firm, based in San Francisco, is about to close on two new venture funds. Nine months after it began knocking on the doors of institutional investors, the firm has made a $67 million first close on the Burrill Life Sciences Capital Fund, which has a target of $250 million. It hopes to close on the fund in several months. In addition, with almost $150 million in commitments from corporate investors, Burrill plans to close the Burrill Biotechnology Capital Fund II by the end of the year.

Burrill Life Sciences Capital Fund will invest in early- to mid-stage biotechnology and life sciences companies, specifically in the bioinformatics, health care and therapeutics sectors. Coming in on A, B or C rounds, the firm will invest between $3 million and $10 million in each portfolio company. The fund will invest in up to 40 startups.

So far, IBM Corp. of New York, North Carolina Retirement System, Denmark’s Sampension, the Scottish Widows Pension Fund in Edinburgh, and the United Kingdom’s Unilever have signed on as limited partners. All but IBM are new investors with Burrill.

The fund will remain open to investors until the end of March.

Burrill’s biotechnology fund, the firm’s second fund dedicated exclusively to biotechnology, is open only to strategic investors. Like the firm’s original biotechnology fund, which closed in 1998 with $140 million in commitments, this one will target startups developing drug delivery, therapeutics and bioinformatics technologies and medical devices. It will invest approximately $5 million in each portfolio company.

Both funds may co-invest with other Burrill venture funds, but they will only do so in new deals, so that the new capital is not used to support old investments that have gone sour. The new funds will not do any PIPE deals, and neither fund has made its first investment. Once the new funds close, Burrill will be on track to make 10 new investments over the next 12 months. -C.B.

Tullis-Dickerson Raises $122M

Early-stage life sciences investor Tullis-Dickerson & Co. has closed its fourth venture fund-Tullis-Dickerson Capital Focus III LP-with $122 million in commitments from individual and institutional investors.

The Greenwich, Conn.-based firm will scout investments in the areas of biotechnology, health-care information technology, bioinformatics, medical devices and health care services, with a special interest in cell therapies. It plans to finance about 15 companies, for an average of $8.1 million each.

The fund’s investment strategy is to get in early and stay with the company through subsequent rounds of financing in order to build it to maturity, says Jim Tullis, the firm’s founder and chief executive.

Although Tullis-Dickerson is a seed-stage investor that makes initial investments between $500,00 and $1 million, it will invest up to $10 million over the course of a company’s life cycle and bring in a syndicate of investors to fill out the later rounds. -C.B.

Cross Atlantic Buoyed by $250M

What began as a meeting between an Irish entrepreneur and a Philadelphia-based venture capitalist in 1998 has evolved into a full-fledged venture firm that invests U.S. capital in the United Kingdom.

Four years later, with its first fund now fully invested, Cross Atlantic Capital Partners is raising capital for a new venture fund. Twice as big as its predecessor, Cross Atlantic Technology Fund II is expected to close with $250 million under management by the end of March 2003.

Although more ambitious in size and scope than Cross Atlantic’s debut fund-this one will mark the firm’s entree into Scotland-the Radnor, Pa.-based firm’s latest offering will stick to the tried and true strategy of its predecessor. It will invest across three sectors: enterprise software, information technology and enabling technologies like nanotechnology. It plans to lead the second round of institutional financing, committing between $2 million and $5 million to each portfolio company.

The fund recently closed its first deal in Scotland, a first-round financing for VEBNet, an Internet-based portal for employee benefits.

While the firm’s earlier fund split its investments equally between England, Ireland and the United States, the new fund will focus heavily on U.S. deals. About half of this fund’s capital is expected to fall in the United States, with the remainder split between deals in England, Ireland and Scotland. The firm has outposts in Dublin, Edinburgh and London.

Like Cross Atlantic’s deal flow, investors in the fund are streaming in from both sides of the Atlantic. The Pennsylvania State Employees’ Retirement System, an investor in the firm’s first fund, has committed $12.9 million to the fund. An unnamed Scottish institutional investor is expected to invest, as are a number of wealthy Europeans.

The fund made an initial close in late December 2001. It is expected to close at the end of the first quarter of 2003. -C.B.

St. Paul Loses $109M

Noticeably absent from the private market transparency debate have been corporate venture investors. Why? Because most of these folks have been publicly disclosing their performance results ever since they started.

The most recent example is St. Paul Venture Capital (SPVC), a $3 billion investment manager affiliated with and solely funded by insurance group St. Paul Cos.

SPVC suffered a third-quarter pre-tax net realized loss of $109 million, according to St. Paul Cos.’ third quarter earnings release. The loss included $56 million related to the sale to Lexington Partners of SPVC’s indirect investments in third-party venture capital funds, which had a carrying value of $126 million. In addition to generating $70 million, the secondaries sale also took $77 million of future funding commitments off the books.

The SPVC direct investment portfolio was valued at $581 million at the end of Q3, compared with a cost basis of $617 million. The group, which maintains multiple offices, is currently investing out of a $1.3 billion fund raised in 2000. -D.P.

Intel Creates 802.11 Fund

Intel Capital will invest up to $150 million over the next two years in startups working on technologies that use the 802.11 wireless standard, formalizing an investment priority that it has pursued with vigor over the last several months.

As Intel Corp. prepares for the launch of its mobile processor platform-codenamed Banias-Intel Capital will be charged with ensuring there are enough functioning wireless networks available to make the platform appealing to consumers.

Capital for Intel’s wireless investments will be drawn from its $500 million Communications Fund. “We’ve set aside $150 million for investments in this area to proliferate the deployment of WiFi [the nickname for 802.11] networks and to create WiFi products and standards worldwide,” says Mark Christensen, vice president and director of Intel Capital’s communications investment group.

Banias is the first chip Intel has designed specifically for laptops. Previously, the company enhanced desktop processors to counteract heat, power and voltage issues to make them compatible with laptops. The Banias processor will be optimized for laptops and allow users to connect to wireless local area networks (LANs).

Intel Capital’s wireless strategy is about linking laptops to wireless LANs. The firm’s new wireless investments will target four areas for investment: wireless services/applications/channels, hardware, software and component technology.

Intel has closed six wireless deals since January, raising the total amount it has invested in 10 wireless investments to $25 million. The firm has three people dedicated to 802.11 investments and dozens of scouts in its offices in Australia, Europe and Israel that are its eyes and ears abroad. -C.B.

Pantheon Closes Asian Fund

With $100 million in commitments, Pantheon Ventures has closed its third fund-of-funds (FoF) with a mandate to invest in private equity funds in Asia.

Pantheon began investing in the region in 1983, but it did not raise its first Asia FoF until 1993, when it closed Pantheon Asia Fund I with $66.5 million. That fund was followed in 1997 with Pantheon Asia Fund II, a $169 million FoF.

Like its predecessors, Pantheon Asia Fund III will invest in balanced-stage, Pan-Asian funds. The fund has already made a commitment to Walden International’s $1 billion Pacven V. Pantheon would not disclose the size of its investment. Pantheon has been an investor in Walden’s four previous Asian investment funds, and the new fund will likely invest in other long-standing Pantheon partnerships.

The firm has drawn on commitments from 11 institutional investors, mostly European corporate pension funds that are investors in Pantheon’s previous Asian fund of funds.

Pantheon Ventures is a global private equity investor, managing regionally-specific FoFs through its offices in Brussels, Hong Kong, London and San Francisco. -C.B.

Techno Has the Beat

Techno Venture Management has closed TVM V Information Technology with a total of $125 million. Even though it didn’t meet its target of $244 million, it is the largest venture fund for high-tech investments in Germany this year.

“In early 2001 we set the target, but it was always clear that this would not be a hard number,” says Theresia Wermelskirchen, a manager with Techno Venture Management, which is based in Munich.

Fund VIT’s size is similar to that of TVM IV Fund’s information and communications technology portion ($146 million). TVM IV Fund capped out at $293 million and is now fully committed.

TVM VIT will invest in about 20 early-stage companies over the next three years, for an average of $6.25 million per deal. Like its predecessors, the fund will focus on core technologies, such as business process software, system and network management, service integration, components, devices, subsystems, and system engineering frameworks.

Limited partners in the fund include Adveq, Allianz Group, CAM Private Equity, Dansk Kapitalanlaeg, Frank Russell Capital, GE Capital, Gerling, the Government of Singapore, Helvetia Patria Versicherungen, ITX Corp., Kredietbank Luxembourg, Minnesota Life Insurance Co., NIB Capital, Siemens Venture Capital, Swiss Life, Technologie-Beteiligungs-Gesellschaft der Deutschen Ausgleichsbank, UBS, the University of Pittsburgh, Versicherungskasse der Stadt Zurich and Winterthur. -D.F.

Veritas Raises $40M 2nd Fund

Targeting seed-stage technology companies in Israel and the southeastern United States, Veritas Venture Partners has closed its second investment fund with $40 million.

The fund will target four technology sectors: communications, enterprise software, security and medical devices. It will invest about $2.5 million in each portfolio company over time.

Among the companies Veritas has backed are media company RichFX, satellite communications carrier Gilat Satellite Networks Ltd. and medical device maker ESC Medical Systems Ltd. The new fund will scout data and network security tools, endoscopic tools and vascular diagnostics.

Drawing on institutional investors from Asia, Europe, South Africa and the United States, the fund’s list of limited partners includes Anglo-American Corp., IDB Holdings, Invesco, Old Mutual, Silicon Valley Bank, Vertex and Frank Bonsal, a co-founder of venture firm New Enterprise Associates. -C.B.

JPMP Posts $299M Loss

J.P. Morgan Chase & Co. (NYSE: JPM) reported another quarter of poor earnings marked by major losses in its JPMorgan Partners (JPMP) private equity portfolio. This marks the ninth straight quarter that JPMP has lost money for its parent bank, and its most recent results are by far its worst.

Net losses for JPMP in Q3 2002 totaled $299 million. That is more than double the $125 million loss it posted in Q2 2002 and nearly triple the $105 million loss in Q3 2001. The New York-based private equity group first reported negative earnings in Q3 2000, but those amounted to just $25 million following $298 million of gains in the previous quarter.

The higher losses between June and September were driven by $290 million of write-downs and another $120 million of net mark-to-market (MTM) losses on public securities, which were partially offset by $111 million of net realized gains. Book value at quarter’s end for the group telecom portfolio was $386 million, while its media portfolio was valued at $257 million and its technology investments were valued at $769 million. The JPMP public portfolio book value is now down to $484 million.

Bank executives said during an earnings call that JPMP invested about $300 million in the third quarter and that the group planned to make $1 billion worth of investments per year. If this happens, the bank estimates that private equity would account for 15% of the bank’s total equity holdings, down from the current mark of 20% and its peak of 37%.

“We’ve made some mistakes, not just for this quarter but also in our prior quarters,” says William Harrison, chairman and chief executive of J.P. Morgan Chase. “In particular, our mistakes have been too much concentration in the telecom space in private equity and in lending.” -D.P.

Outlook Positive on $140M

Outlook Ventures-previously known as iMinds Ventures-closed its third early-stage venture fund with $140 million in commitments.

The San Francisco-based firm will invest between $5 million and $10 million in companies that build enterprise and communications software, provide software support or develop Internet services.

On the market for about a year, the firm drew on previous investors to fill out the fund. Outlook raised a $15 million debut fund in 1995 and followed that with a $70 million offering in 1999. Both funds drew institutional and individual investors from the United States, Asia and Europe. All of the firm’s past limited partners made commitments to Outlook’s latest fund.

With the new fund, Outlook hopes to flesh out its investment team. It presently has three partners on board. -C.B.

CalPERS Ups PE Allocation

Already the largest private equity investor in the world, the California Public Employees’ Retirement System (CalPERS) will increase its target allocation to private equity over the next three to five years.

The Sacramento-based pension fund currently allocates 6% of its $135 billion portfolio to private equity investments. Its board is expected to approve a change to the fund’s asset allocation mix that will raise its private equity target to 7%.

CalPERS’ private equity portfolio includes $16 billion worth of active commitments to 340 private equity partnerships. Some $6.6 billion is invested, while the remaining $9.4 billion has not been drawn down.

While increasing its PE commitments, the pension fund plans to reduce its fixed income exposure from 28% to 26% and increase its real estate exposure a single point to 7%.

CalPERS’ alternative investment portfolio has returned 11.4% since it was organized in 1990, but the fund’s private equity portfolio has returned a net IRR of 1.9% over the last four years.

Although CalPERS is not the first, it is the largest institutional investor in the past year to drive deeper into the private equity markets in order to boost returns. Last October, CalPERS’ cross-town rival, the $100 billion California State Teachers’ Retirement System (CalSTRS), increased its private equity allocation from 5% to 8% of its overall investment portfolio. -C.B.

Baring Closes Asia Fund II

Baring Private Equity Partners Asia has closed its second fund at $257 million, the largest fund raised in Asia this year. The firm originally planned to raise $350 million to $400 million, but it lowered its target to $300 million in June.

Jean Eric Salata, a managing partner with Baring Private Equity Partners Asia, is happy with the closing, despite the fund falling short of its second target. “With stock markets down 50% to 80%, the purchasing power of a fund today is two-to-three times an equivalent amount invested prior to 2001,” he says. “Achieving a fund that is about 15% lower than our last fund we think is a good result.”

The new fund, called Baring Asia Private Equity Fund II LP, will invest about $10 million to $25 million over the life of an investment. About one-third of the fund’s capital is devoted to early-stage deals, another one-third will go to later-stage expansion rounds and the remainder will be used to finance buyouts and corporate restructurings.

The fund will have a multi-stage investment strategy, which covers early-stage, expansion and buyouts. Right now, we see the best value in buyouts and expansion,” Salata says. “Our primary focus now is on asset sales and divestitures by overseas corporates who are restructuring or are in financial distress and are selling their Asian businesses.

“We are also very upbeat about the deals we are seeing in China and expect to provide expansion capital to Asian, U.S. and European companies that are expanding into China.” Fund II will also invest in the North Asian markets of Hong Kong, Taiwan, Korea and Japan, as well as in India and Singapore.

Investors who participated in Asia Fund I include Singapore’s Government Investment Corp., Invesco Private Capital Inc. and CDP Capital. -D.F.

Pentech Comes In Above Target

Pentech Ventures, a Glasgow-based early-stage fund, has closed its first fund, coming in above target at $35.3 million. The close of Pentech Fund followed a final commitment from the European Investment Fund of more than $7.85 million. The fund launched in July 2001 with an original target of between $23.5 million and $31.4 million.

Pentech Fund will invest between $400,000 and $1.5 million in early-stage technology companies based in the United Kingdom that have intellectual property with software content. It will focus on voice, infrastructure, telecom, publishing and software solutions and financial analysis tools.

To insure good investment practices, Pentech uses an advisory group of five veteran technology entrepreneurs based in the United Kingdom and the United States to help with deals. -A.S.

Horsley Bridge Cuts Fund VII

Fund-of-funds Horsley Bridge Partners received approval from its limited partners in November to reduce the size of its latest fund by 25%.

Horsley Bridge VII, vintage year 2000, was reduced to $1.57 billion from $2.1 billion. “It became fairly obvious we were going to stretch out our commitment pace beyond a reasonable time frame,” says Phil Horsley, managing director. “We didn’t see it appropriate to stretch this fund out five or six years.”

After the reduction, the fund was 60% committed to 20 partnerships. Horsley says it will be fully committed by the second quarter of 2005. – C.F.