HarbourVest Partners held final closes in March on a pair of $2 billion funds-of-funds that will invest in the United States. One vehicle will focus on primary and secondary VC partnership interests, while the other will make similar plays in domestic buyouts.
Also, HarbourVest is raising a mezzanine fund-of-funds targeted at $1 billion. Fund-raising on all three funds commenced in mid-2002, with intermittent closes held along the way.
Brooks Zug, a senior managing partner with HarbourVest, acknowledges that the private equity markets have changed since his firm began charting its fund strategies – particularly the venture capital arena – but he says he’s still comfortable with the $2 billion capitalizations.
“You’ve had a downsizing of prior VC funds and new VC funds, but the secondaries market has picked up at the same time,” says Zug, who declined to discuss the mezzanine vehicle due to SEC solicitation restrictions. “So far, we’ve been pretty successful in acquiring secondary positions in VC partnerships in the U.S., including both traditional secondaries that are fully funded and others that are lightly funded and may be just 15 percent invested.”
Both the VC and buyouts efforts first called down capital in February 2002, and began investing at the same time.
Each fund is expected to invest between $200 million and $300 million per year with primary partnerships and another $100 million to $200 million with secondary purchases. Individual investment sizes can range from $10 million to $100 million.
Both the VC and buyouts funds were over-subscribed, Zug says, and many limited partners had to pare down their commitment requests. SEC filings show that each fund was launched with a $3 billion maximum capitalization, but a source familiar with the situation says that HarbourVest never seriously entertained the thought of raising more than $2 billion per fund.
The combined funds received commitments from about 120 institutions, including 41 U.S. public and corporate pension funds, 24 U.S. endowments and foundations, four U.S. insurance companies and 51 institutions based in Europe and Asia.
Among the venture capital fund’s domestic limited partners are the Colorado Public Employees’ Retirement Association, New York State Teachers’ Retirement System, Mineworkers’ Private Equity Trust, Key Bank, The Dairy Farmers of America Retirement Plan, Brown & Williamson Tobacco Corp. Retirement Fund and The Sherwin-Williams Co. Collective Investment Trust.
Woodside Wraps Up Fifth Fund
On the heels of its 20th anniversary in March, Woodside Fund closed its fifth fund with $146 million in commitments.
The firm, based in Redwood Shores, Calif., now has $330 million under management. It plans to add as many as 20 new startups to its portfolio over the fund’s three-year investment cycle, investing up to $20 million in each portfolio company.
The new fund will invest in enterprise software, electronic design automation tools and new fabless semiconductor technologies. Woodside will often lead transactions, build an investment syndicate to finance the deal, take a seat on the company’s board of directors, and then assign as many as two senior partners to guide each investment.
The fund has already led a Series B round in a maker of business networking software, says Woodside co-founder Vincent Occhipinti, but he declined to reveal the company’s name.
About 90% of the fund’s capital came from institutional investors – pension funds, foundations and endowments. There’s no money from public pension funds in the new fund – a decision that reflects growing concerns over issues of disclosure and how to evaluate fund performance, Occhipinti says.
Occhipinti founded Woodside two decades ago with Robert Larson and Charles Greb. (Greb is no longer an active investor, but maintains his role as a special limited partner.) The fund has a total of nine investors, including four managing directors: Occhipinti, Larson, Daniel Ahn and John Occhipinti.
– Carolina Braunschweig
Singapore Targets FoFs
SINGAPORE -This tiny but powerful commercial center – which has long been shadowed by its large communist neighbor to the north – is trying to lure U.S. private equity firms overseas with promises of tax breaks and other financial incentives.
“We want to attract firms like Hamilton Lane, Pantheon, Horsley Bridge, Grove Street, or State Street to manage Singapore-based funds-of-funds and to build a [FoF] industry in Singapore,” says Hwee Song Chua, deputy director of a division of Singapore’s Economic Development Board (EDB).
In an interview in late March with Venture Capital Journal at EDB’s headquarters in Raffles City Tower in Singapore, Chua said that the EDB plans to bring various FoFs to Singapore on a road show to seek their participation. Chua said EDB plans to bring FoF firms to Singapore soon and to make announcements before the end of the year, possibly to overlap with Singapore’s annual AsiaVest Conference in mid-October.
Singapore’s private equity industry is already well established. More than 150 venture firms have a presence in the country. Collectively, those firms manage more than $9 billion in funds invested in Singapore and throughout Asia, Chua says.
Most private equity professionals probably know Singapore through its investment arm, the Government Investment Corp. (GIC), which lately has been an active investor in tech startups. While it has a considerably lower profile than GIC, EDB is also a significant player in private equity and venture capital.
EDB is part of Singapore’s Ministry of Trade and Industry. Chua said that his division – EDB’s Enterprise Ecosystem Development Division – has focused on building its venture capital participation and Singapore’s venture capital industry through three investment programs over the past five years: direct investing, the Startup Enterprise Development Scheme (SEEDS), and the Techno-preneurship Investment Fund (TIF).
TIF is the largest of the three programs. It is a fund-of-funds with $1.3 billion committed to venture capital and private equity funds worldwide. It has made commitments to more than 60 funds, including 3i Capital Corp., DCM-Doll Capital Management, Draper Fisher Jurvetson, Granite Ventures, Sequoia Capital, TVM Techno Venture Management, Venrock Associates, Vertex Management and Walden International.
EDB’s SEEDS program invests in startups. Created in October 2001, SEEDS has committed $28 million to more than 108 portfolio companies, many of which develop emerging technology. Through the program, EDB provides matching funds of up to $300,000 in Singapore dollars (or $178,000 in U.S. currency) for startup ventures.
EDB also invests directly in technology startups. It provides growth financing for companies with products and revenue in matching amounts ranging from $250,000 to $1 million.
Chua says that as EDB moves forward in its FoF development effort it is likely to employ several types of incentives, such as 10-year tax exemptions on both fund management fees and capital gains made on portfolio investments, the ability to manage multiple investment efforts, and possible equity investments by EDB.
Chua cautions that there will be restrictions on FoF groups that set up shop in the country, which may again parallel those imposed on VCs accepting money from EDB. For example, FoFs would likely be required to deploy about one-third of their capital in Singapore-based companies and to hire and retain a certain percentage of staff from Singapore’s professional community. There are other requirements with regard to taxation due to Singapore’s participation in the World Trade Organization.
– Jerry Borrell
GP Departure Surprises Domain LPs
Citing philosophical differences over investment strategy, Arthur Klausner resigned from the general partnership of Domain Associates in March. He has been with the Princeton, N.J.-based venture capital firm for 14 years, including the past seven as a general partner.
Klausner and another Domain partner acknowledged that the timing of the move is poor, since Domain closed its $500 million sixth fund in December. At the time, Klausner said that prospective LPs asked a number of questions about the team, and they wanted to make sure that everyone was on board. He now says that there was no intention to deceive, and that he did not consider leaving until after the fund had closed in late December.
Limited partners were informed of the defection via letter, although some newer investors also received personal phone calls. “There was a reasonable amount of surprise among limited partners when we told them, but Domain has a large team for a VC firm and a deep team in terms of industrial knowledge,” Klausner explains. “One person leaving really shouldn’t slow down the firm’s momentum.”
As for why he chose to leave, Klausner says, “I wanted to do more on the investing side and the partners wanted me more on the firm administration side.” His partners weren’t terribly thrilled with the types of deals he was bringing to the table. Specifically, Domain prefers to invest in early-stage life sciences companies that already have proven some clinical efficacy or, even better, have a product on the market. Klausner, on the other hand, was partial to less mature companies that could best be described as “science-stage.”
“We are a consensual partnership in that you suggest deals you want to do, but everyone has to agree on them,” says Jim Blair, a general partner and co-founder of Domain. “The common denominator of Arthur’s deals was that they tended to have earlier sciences than we usually invest in, although we probably like to have two or three of those in a fund. I didn’t want Arthur to leave, but I do understand his decision.”
Klausner says he is available to help the Domain team with any issues that may come up. The firm has transitioned some of his board positions to other partners, but he will maintain his board seats at both Senomyx Inc. and Santarus Inc. Senomyx is a La Jolla, Calif.-based developer of flavor and fragrance molecules for consumer products. Santarus, a San Diego-based drug company focused on gastrointestinal diseases, which launched a $54 million IPO on April 1.
Klausner had no immediate plans as of mid-March, save for a couple of weeks vacationing in the Caribbean. After that, he says, he hopes to join another venture fund or find a partner and launch a new fund.
– Dan Primack
Valhalla Closes Inaugural Fund
Valhalla Partners closed its inaugural fund with $172 million after navigating the tumultuous waters of venture capital fund-raising. While the total falls below the firm’s goal of $200 million, the final closing is a triumph for any first-time fund, says Gene Riechers, one of Valhalla’s three general partners.
“This was an accomplishment in what was a somewhat difficult climate in raising venture funds,” Riechers says.
Riechers – who served as a managing director with FBR Technology Ventures before joining Valhalla – says that many limited partners were still suffering from allocation issues resulting from low public equity values. Thus, the fund fell a little shy of its goal, but he remains optimistic about future fund-raising. “[This year] will be a better fund-raising year than 2003 was,” he says.
Limited partners in the fund include DuPont, HarbourVest Partners, Investco, J.P. Morgan, Lockheed Martin, Quellos Group and U.S. Trust. While general partners of a fund normally don’t invest more than 1% of the fund, the GPs of Valhalla’s first fund invested nearly 12%, or $20 million.
The firm will primarily make venture investments, but will also do technology buyout deals.
Valhalla held a first close for $106 million in July 2003. The firm expected to hold its final close on the fund by late autumn of last year. Instead, it held a final close in December. Riechers says that the firm could have continued fund-raising but chose not to.
Valhalla has already made two investments. It invested in networking software provider Rivermine Software, which raised a $5 million Series A round last October. In December, Valhalla also invested in the $5 million Series A round of Secure Software, a provider of software security. The firm is close to finalizing its third deal and expects to make up to seven investments in 2004 in the areas of communications and networking, IT services, and software.
Valhalla was founded in 2002 by former New Enterprise Associates General Partner Arthur Marks. Former FBR Technology partners Hooks Johnston and Riechers joined him soon after.
The firm, which is based in McLean, Va., focuses on early-stage technology companies in the Mid-Atlantic region, with a concentration in Maryland, Virginia, and Washington D.C.
EVP, Summit Roll Out Debt Funds
Debt is hot. European Venture Partners (EVP) and Summit Partners in March closed on two debt funds that collectively raised nearly $600 million.
London-based EVP raised a $130 million venture debt fund, EVP II, its second in five years, while Boston-based Summit held a final close on its Summit Subordinated Debt Fund III LP, surpassing its $400 million target with a total haul of $465 million.
EVP II is a leveraged debt fund that will be underwritten by Deutsche Bank’s Alternative Assets Solutions Group. The European Investment Fund of Luxembourg will provide guarantees for the fund.
The fund plans to make debt investments alongside venture capitalists making equity investments in European and Israeli startups, says Marten Vading, an EVP director. Each deal will average about $2.4 million.
Vading will manage the fund alongside Ross Ahlgren, Maurizio Petitbon, Raoul Stein and Geoff Woolley from the firm’s offices in London, Stockholm and Tel Aviv.
Venture debt is a financing option for early and mid-stage companies that want to build out infrastructure and buy hardware. Venture debt reserves the equity placed by venture capitalists for expenses related to research and development, marketing and personnel.
For the venture-backed startup, debt financing can reduce the company’s equity dilution by slowing the company’s burn rate of cash reserves. It may also lengthen the amount of time between rounds of private equity financing. For venture capitalists, venture debt leverages the capital already invested in a company by adding a new source of funding to a portfolio company.
Silicon Valley Bank in Santa Clara, Calif., is a major venture debt lender, as are Comerica Bank-California in Palo Alto, Calif., and Dominion Ventures in Walnut Creek, Calif.
EVP’s first fund, a $191 million pool closed in 1998, has placed debt in 70 companies in 10 European countries.
For its part, Summit plans to use its debt fund to support only those companies funded by its own private equity funds. “Our real intention with these funds is solely for investing alongside our equity funds,” says Summit Managing Partner Martin Mannion. “We have the capability to invest elsewhere, but our first two funds have not done a deal without our equity funds, and we don’t anticipate this fund will either.”
The firm primarily approached past Summit limited partners to invest in this vehicle, and as a result more than 95% of the new fund’s investors have participated in previous Summit funds. Without the aid of a placement agent, the firm targeted public and private pension funds, university endowments, financial institutions and corporations. The Virginia Retirement System is the only LP that Summit would name.
This is Summit’s third vehicle targeting subordinated debt, following the 1994-vintage, $141 million Subordinated Debt Fund I, and the $330 million Subordinated Debt Fund II, raised in 1998.
In the upper tier of the financing arena, the mezzanine market has been pushed aside, as high yield has re-emerged in the past year or so. However, in the smaller deals, where Summit traditionally puts its money, the high-yield market has not had nearly as much of an impact. “In companies where there’s north of $35 million in EBITDA, high yield has cut into that market dramatically,” Mannion says. “Sub-$35 million [EBITDA], though, where there is at best three-and-a-half to four times total leverage, there usually needs to be a mezzanine tranche to get the financing completed.”
The firm says it will invest in transactions as low as $2 million and as high as $250 million, and, when investing equity, Summit will straddle the line between LBOs and later-stage venture capital. In the past, the firm has provided financing for B&W Loudspeakers, E-TEK Dynamics, iPayment, Keystone RV Co., Lincare, Network Associates/McAfee Associates, OPNET Technologies, OptionsXpress and others.
Summit expects to fully deploy the capital in the next four to five years.
Carolina Braunschweig & .Kenneth MacFadyen