ANNAPOLIS, Md. – St. Paul Venture Capital has created its fifth satellite fund, the late-stage Annapolis Ventures, which will be invested by a former managing director at T. Rowe Price.
Doug Hickman, who spent 14 years at the investment house, oversaw T. Rowe Price’s late-stage private equity vehicles, Threshold funds. Mr. Hickman will essentially perform the same work at Annapolis Ventures L.L.C., except he will act as an independent investor with a smaller fund. St. Paul has put up the fund’s total capital of $24.5 million, said St. Paul General Partner Pat Hopf.
Mr. Hickman will back companies on the East Coast and in the Southern United States, likely concentrating on deals in Maryland, Virginia, North Carolina, Texas and Louisiana. Mr. Hickman, who has focused on software and communications, also has invested in specialty retail and financial services. He does not, however, favor health-care investing.
Mr. Hickman was slated to leave T. Rowe Price in early May, and the agreement with St. Paul takes effect in mid-May.
The new managing director anticipates investing $2 million to $5 million per company. St. Paul intends to co-invest in many of Annapolis’s deals, but there is no formal agreement guaranteeing St. Paul access to Mr. Hickman’s deals.
The arrangement with Annapolis is similar to St. Paul’s agreement with Dave Stassen and Keith Eastman, who run another satellite, the medical-focused Upper Lake Growth Capital (VCJ, January, page 19). Other satellite funds are less independent, and St. Paul has veto authority over those vehicles’ deals, as well as the right to co-invest in each of them.
Molly Berger Wuthrich’s $15 million Perspective Capital, an early-stage consumer-focused fund created in October and based in San Francisco, was St. Paul’s first satellite fund (VCJ, December 1998, page 6). St. Paul also helped establish a San Diego medical-satellite fund, Scott Glenn’s Windamere Venture Capital. Carl Witonsky is running another satellite vehicle, the Pennsylvania-based Flying W Capital, which backs health-care information systems enterprises. St. Paul created the five funds to help spread its capital more efficiently.
T. Rowe Price has raised three Threshold funds, vehicles that invest in late-stage companies that might eventually make good candidates for the firm’s public-market investing.
The first fund totaled $74 million and was raised in 1984, prior to Mr. Hickman’s arrival. Fully invested and shut down, it returned an IRR of 7% after management fees, Mr. Hickman said.
In 1987, T. Rowe Price rounded up a follow-on effort of $105 million, which also is shut down. Its returns were 11.8%.
A $65.5 million third fund raised in 1995 is almost fully invested, and returns have been “stellar,” some 39% through the end of last year after the deduction of management fees but before the carried interest split, he said.
Mr. Hickman praised T. Rowe Price, but said that as the company has grown, small-cap public stocks have become less of a priority and, as a result, so have later-stage private equity efforts.
Mr. Hickman had known St. Paul’s Mr. Hopf for many years: the two met in business school, and Mr. Hopf, a former T. Rowe Price manger, hired Mr. Hickman. Prior to joining T. Rowe Price, Mr. Hickman had been an investment banker for a dozen years.
Mr. Hopf noted that the firm’s management fee will be added to the $24.5 million fund, instead of being part of it, giving Mr. Hickman the full dollar amount to invest.
The new Annapolis Ventures manager said he became affiliated with St. Paul to take advantage of the firm’s later-stage focus and co-investor capabilities. Leading a St. Paul satellite fund also means being able to bypass fund raising.
“The fund raising part of the business is probably the part of it I like the least,” Mr. Hickman acknowledged. “Returns [at T. Rowe Price’s private equity practice] are exceeding my expectations, but … the process of trying to tell investors what kind of rate of return you’re going to get in a market like this is hazardous.” The supply of capital and the quality of opportunities make such predictions difficult, he explained.
Successful T. Rowe Price portfolio companies that have gone public include: Entrust Technologies, a security-software company, TicketmasterOnline CitySearch, an event ticket seller, and Cyberian Outpost, an online computer-goods retailer.
Promising companies that remain private include Choridant Software, Forte Software and Corsair, a wireless telecom software and hardware company.