Highland Capital: Smaller & Smarter

Highland Capital Partners has begun raising its eighth venture fund, with a target of around $400 million. That’s pretty large for a typical VC fund, but small for a firm whose past two vehicles came in at around $800 million (it also raised $300m for a consumer-focused fund). So, what gives?

The basic answer seems to be that Highland might be putting common sense above fee-mongering. I know, they might get kicked out of the club (at which point they can just retreat to Wyc’s Lexus Club in the Boston Garden).

Here’s what I mean: Both fund-raising and deal-making volumes are deflated right now, due to things like LP liquidity constraints and decreased valuations. So Highland will raise less now and, if the environment improves, go back out for a larger fund sooner than it normally would. If times stay tough, then it’s sized appropriately for a normal investment cycle.

Also worth noting that Highland’s seventh fund was less than 50% called through Q3 2008, according to data from CalPERS. They’ve probably passed the halfway point in the interceding six months (Cash4Gold, etc.), but it does indicate that Highland is beefing up reserves for existing portfolio companies. Those same CalPERS figures show a -10% net IRR for Highland VII (2006), a 15% net IRR for Highland VI (2001) and a -2.1% net IRR for Highland V (2000).
A Highland spokesman declined to comment, natch.