NEW YORK – After landing a $1 billion private equity round in March, idealab! is solidifying a syndicate of investment bankers to lead its public offering later this year.
After shopping the possibility of an initial public offering to the Street as early as December, Goldman, Sachs & Co. is believed to have won the beauty contest to lead the lucrative idealab! offering, according to one syndicate official familiar with the negotiations. A Securities and Exchange Commission filing for the idealab! IPO, which could value the Pasadena, Calif.-based VC north of $8 billion, was expected in late March.
As publicly held investment firms such as Safeguard Scientifics, Internet Capital Group and CMGI provide outsized returns to their shareholders, sources say a handful of other privately held venture capital firms are thinking about going public as well.
The list of rumored candidates speaks to the magnitude of the opportunity general partners see coming. At least a dozen different firms were mentioned, but the following names came up more than once – Draper Fisher Jurvetson, Kleiner Perkins Caufield & Byers, Benchmark Capital and, interestingly enough, CMGI’s @Ventures. Officials at these firms either declined to comment or did not return phone calls.
“I think everybody is looking at and evaluating the public markets,” said a general partner whose firm is looking at the option. “Look at ICG. It is a $30 billion entity that went public with no track record. A lot of these funds have track records, and it would be irresponsible not to consider these options.”
Indeed, there are plenty of incentives for VC firms to go public – namely, the chance to obtain higher public valuations, establish brand recognition and prepare a path to exit for senior partners.
“Firms have been trying to do it for 40 years, and Safeguard and CMGI are putting pressure on the SEC to relax regulations,” said Joseph Bartlett, a partner at New York-based law firm Morrison & Foerster.
The specific regulation to which Bartlett refers is the Investment Company Act of 1940. Under the rules of this act, an investment firm must hold a controlling interest in approximately 60% of its portfolio companies, otherwise the SEC considers it to be a mutual fund. Among other uses, idealab! has earmarked proceeds from the $1 billion placement to increase its stake in the 50 portfolio companies in its stable.
“We are very familiar with the 1940 Act and are doing everything we can to remain in compliance with it,” noted one idealab! official.
Bartlett worked with the Madison Fund in 1980 to push amendments through that would allow venture firms to list as public companies.
“Firms are asking that they be given latitude to be publicly held and not be treated as a mutual fund,” Bartlett said. “I submit that with this pressure, the dam is going to burst.”
Consideration of public offerings creates questions as to what would happen to limited partners. One California-based source says the LP issue is the “$64,000 question that no one has figured out yet.”
The general consensus seems to be that LPs would still invest in the firms, and that GPs would only float the carried interest in the public markets. However, some question that model, and acknowledge that the potential of antagonizing limited partners may prevent some from filing.
A final intrigue in the puzzle is that as the private equity market matures, senior partners are nearing retirement and want to secure an exit strategy, says a private equity pro at a bulge-bracket investment bank.
“It’s like a cult of personality – if the top person leaves then they are in trouble,” the source said. “Look at Putnam getting close to Tom Lee. They have sex appeal [for Putnam], and it is a natural exit for the [Tom Lee] senior partners.”
According to the source, the increased number of private equity firms partnering with groups that make long-term commitments to the funds – AIG/Blackstone, Thomas Weisel/CalPERS among others – signals an effort by all private equity firms, not just VCs, to move from specialization into generalized merchant banking.
To be sure, there is much work to be done before firms make the final IPO decisions, but the logic of the investment bank source seems likely to win over investment professionals.
“The only thing better than a 20% carry is someone putting a 25 times multiple on the whole portfolio.”