Knocking down the wall between VC and buyouts

When buyout shop Hellman & Friedman teamed up with JMI Equity in April 2005 to buy DoubleClick Inc., it wasn’t interested in the venture capital firm’s money. It was looking for industry expertise.

JMI Equity, which backs software, Internet and business services companies at all stages of development, regularly finds and places executives in its portfolio companies. “You’ve got to partner with people who know the assets,” says Paul Barber, a general partner at JMI. In the DoubleClick deal, JMI plucked from its own ranks Venture Partner Bob Sywolski, a former CEO at Blackbaud Inc., to be executive chairman of DoubleClick’s board.

Together Hellman & Friedman and JMI wrote an equity check for about $340 million—most of that coming from San Francisco-based Hellman & Friedman—as part of the $1.1 billion delisting of DoubleClick, a company that helps manage banner ads on Web sites. By April of this year, the firms netted an 8x return on their money when they sold DoubleClick to Google for $3.1 billion.

As buyout firms move into the technology and health care markets, they’re running into venture capital firms more and more often. Sometimes, as with DoubleClick, they partner with them on deals. LBO shops Francisco Partners and Lightyear Capital are known to partner with VCs, having both teamed with venture and growth equity firm Insight Venture Partners on a few occasions in the past year. All told, Buyouts magazine (a VCJ sister publication) identified more than two dozen deals involving LBO-VC partnerships that have occured since the start of 2004, accounting for more than $3.8 billion in enterprise value (see related table).

Buyout firms are also providing exits for VCs through leveraged buyouts, add-on acquisitions and take-private deals.

Francisco, for example, recently bought venture-backed Ex Libris, which makes software for libraries; TA Associates recently bought venture-backed Alere Medical; and Berkshire Partners and Freeman Spogli & Co. recently teamed to buy TH Lee Putnam Ventures-backed N.E.W. Customer Services Cos. In addition, portfolio companies owned by buyout shop Silver Lake Partners have purchased a number of VC-backed companies in bolt-on type acquisitions.

You’ve got to partner with people who know the assets.”

David Golob, Partner, Francisco Partners

Francisco has been active in partnering with VCs, too. It has teamed with Insight Venture Partners and Sequoia Capital on deals in the past year. David Golob, a partner with Francisco, has his own explanation for why LBO shops and venture firms are partnering more often: There’s too much money in the venture capital business. “The venture capital industry is one that is not made for deploying large funds,” he says. While it is true that VC fund sizes have shrunk significantly since the bursting of the dot-com bubble, there is still a lot of capital sloshing around the industry.

Those venture firms that continue to raise large funds—such as New Enterprise Associates, which closed on $2.5 billion for its12th fund last July—are now more active in capital-intensive late stage deals and even PIPEs (private investment in public equity). “To the extent that GPs of VC firms have a desire to increase assets under management, they almost need to think about buyouts as a way to do that,” Golub says.

Buyers wanted

Direct purchases of venture-backed companies by LBO firms remain rare, but there have been a few recent examples.

When TA Associates paid $175 million to buy Alere Medical, a patient monitoring company based in Reno, Nev., it cashed out some of its prior backers, a large group that includes Cutlass Capital, Firemark Advisors, Flagship Ventures, Institutional Venture Partners, MTS Health Investors, Nevada Ventures, Redpoint Ventures, S.R. One Ltd. and Western Technology Investment. (Flagship and Nevada Ventures are known to have rolled over equity.)

At the time of the exit, the venture capital consortium had achieved a lot, helping the company expand its service areas from cardiovascular diseases to include asthma, chronic obstructive pulmonary disorder and diabetes. MTS Health Investors Senior Managing Director Curtis Lane says there were more avenues for diversification, but “given how much value we created through that initial expansion, we decided it was a good time to exit.”

When Francisco purchased Jerusalem-based Ex Libris last year, it was also dealing with a venture group that was ready for an exit. The startup, which makes software for libraries, was performing well, but it was not at the level of sales and growth where it could go public, notes Francisco’s Golob. His firm felt it would be able to build the company through add-ons and heavy investment. As for the venture backers, whose names were not disclosed, they had been holding the company for long time and “were just tired,” Golob says.

Companies backed by buyout firms can sometimes have an advantage over publicly traded strategic buyers in bolt-on deals because they can take a much longer view.”

Alan Austin, Chief Operating Officer, Silver Lake

Building blocks

A more common way for LBO firms to provide exits to venture firms is by making bolt-on acquisitions to their platform companies. In these cases, LBO firms act as synergy-reaping strategic buyers. With a platform already in place, the LBO firm doesn’t have to worry about cash flows that can support leverage.

Silicon Valley-based Silver Lake, which is presently raising a $10 billion targeted tech fund, has done a number of these deals. One of its portfolio companies, Serena Software, bought Newbury Ventures-backed Pacific Edge Software. Another Silver Lake company, SunGard Data Systems, bought San Mateo-based Aceva Technologies, which had venture funding from Accel Partners, Clearstone Ventures and Sequoia.

Companies backed by buyout firms can sometimes have an advantage over publicly traded strategic buyers when chasing these bolt-on deals, says Alan Austin, Silver Lake’s chief operating officer. For one thing, they don’t have to worry about justifying a dilutive deal to investors. An LBO shop is the kind of buyer that “can take a much longer view,” Austin notes.

Francisco has also bought a few VC-backed companies through its portfolio. Primavera Systems, a software maker, recently purchased Prosight, whose investors included BRM Capital, Generis Partners, Giza Venture Capital, Prism Opportunity Fund and Sequoia. In addition, Francisco’s business-to-business e-commerce company GXS in November bought UDEX, which was backed by 3i, Montagu Private Equity and Northbridge Ventures.

Add-on deals like the ones by Francisco and Silver Lake portfolio companies are becoming commonplace, says Giles McNamee, co-founder of McNamee Lawrence & Co. “There are very few deals we do where there aren’t a few PE guys in the mix,” he notes. “A third of the time they end up being the buyer.”