Unlike venture capital funds that ballooned to billion-dollar levels four years ago and have been deflating in size since, dedicated secondary funds continue to get larger. In keeping with this success of secondary buyers, Lexington Partners plans to raise its sixth dedicated secondary fund this year for up to $2.5 billion.
The New York-based firm closed its last secondary fund, Lexington Partners V, in 2003 with $2 billion. The firm expected that fund to be more than 75% invested by the end of 2004. Lexington Partners VI will be targeted for between $2 billion and $2.5 billion. The firm hopes to have the first close by June and have a final close by the end of 2005.
Limited partners in past Lexington funds include the California Public Employees’ Retirement System, General Motors Investment Management Corp., Los Angeles County Employees Retirement Association, Pennsylvania State Employees’ Retirement System and Western and Southern Life Insurance Co. One potential LP that Lexington may be able to get into the fund before its first close is the New Jersey Department of the Treasury Division of Investment. The Garden State’s Investment Council approved a plan to invest 13% of its $66 billion in assets into alternative investments. The New Jersey plan, however, faces legal and political opposition.
“When we raised Lexington V, people’s backs were against the wall,” says Managing General Partner Brent Nicklas. “We’re in a different environment now.” He points out that while limited partners were cutting back on allocations the last time the firm was raising a fund, today many large institutional investors are increasing their allocations to private equity. There are also new entrants, such as the state of New Jersey, that could potentially be in the new Lexington fund before the first close.
Lexington Partners buys secondary interests in both buyout and venture funds, with a preference for buyout assets. The firm is also raising a $500 million middle-market buyout secondary fund.
The past few years have seen a boom in secondary fund-raising. The record for a single fund so far has been Coller Capital, which closed Coller International Partners IV in 2002 with a total of $2.6 billion. Earlier this month, AXA Private Equity announced it closed AXA Secondary Fund III with $1.04 billion.
Pantheon Ventures closed on a $900 million secondary fund, Pantheon Global Secondary Fund II. Goldman Sachs is raising a secondary fund of more than $1 billion, and Credit Suisse First Boston expects to seek a total of $1.85 billion in three separate secondary funds. Secondary private equity investors raised more than $4.2 billion for new funds in 2003 and more than $5 billion in 2002, according to Thomson Venture Economics (publisher of VCJ).
Bank One Sells Portfolio To Landmark
Investment banks continue to unload their cumbersome private equity assets. Bank One sold a private equity portfolio for $950 million to Landmark Partners.
The transaction represents virtually the entire third-party private equity portfolio of the Chicago-based investment bank and was closed in Q4 2004. The portfolio had been managed by One Equity Partners, a JP Morgan Chase private equity affiliate. JP Morgan acquired Bank One for $58 billion last January. Bank One invested in third-party private equity deals as well as venture capital and buyout deals. The group had concentrated on buyouts of manufacturers and industrial product makers in recent years.
The deal was made in an exclusivity agreement after Bank One approached many groups. While neither JP Morgan nor Landmark Partners would comment on the price paid for the assets, a source familiar with the deal says it traded at a discount of less than 15 percent. Landmark now completely manages the assets.
Landmark Partners, which is based in Simsbury, Conn., closed on $625 million in August for its latest fund, Landmark Equity Partners XI. The firm also quickly raised another fund specifically to help pay for the Bank One transaction. Landmark Equity Partners XII closed in December with $450 million. “We’re looking at a number of transactions similar to this one and looking forward to moving those along,” says Francisco Borges, Landmark’s chairman and managing partner. He says the Bank One deal was closed ahead of time with intense investor interest resulting in its supplemental fund being oversubscribed.
Last year, Landmark was a lead investor along with Goldman Sachs in Vision Capital’s $189 million fund to manage the investment portfolio of CS Structured Credit Fund. The deal was secondary buyout for a direct portfolio of companies
Landmark began making secondary investments in 1989. It has approximately $4.2 billion under management and has raised 14 secondary funds. In addition to its Connecticut headquarters, the firm has offices Boston and London.
Innovatech Portfolio Goes for $162M
The province of Quebec reached an agreement in December to sell the portfolio of venture capital group Societe Innovatech du Grand Montreal (Innovatech Montreal) to Coller Capital.
Coller will invest up to $162 million in the deal. Of that amount, $65 million will be put toward the purchase of the portfolio, which has more than 120 investments. Another $33 million will go toward committed follow-on investments. Coller also plans to invest an additional $64 million in the portfolio.
The government received 12 offers for the portfolio and chose Coller from the best three, says Herbert Manseau, CEO of Innovatech Montreal. The combination of a good price and follow-on commitments secured the deal for Coller, he notes. “Since this is a very young portfolio it was very important to the government [to have a commitment for follow-on funding], since a lot of our companies will need another round of investment before allowing for an exit.”
Manseau adds that Innovatech typically invests via tranches based on company milestones, especially for life science companies, and it wanted to insure that its commitments would be maintained.
The two parties were expected to decide in January how the portfolio will be managed. Financial services provider KPMG and law firm Desjardins Ducharme Stein Monast advised the Quebec government on the sale, which will likely be finalized by the end of February.
For Coller Capital, the buy marks another large purchase of a portfolio of direct venture capital investments. The firm stands alone in its more extensive purchase of direct venture. Most secondary buyers of its size have been reluctant to buy venture assets, citing increased volatility and past overvaluation. “A number of our competitors have shied away from venture, particularly from the 1999 and 2000 vintage year,” says Frank Morgan, head of Coller’s U.S. operations in New York. “With the right management and the right price some of those portfolios present an interesting opportunity.”
Morgan adds that the volume of direct portfolios Coller has bought in the past year is greater than that of its buyout LP interests, but that the buyout LP interests consume a larger portion of capital, particularly in the wake of its Abbey National deal in early 2004.
Last September, Coller and Dresdner Bank announced a $90 million deal that spun out a 22-company venture portfolio. The management team that spun out of that deal is now operating as Annex Capital. Innovatech’s CEO Manseau says he would favor a similar arrangement for the Innovatech portfolio. The Annex spinout was Coller Capital’s eighth such transaction.
The Quebec government announced in April 2004 that the government would sell the portfolio of Innovatech Montreal. Quebec’s premier, Jean Charest, had vowed to severely restrict government subsidies for businesses. Soon after Charest took office, the government froze all new publicly backed venture fund investments. The funds were able to make follow-on investments and make good on current commitments.
Government subsidies had been a centerpiece of the Quebec venture capital industry and have helped the province establish itself as the biotech hub of Canada. Companies doing research and development in Quebec can earn tax breaks from both the provincial and federal governments for up to 40% of the salaries of R&D workers and up to 100% of expenses. Lower costs attracted U.S. companies south of the border, and other subsidies and resources helped Quebec weather the recent industry downturn better than other Canadian provinces.
Innovatech was founded in 1992 and became a venture fund in 1998. It has invested in more than 220 portfolio companies in the life sciences, information technology and telecommunications sectors.
Atlas Sells Six Companies
Atlas Venture has sold a portfolio of six companies to the Omega Fund, a secondary fund managed by Geneva-based Omega Advisors. It is one of the first transactions in which a combination of public and private assets have been sold by a traditional VC firm from its legacy funds, according to Waltham, Mass.-based Atlas.
Otello Stampacchia, CEO of Omega Advisors, declined to disclose the price paid for the assets, but says it was “in the high double figures” of millions, and included substantial funds available for follow-on investments and other commitments such as build-on acquisitions. The sale proceeded under an exclusivity agreement.
The six companies in the portfolio are from three older funds that Atlas found it no longer had reserves to support, Stampacchia says. The companies Cropdesign, a Gnent, Belgium-based genetic crop developer; DeveloGen, a Goettingen, Germany-based drug discovery company focused on gene therapy that has merged with Israeli pharmaceutical company Peptor; Illkirch, France-based EntoMed, which develops peptides against bacteria; Micromet, a Munich-based developer of anti-cancer antibodies; NitroMed (NTMD), a Bedford, Mass.-based provider of cardiovascular-related drugs that went public last year; and Vasca, a Tewksbury, Mass.-based provider of dialysis products.
The Omega Fund focuses on buying direct health care-focused venture portfolios. While Omega Advisors is based in Switzerland, the firm is considering opening a Boston office and expects that all of its purchases will have a U.S. component. This transaction is the fund’s first. The fund was closed earlier this year. It seeks assets between $3 million and $150 million.
Stampacchia says that health care companies are particularly well suited to be bought and sold on the secondary market, given their long product development cycle and capital-intensive nature. He says Omega is looking at a number of portfolios comprised exclusively of U.S. companies.
The deal marks the further acceptance of the secondary market as a portfolio management tool. Typically traditional venture investors like Atlas have not turned to the secondary market, and sellers of direct venture portfolios have been corporate VCs, investment banks and other entities looking to end or sharply reduce their private equity exposure.
Dell Sells Venture Unit To Lake Street
Dell Ventures, as abrand, is officially past tense. Dell recently sold nearly its entire direct investment portfolio on the secondary market. (See related story, page 3).
The deal was done in two parts, with a set of under-performing portfolio companies being sold in January 2004 and a group of slightly better performing portfolio companies (like 2Wire Inc.) being sold last November. Lake Street Capital snatched up both portfolios. The San Francisco-based firm is among a growing number of firms doing brisk business in the relatively youngworld of direct secondary investing.
Dell spokesman Mike Maher confirmed the sale, but he stressed that Dell was not completely out of the private investment business. He says that the computer giant will continue to make occasional strategic investments in companies that complement Dell’s core business. He said he wasn’t sure why companies like 2Wire no longer fell within that bailiwick. He also didn’t have specific information as to the destination of the staff of Dell Ventures, except to say that some of them had been transitioned into the Dell Business Development Group, which is the division from which future investments would originate. (Additional reporting by Dan Primack.)
HarbourVest Brings on Abbey Vet
Boston’s HarbourVest Partners announced it hired David Atterbury as a vice president. Atterbury, who was most recently director of private equity for Abbey National Treasury Services, will work from the firm’s London office. Atterbury will focus on non-U.S. secondary deals. Abbey National sold off most of its private equity portfolio to Coller Capital in a deal announced early last year. Prior to working at Abbey, Atterbury worked for PricewaterhouseCoopers. HarbourVest, which was founded in 1986, has completed more than 400 secondary deals.