The National Venture Capital Association (NVCA) has chosen not to throw its weight behind a set of guidelines proposed in December that tried to set industry-wide standards for valuing portfolio companies and calculating fund returns. Instead, the NVCA urged its members to be open and forthcoming with their limited partners.
At its annual meeting in March, the NVCA recommended that, “Its members create, follow and communicate clearly the specific procedures and methodologies used for valuing their portfolios,” and that they conform to Generally Accepted Accounting Principles, when required to. If those procedures are unclear, the NVCA advises firms to take a cursory glance at the proposals set forth by the Private Equity Industry Guidelines Group (PEIGG).
PEIGG had sought to eliminate that sort of ambiguity when it made its proposals in December. It urged venture firms to evaluate and monitor investment on the best estimate of fair market value. That is, to carry an investment at its current resale value, rather than valuing a portfolio company based on its most recent round of financing.
The group asked VCs to report valuations on a quarterly basis to LPs and to establish valuation guidelines that general partners and limited partners would agree on.
“We’re glad that the NVCA said something, that they were not silent or agnostic on this thing,” says Stephen Holmes, InterWest Partners’ administrative partner in Menlo Park, Calif., and a PEIGG member. “My view of life in general is about taking baby steps. Things evolve as people think, read and change their minds.”
Even when the proposals were unveiled, however, they had little support.
Jim Breyer, a general partner with Accel Partners in Palo Alto, Calif., and the NVCA’s incoming president, expressed his reservations, as did Dick Kramlich, co-founder and general partner with Baltimore-based New Enterprise Associates.
PEIGG is a two-year old consortium of venture capital and buyout shops, institutional investors, industry consultants and attorneys.
To clarify its position on PEIGG, the NVCA sent the following letter to Venture Capital Journal:
As you may be aware, NVCA provided input to PEIGG in their drafting process based on member input and current market practice. Once the guidelines were issued in December, the NVCA Board studied the guidelines and solicited member feedback.
What we learned in that process is the following:
* The PEIGG guidelines are not far off from standard practice in today’s industry.
* The venture capital industry is typically more conservative than the PEIGG guidelines in respect to writing up valuations of portfolio companies. Most venture capital firms never write up values without a third party transaction as valuations for early stage ventures are extremely subjective and typically there are no similar companies to benchmark. It’s important to point out that the PEIGG guidelines are meant to apply to the full private equity asset class.
* Many in the LP community are uncomfortable with write-ups without third party events as well and would prefer for their GP’s to continue with their conservative approach to valuations.
The nature of the industry is that it is driven by private partnerships made up of GPs and LPs. The various reporting practices and policies are determined by both parties up front when setting up their agreement. LP requirements are reflected in that process.
NVCA commends PEIGG on their fine work and encourages our members to refer to their guidelines as they discuss this important issue with their limited partners.
CalPERS Expands Portfolio
Pushing forward on plans to increase the size of its private equity portfolio by $1.35 billion over the next five years, the California Public Employees’ Retirement System (CalPERS) made $250 million worth of new commitments to two investment funds in the first quarter of the year.
CalPERS invested $125 million in Silver Lake Partners II, a fund managed by Silver Lake Technology Management of Menlo Park, Calif. The Silver Lake fund – which has a target of $3 billion – will invest in buyout and recapitalization deals in the technology industry. Silver Lake’s first investment fund, a 1999 fund with $2.3 billion in its coffers, has posted returns of more than 30%, according to data supplied by CalPERS. CalPERS invested $65 million in that fund.
CalPERS also made a $125 million commitment to First Reserve Fund X, managed by First Reserve Corp. of Greenwich, Conn. That fund is slated to close at the end of March with $2.2 billion. It will take controlling positions in energy companies, with a focus on the services and manufacturing sectors for natural gas.
CalPERS was an investor in two previous funds managed by First Reserve. The firm’s $1.84 billion 1992 fund has posted gains of 26%. CalPERS invested $35 million in that fund. The firm’s 2001 fund, a $1.38 billion fund that CalPERS committed $125 million to, is still in the red. It has lost 4.6% of its value.
In total, CalPERS’ private equity portfolio is worth $7.7 billion, or 4.7% of the pension plan’s total assets. Nearly 40% of the pension fund’s private equity portfolio sits in corporate restructuring funds, another 20% is dedicated to expansion-stage capital. Venture capital funds account for one-fourth of CalPERS’ private equity allocation.
– Carolina Braunschweig,
LACERS Looks Outside the Box
The Los Angeles City Employees’ Retirement System (LACERS) made an $8 million commitment to Reliant Equity Investors’ debut fund last week, highlighting a trend that has public pension funds pouring capital into private equity funds that fall outside the mainstream.
Reliant is a Chicago-based investment firm founded in 2001 by Thomas Darden. Its first private equity fund is expected to reach $125 million and invest in later-stage middle market minority-owned and minority-controlled businesses, and in businesses that target the minority marketplace, says a source within LACERS.
Reliant’s investment strategy is an increasingly popular one. There are at least 24 firms investing in minority-owned and minority-focused businesses, according to a study prepared in July 2003 by the Ewing Marion Kauffman Foundation in Kansas City, Mo.
Together, such funds manage $2 billion and find most of their limited partners in pension funds, regional banks and insurance companies. Their portfolios most often include service companies, retail and wholesale businesses.
Last year, for example, Hispania Capital Partners in Chicago closed a $150 million fund to invest in Hispanic-owned businesses, including a Spanish-language newspaper publisher in Chicago. The fund’s limited partners include Duff & Phelps and Bank One.
While firms like Reliant might stray from the technology and life science companies most familiar to venture capitalists, Reliant’s strategy is just the thing LACERS was looking for. Last year the $7.8 billion pension fund vowed to commit $600 million to private equity investments after upping its allocation to that asset class from 5% to 7 percent.
Last summer the fund said it would devote one-tenth of that allocation to non-traditional private equity investments, those that reach beyond the scope of traditional buyout and venture capital deals.
– Carolina Braunschweig,
CalSTRS Alters Its Strategy
The California State Teachers’ Retirement System (CalSTRS) is slowly adjusting its investment strategy. It plans to move a larger percentage of its capital into venture and expansion-stage equity, while moving out of international private equity, distressed debt and mezzanine funds.
CalSTRS is tweaking a strategy that produced a return of nearly 19% in its private equity portfolio last year.
A semi-annual performance report prepared by the pension fund’s consultants, McKinsey & Co., was presented to the fund’s investment committee at its monthly meeting in Sacramento in March. It indicates that the pension fund’s $5.16 billion private equity portfolio is moving toward allocation targets outlined in an investment plan last July.
Its most recent investments reflect those changes. Since the fiscal year began in July, the pension fund has put $1.2 billion to work in the private equity markets, including $150 million in new commitments in January (the latest month for which records are available).
In January CalSTRS made a $100 million commitment to Onex Corp., a Toronto-based middle-market buyout fund targeted to top off at $1.65 billion. Buyout funds will comprise 55% of CalSTRS’ portfolio this year, according to its investment targets.
CalSTRS also made a $50 million commitment to Technology Crossover Ventures’ new $900 million early-stage venture capital fund, which closed in January. About 14% of CalSTRS’ private equity portfolio sits in venture capital funds. The pension fund wants to boosts that up to 20% of the total.
Equity expansion funds are also getting augmented. In the investment plan’s new exposure targets, as much as 10% of the portfolio will go to an equity expansion fund. They currently make up 7.2% of CalSTRS’ private equity portfolio.
At the same time, CalSTRS is decreasing its exposure to distressed debt funds, mezzanine and international private equity, which together make up about 24% of the portfolio.
– Carolina Braunschweig,
New Faces at CalSTRS
Gov. Arnold Schwarzenegger appointed two Republicans, two Democrats and one unknown to the board of the California State Teachers’ Retirement System, a pension plan with a $117 billion investment portfolio.
CalSTRS’ board controls over the investment and administration of the retirement fund. It sets policies, makes rules and has authority over all aspects of the pension plan and its administration. In recent years it has led the fund’s efforts to scout emerging managers for its venture capital portfolio and to make investments in alternative energy sources.
The governor appoints five of the 12 members of the board. The rest are elected by the system’s 735,000 members.
The new directors are Democrats Mark Battey and Miguel Pulido, Republicans James Gray, Gloria Hom and Kathleen Smalley, who is not affiliated with a political party. Battey is a managing director with Miramar Capitol and the former chief deputy controller and senior policy advisor to California State Controller Steve Westley.
Pulido is in his third term as mayor of the Southern California city of Santa Ana. Gray is the chairman of the Desert Community College Board of Trustees and the former chairman of Generation Trust Bank. Hom is a former economics professor who once sat on the board of Sallie Mae. Smalley is a managing director at Greenbrier Associates, a real estate financial services firm, and a lawyer who once clerked for U.S. Supreme Court Justice Sandra Day O’Connor.
– Carolina Braunschweig,