PNC Equity Management Corp. not only seeks strong returns from its limited partnership investments but also is equally interested in using those relationships to help the firm make direct investments, says David Hillman, executive vice president of the Pittsburgh-based subsidiary of PNC Bank Corp.
As the private equity investment arm of one of the nation’s largest bank holding companies, PNC Equity has taken a rather judicious approach to private equity investing by carefully selecting its commitments to limited partnerships and direct deals.
“We’re looking for co-investment referrals from funds,” Mr. Hillman says. “We make sure that they know what we are interested in. And we show that we can react quickly to an investment opportunity, and that we are a good partner in deals.” If a limited partnership does not lead to recommendations on direct investments, PNC Equity will sever its ties to the fund, he adds.
Mid-Atlantic Venture Funds, for example, contacted its limited partner PNC Equity early last year about one of the venture firm’s portfolio companies, Net2000 Communications, which was in need of a second round of financing. Mid-Atlantic knew of PNC Equity’s interest in the communications industry, and, after reviewing the opportunity, PNC Equity became part of a syndicate of investors by committing $4 million to the company in May 1998.
Similarly, when Pacific Venture Group considered participating in a third round of venture financing for health-care company Kelson Physician Partners, the group called on PNC Equity. The G.P. and L.P. teamed up in December 1997 and co-led the deal, with PNC Equity investing $4 million.
Mr. Hillman, who co-founded PNC Equity in 1982, estimates that since inception the firm has completed about 20 direct investments based on fund referrals. He had been working at PNC Bank’s corporate banking division since the 1970s, when his colleague Gary Zentner suggested launching a private equity arm.
The bank’s board approved a business plan in late 1981, and PNC Equity was launched the following spring with an initial $4.5 million commitment from its parent. PNC Bank has upped its commitment over the years to between $200 million and $220 million in 1999, as the private equity arm continues to produce attractive returns, Mr. Hillman says. PNC Equity’s total investment pool exceeds $500 million.
PNC Equity targets 20% to 40% in returns from its partnerships, with expectations for mezzanine investments at the lower end and venture financings at the higher end. Actual returns from direct investments have been in excess of 30%, surpassing the 18% net returns on fund investments, Mr. Hillman says.
The firm’s performance has led to a growth in its asset base. Total investments, roughly split evenly between partnerships and direct deals, have doubled to about $370 million by the end of 1998 from $185 million in 1994, and the firm intends to “roughly duplicate” those figures by 2002, Mr. Hillman says.
PNC Equity focuses on later-stage venture capital investments in telecommunications, media and health care but also has invested in consumer retail. The firm, however, has avoided early-stage or technology investments since the mid-1980s because of “too many strike-outs” in these areas due to volatile pricing and market conditions, as well as rapid technological change, Mr. Hillman explains.
While PNC Equity has invested in or teamed with venture firms that invest in deals across the United States, the large majority of investments flow into traditional strongholds of PNC Bank such as the Northeast, Southeast, Mid-Atlantic and Mid-West. International investments are not part of PNC Equity’s strategy.
Direct venture capital financings typically range from $2 million to $10 million. Strong management teams and proven products and services are key determining factors for evaluating investment opportunities. PNC Equity’s commitments to limited partnerships range from $5 million to $15 million but occasionally are larger, Mr. Hillman says. The firm decides to commit greater amounts of capital, for example, only when an investment involves a long-time business partner. PNC Equity has invested in Warburg, Pincus Venture Funds since the 1970s, so “we have made some larger commitments to them,” he says.
Part of the firm’s limited partnership investment strategy is to cooperate with a venture firm “earlier in [its] lifecycle and become a valued partner rather than get on a sixth or seventh fund and beg to be there,” Mr. Hillman says.
PNC Equity has achieved high returns without any advisory relationship and does not intend to seek outside assistance, given its experienced management team, Mr. Hillman says.
A strategic plan by PNC Bank in late 1997 stated that PNC Equity should grow alongside its parent company and called for a stepping up of investment activity. The firm plans to deploy an additional $1 billion between 1998 and 2002, according to the plan. Actual investments should then reach between $700 million and $800 million, Mr. Hillman says. About $550 million will go into direct investments and $450 million will flow into limited partnerships, Mr. Hillman says.
The projected distribution between limited partnerships and direct deals is consistent with PNC Equity’s investment goals: “We have more of a singles and doubles than a homerun strategy,” Mr. Hillman says. “We are looking for a lot of solid hits and not too many strike-outs.” This approach is particularly suited for the investment arm of a large, publicly traded bank such as PNC, which values stability, he adds.
Although commitments to limited partnerships were lagging behind direct investments in the early 1990s, the two are now comparable. This year, as in 1998, PNC Equity will invest approximately half its money in partnerships and the other half in direct deals in venture capital, buyouts and mezzanine investments. Direct investments will be divided among venture, buyouts and mezzanine deals, with a little more weighted toward mezzanine investments, Mr. Hillman says. Within limited partnerships, however, venture capital is the dominant investment category. Venture investments make up more than half PNC Equity’s limited partnerships, with the remainder in buyouts and mezzanine investments, Mr. Hillman says.
Mr. Hillman was named executive vice president of PNC Equity in 1983. He and Mr. Zentner, who now is president, focus on venture capital investments. They are assisted by Robert Daley, who joined the firm as assistant vice president and associate in 1998, and Wali Bacdayan, who joined as an associate in 1997. The four men focus on direct venture capital investments but also play a key role in limited partnership investments. Vice President Laura Vassamillet, who was hired in 1998 amid the firm’s rising commitments to limited partnerships, serves as a gatekeeper for all L.P. investment opportunities.
Much like other private equity arms of banks, PNC Equity typically declines to manage outside money. However, the group recently decided to make an exception when the Public School Employes’ Retirement System of Pennsylvania decided to seek a venture firm to manage a mezzanine fund, the Pennsylvania Capital Fund. “We thought it was consistent with what we are doing already, and therefore we accepted,” Mr. Hillman says. The two organizations agreed on a $25 million contract, which was slated to be signed in December. PNC Equity will match each investment by the fund at least dollar-by-dollar. The fund typically will invest $5 million to $15 million per deal in more mature companies with headquarters or substantial operations in Pennsylvania, Mr. Hillman says. While the vehicle does not have any industry focus, it will not invest in fields with rapid technological change, he says.