DuPont Capital Management, the pension fund manager of chemical giant E.I. du Pont de Nemours & Co., says it will increase its allocation for secondary purchases as part of its revamping of its private equity allocation. It has steadily increased its secondary investments over the past several years and now holds several venture partnerships through purchases from institutional investors.
The report of the secondary increase comes with the pension manager’s allocation change. The $1.1 billion private equity fund will increase its allocation to venture capital from 2% to 15%. It will make secondary purchases through the Wilton Fund, a joint venture with Boston’s State Street Global Advisors in which DuPont Capital invested $100 million. It will use up to 20% of that fund for secondary transactions and direct co-investments.
“We like the whole return characteristics of the secondary markets,” says Carmen Gigliotti, portfolio manager with DuPont Capital. “You can buy through the bad part of the J curve. You can see what you’re buying. You can buy those assets at discounts to fair value of the assets. For us, this is key when we’re trying to build a portfolio that outperforms the private equity indices.”
While DuPont Capital has no specified allotment for secondary investment, the pension fund is interested in greater secondary investing, with a particular interest in doing more direct purchase deals on its own.
The pension fund invested in Paul Capital Partners VI, which closed in 1998 with $270 million. Other private equity investments in DuPont’s portfolio include venture capital firms Citicorp Venture Capital, Edison Venture Fund and William Blair Venture Partners; buyout firms Greycliff Partners and HSBC Private Equity Fund; and funds-of-funds Crossroads Group and Horsley Bridge Partners.
Belgium’s Flanders Seeks Buyer
The remaining portfolio of Belgian venture capital fund Flanders Language Valley Fund (NASDAQ: FLVF) is expected to be sold to one or more secondary buyers as it winds down. The fund, which invested in language education, translation and interpretation technology, announced in November 2001 that it would wind itself down, with a goal of being completely shut down by the end of 2004. The firm was damaged by the embezzlement of $30 million from its Korean fund (FLV Fund Korean) and with its association with Belgian company Lernout & Hauspie Speech Products, which filed for bankruptcy after it was found to have engaged in Enron-style accounting practices.
Flanders, based in Aartselaar, Belgium, said in August that its board of directors agreed to enter into negotiations for a secondary market transaction for its entire portfolio. It began to accelerate the pace of its winding down in the first half of this year.
The firm said in a statement that a European-based secondary firm “shows real interest in the acquisition of all or at least the major part of the participation in the FLV Fund portfolio.” The secondary buyer in question asked for exclusivity and is conducting due diligence, Flanders said.
At the time it announced it would shut down, Flanders had 39 portfolio companies and had cut off all new investments. As of June 30 of this year, it had 28 portfolio companies, including CellPort Systems, Onset Technology and SyVox.
The fund is valued at about $18 million, down from $45 million in mid-2002. With new management in place following the embezzlement scandal, Flanders returned about $44 million to investors.
CPP Will Do More Secondaries
Providing a bright spot in a cold and dismal year for the Canadian private equity market, the Canada Pension Plan Investment Board (CPPIB) put nearly $400 million to work in buyout, late-stage venture capital and secondary funds.
The Toronto-based investment management board is allowed to invest 10% of its total portfolio in private equity. The investment board said the move would diversify CPPIB’s portfolio, as well as the portfolio of the Canada Pension Plan. CPPIB is an independent firm that invests funds from the Canada Pension Plan, which has a portfolio valued at $44.3 billion. It began investing in private equity in June of 2001.
CPPIB put an additional $25 million into Lexington Capital Partners V, a $2 billion fund run by Lexington Capital. That brings its total commitment to the secondary fund to $75 million. The investment board has also invested $90 million in Paul Capital Partners VII, a secondary fund that raised $800 million in 2001, and it invested $75 million in Collar Capital’s large $2.6 billion Coller International Partners IV.
The increase in Lexington’s fund reflects CBBIB’s commitment to secondaries, which can make up a maximum of 25% of its private equity portfolio. “From day one we talked about having an interest in secondaries,” says Mark Weisdorf, CPPIB’s vice president of private market investments. “Secondaries give us vintage year diversification and it allows us to dampen the J-Curve a little bit.”
Currently, the investment board has less than 20% of its private equity portfolio invested in secondary funds, up from under 12% in its first year. “Private equity is a long-term commitment,” Weisdorf says. “While our view was that up to 25% of the portfolio would be appropriate, we didn’t expect to get there by day one. In the first year we didn’t find as much as we were hoping for.”
While the investment board is not eyeing any new secondary funds, it expect to invest in new ones in the future, and it is very interested in increasing the commitments to its current funds. Weisdorf also wants to co-invest on secondary deals with its secondary GPs.
“We have always been open to working with our partners in secondary opportunities. We’re hopeful that all of our partners will identify opportunities where we can work with them.”
So far, Paul Capital has brought deals to the investment board, including the November 2002 joint purchase of a portfolio of fund interests from a financial institution for $182 million. CPPIB and Paul Capital Partners each acquired 50% of the portfolio.
Caisse Sells Half Its Portfolio
As part of a larger deal, Business Development Bank of Canada (BDC) will make a secondary purchase of half of a private equity portfolio owned by pension and insurance plan manager Caisse de Depot et Placement du Quebec.
On August 26, government-controlled BDC and Caisse announced that they will set up a $216 million fund for investment in small- to medium-sized Canadian startups. Each of the Montreal-based institutions will provide $108 million to the fund, which will focus on non-tech Canadian companies. BDC and Caisse will invest equally in each portfolio company.
The new fund, which so far has not been named, has an investment period of three years. BDC will manage the new investments and Caisse will invest amounts exceeding $1.44 million into Quebec-based companies.
As part of the agreement, BDC will make a secondary purchase on 50% of a Caisse portfolio for $14.42 million. The Caisse portfolio, which is comprised of 52 direct investments in companies and one small fund, will be absorbed by other Caisse funds, managed by BDC and jointly owned by Caisse and BDC.
The fund was formerly managed by Caisse affiliate CDP Capital Americas. The fund’s limited partners are individual investors who may invest up to $1.44 million each in the fund.
Caisse made the sale as a way to improve its returns on small-to-medium sized businesses, says Lucie Frenere, a spokeswoman for the firm. “We realized we weren’t positioned to get the best returns possible,” she says. “We looked to get a partner and went around and sought proposals from different institutional investors.” Freniere adds that Caisse transferred some employees to BDC and that the transaction is now complete.
The secondary purchase element of the agreement stems from Caisse’s shift in investment strategy from one of making both direct and indirect investments in companies to making only indirect investments in companies.
Michel Re, executive vice president of investments for BDC, says the purchase helps Caisse shift its investment strategy and at the same time gives BDC an increase in its “critical mass.” He adds that the portfolio holds the promise of exits. “These companies are doing all kinds of things,” says Re. “It’s not volatile, but there are some discussions on some of [the companies] for exits.”