Secondary Dispatch: Notes –

Adding to the already record-setting pace of the private equity secondary market, Paul Capital Partners has launched its effort to raise Paul Capital Partners VIII. The San Francisco-based secondary firm expects to close on $800 million.

Paul Capital launched the fund in the fourth quarter and expects to have a first close sometime in the first quarter of 2004. It plans to hold a final close by the end of the second quarter.

While the firm has preferred buyout assets to venture assets over the past couple of years – just like many other secondary shops – it sees venture deals becoming more attractive. “On the venture side, I think that world is getting a lot more attractive now, particularly in some of the 2001-2002 vintage funds,” says Bryon Sheets, a partner with the firm since 1994. “We think those are going to be excellent buys in the next two to three years. We see excellent valuations of companies these days.”

Paul Capital recently won a $125 million commitment to its Paul Capital Top-Tier Investments II fund from the Florida State Board of Administration. The Top-Tier fund, a vintage 2002 fund-of-funds that now has over $500 million, makes both primary and secondary investments in venture funds.

With its eighth fund, Paul Capital is looking to expand its limited partner base with a focus on state pensions. “We expect the vast majority of our existing investors to re-up and are targeting a number of new relationships, including a few state pension plans,” Sheets says. Past limited partners include AT&T Investment Management Corp., BancBoston Investments, E.I. du Pont de Nemours & Co., Howard Hughes Medical Institute, J.F. Shea Co., QP Investments and Rice University.

Paul Capital’s strength lies in its ability to address a variety of sellers’ needs, Sheets says. It focuses on middle-market transactions and on deals outside the traditional large auctions for portfolios that its larger competitors dominate. “Some sellers just cannot absorb a large discount, so they’re going to be looking for ways to do something that is a bit more financially engineered than a traditional cash sale,” he says. “As a result, they’re going to be willing to listen to those who can bring something unique to the table that allows them to divest from this asset class without having a major accounting impact.”

Paul Capital was founded in 1991 by Philip Paul, who had served as chairman and chief executive officer of Hillman Ventures, the venture capital arm of the Hillman family private equity portfolio. In addition to its headquarters in San Francisco, the firm has offices in New York, Paris, and Basel, Switzerland.

Fund-Raising Sets Record

Dedicated secondary fund-raising for 2003 is expected to total more than $6.5 billion, outpacing the previous year, according to Columbia Strategy, a New York-based research and consulting firm.

Columbia estimates that more than $15 billion is available for secondary purchases. HarbourVest leads the pack with $3 billion available for deals. Other market leaders include Coller Capital with $2.6 billion and Lexington Partners, which closed on a $2 billion fund this year.

With the amount of capital available to secondary buyers may be at a record high, deal flow has increased dramatically. According to Columbia Strategy, the secondary market saw $3.4 billion in deals in 2002. Columbia expects the volume to keep growing in 2004.

HarbourVest featured prominently in two of the largest secondary transactions of the year. In Deutsche Bank’s sale of $1.5 billion of private equity investments that created MidOcean Partners, HarbourVest committed $160 million. The Boston-based firm ended the year having completed a potentially groundbreaking deal for portfolio assets of UBS. The UBS commitments total $1.3 billion. The secondary sale represents more than 50% of the UBS private equity portfolio and consists predominantly of buyout funds. HarbourVest and UBS have formed a joint venture named Tresser to acquire the partnerships.

It was a banner year for HarbourVest’s secondary team, which saw a round of internal promotions. Its team evaluated more than $10 billion worth of secondary assets in the first nine months of 2003, up from about $9 billion for all of 2002. It had already closed on more than $500 million in secondary deals, prior to the UBS announcement.

Keyhaven Adds Another MD

Keyhaven Capital Partners, a fund-of-funds firm raising a $169 million secondary fund, has hired its second managing director. Claus Stenbaek, a former partner and executive director with Danske Private Equity, has joined the London-based firm. He was a founder and managing director of investment bank Richmond Capital.

Keyhaven Capital was founded by former AXA London fund-of-fund leader Sasha van de Water and Chairman Michael Boxford, a former private equity investment professional with Graphite Capital.

Is Management a New Trend?

French secondary management firm Equitis took control of two venture capital funds with a combined total of 19 portfolio companies in the health care and IT sectors.

One of the funds is the Paris-based Human Health Investment Fund, which focuses on making venture investments in health care and biotech companies. Its limited partners include Innovatech du Grand Montreal. The firm would not disclose the name of the other fund, but it is a French venture capital fund with a focus on technology investments made in the early 1990s.

Since it was founded in 2000, Equitis has managed more than 150 portfolio companies on behalf of private equity investors. The company has seen 90 exits so far and currently manages 60. Unlike traditional secondary investors, Equitis is not technically a dedicated secondary firm, but rather a management company. It does not purchase assets from existing investors, but takes over management of portfolios for a share of returns on investment. It does not have any limited partners other than its founders Philippe Bertin, Stephan Catoire and Herve Thomas.

Earlier this year, Equitis was involved in the bidding battle for Viventures Partners’ Viventures II portfolio. Equitis and Alantech Capital proposed replacing the management team of the $680 million fund with their own managers and bailing out of portfolio companies that were not up to snuff.

The idea of such a secondary management service firm has been taking hold elsewhere in Europe. Last year England saw the launch of Nova Capital Management, which also provides secondary private equity management services.

Fading Flanders Seeks Buyer

Belgian venture capital fund Flanders Language Valley Fund, which is looking for a buyer, posted a loss of more than $575,000 in the third quarter. The losses continued as the fund expected to close on a secondary transaction. Reports indicated that negotiations with Arcis Capital and Strathdon were nearing an end.

The remaining portfolio is expected to be sold to one or more secondary buyers as it winds itself down. The fund, which invested in language education, translation and interpretation technology, announced it would start winding down in November of 2001, with the goal of being completely shut down by the end of 2003. The fund was voluntarily de-listed from the European NASDAQ exchange in mid-November 2003.

Resignation May Affect Strategy

Mark Weisdorf, who expressed keen interest in secondary deals to VCJ in September, resigned as vice president of private market investments for the Canadian Pension Plan Investment Board (CPPIB) in December. It is unclear if the departure will have an impact on the Canadian Pension Plan’s secondary strategy.

CPPIB manages a portfolio valued at $44.3 billion and has made commitments of at least $240 million to secondary funds run by Coller Capital, Paul Capital Partners and Lexington Capital Partners.

Landmark Makes Big Dent

Landmark Partners has closed on more than $250 million for Landmark Equity Partners XI, a secondary fund with a target of $750 million, according to documents filed with the SEC. The Simsbury, Conn.-based firm has raised roughly a third of its newest fund in just over a year.

In other news, Landmark lost two of its real estate partners, Robert Harvey and Richard Maine. The duo plans start their own firm. Trade newsletters cited a memo sent to investors stating that no new hires were expected for the real estate secondary division. Real estate deals account for about 30% of Landmark’s business.