Last month, I wrote that TPG Capital’s $1.35 billion infusion into Washington Mutual was the worst private equity deal in history. Keeping with the theme of sweeping characterizations, TPG also seems to have been involved with the strangest venture capital deal in history. But TPG wasn’t actually the odd actor this time around. That dishonor goes to Highland Capital Partners.
I hate to kick a firm after it plied me with liquor and Wolfgang Puck food, but this is so bizarre as to give me no other choice…
Lexington, Mass.-based Highland earlier this year invested $20 million as part of TPG Capital and Apollo Management’s $17.1 billion buyout of Harrah’s Entertainment Inc. Let that sink in for a moment. An early-stage and growth-stage VC firm participated in a massive take-private acquisition in exchange for much less than a 1% equity stake. The $20 million check is virtually insignificant to mega-LBO firms like TPG and Apollo, but represented more than 2% of Highland’s current fund (note: Harrah’s is in Highland’s general fund, not its Tom Stemberg-led consumer fund).
Highland is clearly embarrassed by the deal, which it has already marked down significantly. You can’t find mention of it on the firm’s detailed website, and the firm’s normally-receptive spokesman has not returned any of my calls of emails (nor has partner Bob Davis, who led the transaction).
So why did Highland do it? That’s the $20 million question, and unfortunately I don’t have a terribly compelling answer. A few folks who attended Highland’s annual LP meeting say they were told that the deal would provide Highland portfolio companies with a big foot in the door at Harrah’s when it comes to future partnerships, contracts and/or acquisitions – particularly in terms of online gaming. Let’s hope those LPs are wrong, because the theory is full of more holes that a Caddyshack golf course. After all, why not then also buy $20 million of Microsoft stock. Or of Cisco, Google, Johnson & Johnson, etc.?
Maybe it was just a question of personal relationships. HBS professor Walter Salmon is a “merchandising domain expert” with Highland Consumer Fund, and once served on the Harrah’s board of directors. Moreover, current Harrah’s CEO Gary Loveman last year bought a 2.4% stake in the Boston Celtics, which happens to be run by Wyc Grousbeck, a former Highland partner who currently serves as an advisor. Again, I hope this isn’t the reason either – particularly because the existing Loveman relationship would negate any “foot in the door” rationale.
All of this leaves me at a loss. Every VC firm has plenty of bad deals, and Harrah’s will probably fall into that bucket for Highland. But this one is different because there seems to be no clear strategy, or at least one that would justify investment by a venture capital firm.
Sources I spoke to could come up with only semi-comparable, which was when Battery Ventures teamed up with The Blackstone Group to invest in the London International Financial Futures and Options Exchange. The differences there, however, were that the total deal was for just $91 million, and it was a situation in which Battery sourced the deal and brought it to Blackstone. In the case of Harrah’s, it was a competitive auction process that ultimately generated billions of dollars. Apples and grapefruits.
If anyone can make sense of this transaction – that includes you, suddenly-silent Highland – I’m all ears…