St. Paul Sacks FoF Strategy –

Lopping off the final vestiges of its fund-of-funds past, St. Paul Venture Capital has agreed to sell the remainder of its private equity fund portfolio to Lexington Partners. This is Minneapolis-based SPVC’s fourth and final secondaries sale, each of which has involved auctions won by Lexington Partners.

SPVC declined to provide pricing details, and Lexington Partners declined to comment on the sale.

Zenas Hutcheson, managing general partner with SPVC, acknowledges that the secondaries market is a good place for bargain hunters right now.

“We began to change our [strategy] five years ago by dramatically increasing our number of direct investments and hiring new partners who weren’t interested in managing a fund portfolio,” Hutcheson says. At the time, SPVC held stakes in dozens of funds managed by some of the nation’s leading private equity shops. Rather than selling its entire portfolio at once, SPVC began divesting itself of stakes in those funds that did not focus on venture capital. The first sale to Lexington occurred in the fall of 1999, with subsequent offerings in the winter of 2000 and the summer of 2001. Each sale included between 15% and 25% of SPVC’s private equity holdings.

As of this year, SPVC had given up its limited partner position in such buyout shops as Banc Funds, Century Capital Partners, Stonebridge Partners, Westin Presidio Capital and Willis Stein & Partners. The firm had also sold its position in a handful of venture groups, including Redpoint Ventures and Versant Ventures.

The final piece of the SPVC fund of funds (FoF) was put up for auction earlier this year. Lexington bested five other bidders, and walked away with positions in about seven new venture capital funds.

“Our basic feeling was that the 1999 and 2000 funds are basically a lost generation that we would have had to hold on to for three years or more if we didn’t sell them now,” Hutcheson says. “Our intent was to sell the remainder of our partnership positions, and this was the bulk end of them.” He adds that SPVC will continue to back affiliated regional investment groups like the Quatris Fund.

The deal must be approved by certain involved partnerships that feature “right of first refusal” clauses. For example, Accel Partners two weeks ago sent its LPs an email that offered the opportunity to purchase some Accel fund interests being sold by SPVC. Accel declined to comment, but a source familiar with the situation says he doubts that anyone will accept the offer given the asking price. “What Lexington is essentially doing is overpaying for the Accel piece, but offsetting it by underpaying for some of the other assets,” he says. “That way, no one will take any of the stake because there is no reason for someone to pay above net asset value.”