St. Paul VC Adds Public-Market Focus –

MINNEAPOLIS – A mutual fund expatriate has found a home in venture capital. In October, Kurt Winters joined St. Paul Venture Capital as a principal, charged with investing in small-cap public companies.

Winters had formerly been a vice-president at American Express Financial Advisors Inc. He also served as the chief investment officer for the value group, one of three mutual fund style groups, and managed the AXP Discovery Fund.

Winters said that mutual fund companies are primarily focused on retaining their assets and collecting management fees. “Where I was before has become the asset-gathering business,” Winters said. “This [VC] is the investing business.”

“The whole fun of the investing business is the quest for good ideas,” Winters said. So, Winters figured out a way that his public market skills could work in VC firms, and what did he do?

“I cold-called them,” he said, using a trick from his days as a stockbroker in the beginning of his career. Winters called about 10 VC firms during his search. Winters said other firms he called agreed with his idea but were not in position to hire somebody.

St. Paul is charging Winters with investing about 10% or 15% of its $1.3 billion St. Paul Venture Capital Fund VI, under an investment strategy Winters described as similar to VC.

Winters said the idea is to be like a venture investor in terms of partnership with the management. He expects a three-to-five year holding period and will seek exits through the standard VC ends.

Pat Hopf, managing general partner at St. Paul, said the objective is for a three-times return on investment.

“We [St. Paul] know how to build growth businesses,” Winters said, adding that he expects to look for “growth companies that aren’t working that way – fallen angels.”

“Wall Street can be unforgiving but that does not mean the business is tarnished,” Winters said. He said Wall Street expects linear growth from companies that are sometimes cyclical, and the companies pay the price for disappointing public investors.

Winters said he finds examples of battered companies in places like the communications sector, where some stocks have lost most of their values off their highs. He thinks some companies were hurt because they went public prematurely, and the public markets have since turned on developing companies.

St. Paul will be investing in public companies with market capitalizations below $750 million, and Winters expects $300 million to realistically be the high-end of his market cap range.

Each year, he expects to make three or four transactions with a sweet spot between $5 million and $15 million. There have been no investments made to date.

Winters started considering a career move in 1999, because he was discouraged by public investing and the small-cap environment.

“Small-caps have essentially been out of favor for five years and nobody cares,” he said. “It doesn’t matter to any place that’s big to have small-cap funds.” As an example, he pointed out that his Discovery Fund had $1 billion in assets which is large among small-cap funds, but it still counted for less than 1% of the $120 billion in assets of his employer.

From January 1995 when Winters began managing the fund to June 2000 when new management officially took over, the Discovery fund returned 11% annualized, compared to 18% from the Russell 2000 Growth and 25% from the S & P 500, according to Wiesenberger InvestmentView.

The fund beat its peers in 1996 and 1997, but remained flat through 1999 when many of its peers soared.

“The Discovery Fund shows the difficulty of managing the money according to a style box, and I’m looking forward to investing in the best ideas out there regardless of the style box and when those investments become available,” Winters said.

Hopf said St. Paul independently started considering the public-investing position in May 2000, but before they could finalize their plans, Winters called them in July.

Both men noted philosophical differences between private and public investment professionals.

Hopf said the difference is that VCs are primarily optimists who have to buy into entrepreneurs’ dreams and become part of their team to realize their success. He thinks public investors tend to be more cynical and skeptical of their investments.

Winters said that he thought the VCs were more interested in a company’s long-term issues.

Winters added another distinction. “Until I came and had a Bloomberg [screen], St. Paul had no connection to the public market.”