The Month in Secondaries –

Canadian native Alan Held went to Israel 10 years ago as a venture capitalist investing in seed and early-stage companies. He served as a managing director with Evergreen Capital Markets, a partner with Vertex Management and a general partner with Israel Seed Partners.

Things are different now. A depressed technology sector and the ongoing Palestinian conflict have not been encouraging signs for people bullish about Israel. The great increase in investment in venture capital funds and startups during the 1999 era boom has left Israel ripe for secondary investment.

Seizing on the opportunity for secondary investment, Held founded Vintage Ventures, a secondary investment firm focused on secondary purchases of Israeli venture capital assets and portfolios. The firm recently closed on $18.9 million for its inaugural fund. It has a goal of $60 million, which Held expects to close on by the end of the year. SEC documents filed by the firm reveal that Vintage will take as much as $75 million for the fund. The fund’s limited partners thus far consist of Canadian, Israeli, Swiss and U.S. institutional and corporate investors. The fund has a few endowments as investors as well.

“It’s a relatively new market here,” says Held, who works along with chief financial officer and former Goldman Sachs analyst Abe Finkelstein as an associate. “The Israeli market is only now reaching the maturity level for a secondary market. There’s been about $8 billion raised by Israeli venture funds since 97 and roughly a billion invested directly by foreign corporations and foreign VCs. That’s our target market. We’ll either buy directly from VCs or from corporations that don’t plan on making any follow-on investment.”

The fund will be flexible with regard to deal size, but Held expects to do deals that are relatively small for the secondary market. He expected to close on his first few deals in July.

Being a smaller fund with an exclusive focus on Israel frequently brings Vintage into partnerships with foreign secondary investors. It has partnered with six such firms so far. “We’re working with a number of non-Israel secondary funds,” says Held. “It’s mostly cooperation as opposed to competition with the foreign secondaries. There’s clearly an advantage to being on the ground here. Between myself and my colleague, we’ve met most of these funds.”

Vintage Ventures is a part of the Dorvat Group, an Israeli private equity firm that also initiated Carmel Ventures, which makes direct investments in software companies; Dor Ventures, which invests in imaging, printing and publishing companies and Plenus, a venture lending fund.

Lexington Caps Largest U.S. Fund

Lexington Partners closed its fifth secondary fund, Lexington Capital Partners V, with $2 billion. It is the largest U.S.-based secondary fund ever raised and the second largest secondary fund ever, coming in behind the $2.5 billion fund that Collar Capital raised last year. Lexington’s previous fund, Lexington Capital Partners IV, closed with $600 million in 2001.

The new fund will invest in buyouts, mezzanine and venture capital secondary deals. Lexington began raising the vehicle in 2001 with a target of $2.5 billion. It later lowered its goal to $2 billion, citing discounts in the market that made the larger fund size unnecessary. So far, Lexington has committed approximately $620 million of the fund. It has said it believes the secondary market is on track to handle an influx of new and larger funds.

Don’t Count Out Carlyle

The Carlyle Group’s premier secondary fund is still on, despite widespread reports to the contrary. Some secondary professionals believed that Carlyle had dropped out of the secondary business entirely following the recent spin-off of the Carlyle Asset Management Group, which launched the fund last year.

Part of the confusion stems from the fact that the Carlyle Asset Management Group dropped the fund in April after a less-than-savory reception from investors, according to a source familiar with the firm. But, the source says, a secondary team is in place within the Carlyle Group and it is re-working the fund with the intent of bringing it to investors within the coming months.

When last heard from, the secondary fund was seeking $400 million to invest in buyout and venture capital partnership interests. The firm declined to comment on whether the fund-raising goal has changed or when the fund would officially close.

Pantheon Plans New Fund

Pantheon Ventures has held a final close on its new fund-of-funds, Pantheon USA Fund V (PUSA V). The fund raised $313 million, exceeding its target of $200 million. It will co-invest in U.S.-based private equity funds over the next three years.

The San Francisco-based private equity firm raised its first U.S.-focused fund 10 years ago. Pantheon USA Fund I closed in 1993 with $53.5 million. Pantheon has raised more than $1.7 billion for its U.S. funds-of-funds. The last fund it closed was Pantheon USA Fund IV, which raised $800 million in 2000.

PUSA V’s investment strategy will differ slightly from past PUSA funds. “We’ll most likely invest a little less in venture capital, given the lack of top-tier venture capital firms raising money right now,” says Braman. “That may change over the next couple of years. The most important part of the strategy is that the secondary component for this fund will be relatively high.” Pantheon will focus on larger, established funds but will also set aside capital to invest in newer funds as well as buyouts and special situations.

This fund will mostly likely reach a 20% allocation for secondaries, which is a significant departure from past PUSA funds, given that the firm has raised a stand-alone secondary fund, Pantheon Global Secondary Fund, which closed in 2000 with $418 million. That fund is about 75% invested. “We do a lot in the secondary space,” Braman says. “We think the secondary component will be more significant than in our earlier fund-of-funds, given the market that we’re in now.”

Pantheon is also gearing up to enter the market with Pantheon Global Secondary Fund II. It said last year that that vehicle would raise between $700 million and $800 million.

Last year, Pantheon’s most significant secondary deal was the $11 million purchase of Quantum Technology Ventures from Quantum Corp. (renamed QTV Capital). The portfolio includes companies in enterprise software, storage and security.

PEH Dumps Most of Its Portfolio

Publicly traded Swiss fund-of-funds manager Private Equity Holdings (PEH) sold over two-thirds of its portfolio to Credit Suisse First Boston. The deal was valued at $448 million and left Private Equity Holding, which is managed by Swiss Life Private Equity Partners, with a portfolio worth $195 million.

The deal allows Private Equity Holdings to get out of capital commitments and pay back money it borrowed from parent company Swiss Life. PEH borrowed $254 million from Swiss Life in 2001 to cover the cost of capital calls.

PEH reduced its capital commitments from $265 million to $43 million.

Tredegar Details Emerge

Tredegar Corp. (NYSE: TG) has released more information about the sale of its private equity partnership and direct company investments. The Richmond, Va.-based plastics and aluminum manufacturer announced in March that it had agreed to sell its portfolio of private equity partnerships to Goldman Sachs’ GS Vintage Funds II. It also agreed to sell its portfolio of direct investments to W Capital Partners. Tredegar expected to receive about $75 million in cash from the deals after taxes.

A month later, Tredegar revealed more details of the deal in its first-quarter report. For example, the $75 million in cash it earned from the deal would include $54.4 million in mid-2004 “related to the carry-back of 2003 capital losses against gains generated by the portfolio in 2000.” The deal closed on April 17. While Goldman Sachs did not disclose the details of the discount purchase, the firm usually buys for discounts of between 5% and 15% and said that the Tredegar deal was at the higher end of that spectrum. Sources at Goldman cited the firm’s focus on health care and its consistent investment at competitive valuations for the higher value.

As of Dec. 31, 2002, Tredegar had $191 million invested directly or indirectly through venture funds in 370 companies, according to public documents. It was an investor in funds run by 15 venture firms. Among those funds are Arch Venture Partners, ComVentures, Intersouth Partners, Novak Biddle Venture Partners, Madrona Venture Fund, OVP Ventures, Prism Venture Partners, Vanguard Ventures and Voyager Capital.

Pomona Earmarks More for Secondaries

New York fund-of-funds Pomona Capital plans to dedicate one third of its upcoming fourth fund to special situation secondary transactions. That comes to about $66 million of the planned $200 million Pomona Partnership Holdings IV.

Pomona will focus on what it calls “less funded” secondary deals, with positions that are not as well established as traditional secondary deals and that are about 80% drawn down. The firm hopes to hold a first close in mid-September and a final close in late 2004.

Pomona Capital has more than $1 billion under management. Last year it raised a fund devoted exclusively to secondary deals. That fund, Pomona Capital V, totaled $582 million.