Like its American counterpart, the Israeli private equity community took some big hits with the bursting of the tech bubble, leaving both LP and direct investors burdened with portfolio interests that are a bit much to manage. But Israeli LPs and direct venture investors who were left holding the bag have a new friend in Vintage Venture Partners, which closed its premier secondary fund with $65 million and has been aggressively pursuing deals from all sellers.
The fund, which had an initial goal of $60 million, counts among its LPs three European funds-of-funds, a Canadian investment bank, several U.S. endowments, three Israeli insurance companies and various family foundations and high net worth individuals.
Vintage Venture, based in Herzliyah Pituach, Israel, 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.
Alan Feld, a Vintage Venture Partners co-founder and former partner and managing director with several Israel-based venture capital firms, says that Israeli venture funds have raised about $8 billion since 1997 and that roughly $1 billion has been invested directly by foreign corporations and foreign VCs into Israeli companies. That, he says, is Vintage’s target market. Feld says that Israel’s private equity market took until the 1998-2000 period to become large enough to support dedicated secondary players.
Vintage estimates that about $250 million in LP interests effectively goes on the auction block in Israel every year. The firm has been doing business with both LPs in VC funds and direct venture capital investors, individual LPs and investors, and corporate and traditional VC investors.
Feld says that several deals have been closed from the fund. He declined to say how many deals have been closed or how much the firm has invested.
Unlike its American and European counterparts, the Israeli private equity community is comprised mostly of venture capital firms. Israel is only now developing a substantial buyouts industry. As a result, its secondary market has been focused exclusively on venture. “We’re excited about the fact that a buyout market is beginning to form here. This will also create more secondary opportunities in the long term,” says Feld. He adds that while the fund focuses exclusively on Israeli secondary deals, the majority of the fund’s capital has come from outside Israel.
Being a smaller fund with an exclusive focus on Israel frequently brings Vintage into partnerships with foreign secondary investors. Feld says that Vintage has worked closely with name-brand secondary players from the United States and Europe. While not naming any of the firms he works with, Feld says they are “within the top 20” secondary firms.
“We’re working with a number of non-Israel secondary funds. We’ll do due diligence with them,” he says. “It’s mostly cooperation as opposed to competition with the foreign secondaries. There’s an advantage to being on the ground here. We’ve met most of these funds.” Vintage has partnered with about six such firms so far.
NYPPE’s Allen Capital
The private equity world is filled with intermediaries who go beyond the role of advisors and become active in deals. The recent boom in secondary private equity advisors is now producing affiliated buying operations.
Witness Allen Capital Partners, an affiliate of the New York Private Placement Exchange (NYPPE), which is seeking $250 million to acquire private equity limited partnership interests for Allen Capital Partners X (ACP X). It expects to close the fund by the end of the year.
Greenwich, Conn.-based NYPPE was founded in 1998 and serves as a placement agent for the sale of small private equity stakes. It has worked with Allen Capital Partners to help its advisory clients shed private equity holdings since 2000. In February 2002, the firm allowed investors to exchange their shares in 18 private portfolio companies for interests in the then newly created ACP IX Fund.
ACP X is the first fund focusing on making purchases from institutional sellers rather than individuals. OffRoad Capital Markets, which NYPPE acquired in April 2001, is acting as a placement agent for the fund. Like its predecessors, the fund will have access to proprietary deal flow coming from the NYPPE network.
ACP X will focus on what NYPPE president and CEO Laurence Allen calls “special situation private equity secondaries.” The three main categories of special situations the fund will focus on are delinquent LPs; “out of favor structure,” such as funds-of-funds or trusts; and transfers that require quick settlements for general partners to approve the deal.
“You’re seeing the asset class evolve to another level now where portfolio managers are looking for similar services that they have in other asset classes,” Allen says. ACP X will also enable LPs to open lines of credit through the fund using their private equity holdings as collateral.
NYPPE is not alone in closing the gap between secondary strategic advisor and buyer. New York-based secondary advisory firm Columbia Strategy has an affiliate, Morning Street Partners, which is also raising a fund. Unlike Allen Capital Partners, Morning Street is interested in buying direct interests in private equity-backed portfolio companies. Partners from Morning Street declined to comment, citing SEC regulations surrounding fund-raising.
The trend of advisors moving toward doing deals themselves makes sense, says John Costello, a director with SSG Capital Advisors who leads its secondary advisory practice. “A lot of people want to be on the principal side of things,” he says. He notes, however, that there is a danger of a possible conflict of interest for such firms.
“My feeling is that there’s conflict if you try to do both, much as if you’re in the direct investment game,” Costello says. “It’s hard to be a true independent sell side advisor if you have a fund.”
So might there be conflicts of interest for Allen Capital Partners and NYPPE? “Potentially,” says Allen. “But it’s the same conflict that exists with merchant banks and their banking funds. The key is following the client’s request. If a seller comes to NYPPE and says, I want a best price,’ that might be a situation where NYPPE does not show the offering to ACP X, because it’s not a special situation.”
Be Very Quiet…
In the heart of Texas, a lone hunter searches for quiet and elusive game. No, it’s not a well-armed man in a deer blind hungry for venison. It’s a new entrant to the popular secondary private equity marketplace. Harbert Mulherin is on the prowl for small to mid-size private equity secondary deals as the managing partner of Live Oak Capital.
Dallas-based Live Oak raised its inaugural fund, the $100 million Live Oak Secondary Opportunity Fund, entirely from the firm’s four partners: Chicago and New York-based asset management firm Guggenheim Partners; Dallas-based holding company Sammons Enterprises; Dallas-based merchant bank Sponsor Investments; and Mulherin himself, who is the firm’s lone investment professional so far. The firm uses strategic advisors and placement agents to help find deals.
Mulherin describes the firm’s fund as a “hybrid between a partnership and a fund” in that all its LPs are also founding general partners in the firm. So far Live Oak has closed several deals under $10 million each for shares of mid-market buyout funds. At its current rate of investment, Live Oak could be back in the market for a new fund by the end of the year and ready to take money from outside limited partners.
About 75% of the firm’s deals will be for buyout assets and between 20% and 25% will be for venture assets. “I’m going to be heavily weighted to buyouts, and smaller pieces of the large funds are high on my buy list,” says Mulherin. “[Buyout funds] between $150 million and $300 million are my sweet spot.”
What’s the problem with VC? It is more difficult to determine good values, he says. “A lot of the venture deals we’re seeing are heavily discounted hangover deals from the venture boom,” he explains. “It takes more than analysis to determine if they are more than just the walking wounded. When they hit a downturn and stay down for awhile, it’s not always a sure thing that they’re going to have a lot of value.” Mulherin adds that he would prefer to buy shares in older and more established venture firms, but that these don’t come to the secondary market as frequently.
Mulherin was previously a vice president of business development for Electronic Data Systems and in 1999 sold about $500 million in EDS private equity holdings to the Crossroads Group. “At that time it was one of the larger secondary deals,” he says. “Now a $480 million transaction gets a second look but not much of one. It’s amazing how the market has expanded.”
W Capital Targets VC
Like concert-goers at Woodstock warned not to eat the brown acid, many secondary buyers are told that buying venture portfolio assets would be a long, bad trip featuring overvalued assets that are difficult to price and problematic to manage.
One of the small band of secondary contrarians that sees direct private equity and venture assets as a promising market is W Capital Partners. The secondary firm recently closed its inaugural institutional fund, W Capital Partners LP, with $250 million in commitments. The New York-based firm had an initial goal of $150 million for the fund.
While the fund is mandated to explore any and all private equity assets, W Capital expects to be much more active in buying venture capital portfolios. “Much more opportunity exists in the venture capital side than the private equity side,” says David Wachter, who manages W Capital with fellow general partners Robert Migliorino and Stephen Wertheimer.