5 questions with Clifford Friedman

Constellation Ventures, a former affiliate of Bear Stearns Asset Management, earlier this month announced that it has become part of Highbridge Capital Management. It also closed its third fund with $200 million, and renamed itself Constellation Growth Capital.

The firm will continue to be led by Clifford Friedman, Constellation’s founding partner, who recently chatted with PE Week Editor-at-Large Dan Primack.

Q: When Bear Stearns collapsed, did you think that maybe Constellation couldn’t raise another fund?

A: No. We had great strength in our existing portfolio. Then, once the hedge funds blew up, we got a lot of inbound interest from secondary buyers wanting to do a lift-out of the firm. We went down the path of lining up a serious buyer, but Todd Builione, COO of Highbridge, called and talked about how Constellation could have a future at Highbridge.

We’ve already begun to see much higher levels of deal-flow than we ever saw at Bear Stearns. Here we really are part of a team that can invest along the entire capital structure of a company. The goal was to find the best place to build a scalable business that can last. Bear Stearns was not going to grow the private equity side of its business.

Q: Why did you close below your original target of $250 million?

A: We had lots of opportunities to raise more than $200 million. There were interested investors, but we couldn’t wait. So we made a decision to close, invest the capital over 18 to 24 months and then bring them back in for the next fund.

We gave our LPs direct co-investor rights, which means the fund is a lot larger than $200 million.

The $50 million was not going to make or break us. We have the opportunity to scale and write larger checks, if needed, with Highbridge and JPMorgan, so why hold back for $50 million? We made a decision to roll out, rather than hold to some arbitrary number.

Q: Is Constellation’s investment strategy moving farther downstream?

A: We’ve always been stage-agnostic. If you’ve looked at some of the investments in our last fund, such as ActiveHealth or College Sports TV, we were very early stage. But we also backed a company like Savvis that already had revenue.

Q: Then why change the firm’s name to Constellation Growth Capital?

A: We wanted to make people understand that we have a broad focus, with the ability to do both early stage and late stage. The key in our name is ‘Constellation.’

Q: Most of your historical deals have been in the U.S., but why is this fund one-third allocated to international investments?

A: We had the capability to invest up to one-third of the last fund internationally, but were very careful. We usually look for a great management team, a local partner and a company that fits our investment themes.

For example, out of the last fund, we invested in Net Insight, a $4 million revenue business in Sweden that worked out very well. That company has grown to close to a $40 million run-rate business since we invested, and it’s won most of the major national DDTV rollouts in Europe. That gives us the comfort to invest in other Swedish companies, and have done both OnePhone and AirplusTV.