Accel-KKR Downloads $600M For Third Tech Fund

Firm: Accel-KKR

Fund: Accel-KKR Capital Partners III LP

Target: $450M

Hard Cap: $600M

Final Close: $600M

Placement Agent: None

Legal Counsel: Kirkland & Ellis

After burning through its second fund in two years, tech-focused Accel-KKR has raised a new fund it hopes will last up to twice as long. The Menlo Park, Calif.-based firm closed Accel-KKR Capital Partners III LP after hitting the $600 million hard cap in August. The original target: $450 million.

Every Fund II limited partner re-upped for the third fund, while a handful of mid-sized endowments and European investors joined for the first time, according Managing Director Tom Barnds. “That’s a very strong signal to potential new investors about the prospects for the firm and for the fund,” he said.

It’s also a sign of great returns: Accel-KKR, following a strategy light on leverage, has generated a gross IRR of more than 50 percent on an annual basis since 2002, a source familiar with the firm told Buyouts. Many of the firm’s successes have come via sales of portfolio companies to larger, publicly-traded technology companies.

Last November, for example, Accel-KKR nailed a 6.2x return on its investment in Saber Corp., selling the government solutions software provider to EDS Corp. (NYSE:EDS) for about $420 million. In Jan. 2006, Accel-KKR and Teachers’ Private Capital exited their respective investments in a 3D graphics company called Alias, having sold the concern to Autodesk Inc. (Nasdaq:ADSK) for $197 million, or 3.4x what they paid for it in June 2004. And in Dec. 2005, Accel-KKR jettisoned CRS Retail Systems, a point-of-sale software provider, through a $121 million sale to Epicor Software Corp. (Nasdaq:EPIC) after acquiring the company three years earlier for $45 million.

All told, formal marketing for Fund III—from the time the fund’s final PPM was sent out to its final closing—spanned the three months from June through August of this year. Investors in the new fund include college and university endowments, corporate pension plans, foundations, insurance companies, investment advisors, state and government retirement systems and family offices. Barnds said that some LPs were asked to make smaller commitments than they originally intended to make and that others had to be turned away altogether in order to preserve the fund’s size and investment focus.

Accel-KKR invests in technology companies in what it terms the lower middle market—businesses with revenues between $15 million and $150 million. Too small to go public, companies of this size see Accel-KKR as a source of growth and liquidity, Barnds said.

No investments have been made using equity from Fund III as of press time. Barnds noted that the first investment made with the new fund could be made to help facilitate an add-on acquisition for Fund II portfolio company iTradeNetwork. Owned by Accel-KKR since Dec. 2007, iTradeNetwork, a supply chain software provider for the food industry, agreed to merge with a similarly-focused business called Amphire Solutions Inc. earlier this month.

In addition to iTradeNetwork, Fund II—raised in 2006—is steward to three other portfolio companies: consumer business software provider Applied Predictive Technologies; U.S. oncology market data provider IntrinsiQ; and mid-market software investment firm M2 Technology Partners. Fund I, meanwhile, is just one company away from being completely liquidated. Model N, which makes software for companies in the life sciences and high-tech markets, is the final portfolio company in Accel-KKR’s vintage-2000 first fund, which enjoyed backing from Washington State Investment Board.

With the closing of Fund III, Accel-KKR now has more than $1 billion total assets under management.