After home run debut fund Garnett & Helfrich considers a second

Year founded: 2004

Investment strategy: Acquires mid-sized divisions of technology companies

Key executives: Co-founders Terry Garnett and David Helfrich

Office locations: San Mateo, California

Assets under management: $350 million raised for debut fund

Fundraising status: Considering a second fund

Number of active portfolio companies: Two

Web address: www.garnetthelfrich.com

Their first fund, a $350 million vehicle put together nearly a decade ago, has performed remarkably well. To date, it has returned $600 million to investors, with another $600 million in unrealized gains sitting in the portfolio. When all is said and done, limited partners like Harvard Management Co., Stanford Management Co, and HarbourVest Partners, which put up the bulk of the capital, will likely earn four-times their money on this one fund.

“If you look at all buyout and venture funds from the 04/05 vintage year, we are near the top of the list, and we think there is even more upside in our fund,” said Garnett. As of the beginning of this year, the firm’s gross realized and unrealized performance was a 5.3x multiple and 32 percent IRR.

So, with that kind of track record, why hasn’t Garnett & Helfrich raised a second fund already? “Raising another fund means making another ten year commitment,” said Garnett. “We take that very seriously. That would mean building a whole new generation of companies. We still may do it, but we haven’t made that decision yet.”

At least 2 LPs contacted by Buyouts said Garnett & Helfrich has been talking to investors about the possibility of raising a $400 million successor since the beginning of the year. One had the impression that Helfrich would not be involved in the effort. Garnett declined to comment on the specifics of any fundraise. But he acknowledged there’s no guarantee that he and Helfrich would remain partners in any new fund. “I can’t speak for David, I don’t know what he would want to do,” said Garnett. Buyouts asked Helfrich about his future plans via email, but he did not respond.

In truth, the first fund has been a long and often bumpy road. Garnett said that, in the beginning, he had visions of building a private equity empire with multiple funds of ever-increasing sizes. But he quickly learned that managing a firm is often more difficult than nurturing a portfolio company.

Garnett & Helfrich quickly staffed up the firm with associates and directors, and then staffed down again in 2007 when they were forced to cancel a second fundraising targeted at $700 million, all the while creating an unflattering impression in the marketplace. “I mentally wrote (them) off as just another zombie,” a journalist at Fortune recently commented.

Garnett said mistakes were made. “Lots of private equity people focus on the raising of the money as the objective, but at the end of the day it’s all about the exits,” he said.

He was determined to press on and focus on what really matters: delivering returns. “We stripped things down to the bare essence,” he said. “Our message to LPs was that David and I are committed. We’re the ones you gave the capital to. We are going to make this work, and we are going to stick with this come hell or high water. And that’s what we’ve done.”

Garnett and Helfrich first conceived of what they call their “venture buyout” firm after the collapse of the dotcom bubble. As partners in early-stage venture capital firms—Garnett was at Venrock and Helfrich at ComVentures— they saw how hard it was becoming for technology startups to attract enterprise customers. Enterprises wanted to do business with names they could trust. They were tired of buying expensive technology from young companies, only to see them implode.

The partners created the firm in 2004 to buy unloved and underperforming divisions of larger companies that already had a significant base of customers. They would purchase the units from the parent company and nurse them back to health.

“What we do is a cross between venture and buyouts,” said Garnett. “We acquire these companies, but we almost have to treat them like startups. We get the technology and the customers, but then we have to build the management team, come out with new products, and reinvent the business.”

They followed this model for all six investments they made with the fund. The firm bought Blade Network Technologies out of Nortel and Ingres (renamed Actian Corp.) out of Computer Associates (see accompanying table for details). It also bought an English thin client company called Wyse Technology that was part of a larger Taiwanese conglomerate. The firm also snapped up an unheralded managed services company called MTI Technology out of bankruptcy court at a bargain basement price. 

The firm’s largest exit to date has been from Wyse, which it sold to Dell for $1 billion in 2012 after investing $70 million in the company and growing it from $170 million in annual revenue to $375 million. Garnett & Helfrich was able to successfully expand Wyse beyond its thin-client roots into the burgeoning market for desktop virtualization software. Its other exit was from Blade Networks, which it grew from $35 million to $135 million in revenue before selling the company to IBM for $450 million in 2010. Blade, which made networking switches for data centers, was able to attract numerous customers with its low-power, low-cost switches.

Exits To Come

Garnett said more lucrative exits are potentially on the horizon.

In particular, he point to Actian, which has gone on an acquisition tear recently, snapping up three companies in the last year in the big data and information analytics space. The company, which transforms data into actionable information, has grown from $40 million in revenue when Garnett Helfrich purchased it in 2005 to $150 million today. “We are still actively involved in the company and I talk to the CEO practically every day,” said Garnett. “Given the multi-billion dollar valuations of other companies in the big data space, Actian could turn out to be our biggest exit.”

Actian CEO Steve Shine credits Garnett & Helfrich with engineering an acquisition strategy to move the company more deeply into the fast-growing big data market. “Some private equity partners only call you when they want to know where the numbers are,” he said. “That’s not Terry and David. They are very involved. There’s no way I could have invested in the three acquisitions we did last year without having in-depth discussions with Terry about what we were doing and where the opportunities lie,” he said.

Another sleeper hit in the portfolio is MTI Technology, which the firm purchased out of bankruptcy in 2007 for under $10 million. “We literally learned about this company two weeks before we bought it,” said Garnett. At the time, MTI was a public company that ran into trouble, but its European business was profitable. So Garnett flew down to bankruptcy court in Los Angeles and acquired the European assets for under $10 million. “We were the only bidders,” he said. “They had no debt and, even better, they had good customers.”

Garnett & Helfrich has since grown MTI’s revenue to $150 million annually by strengthening the company’s alliance with EMC and reselling its products. In fact, MTI was recently named EMC’s mid-market partner of the year. “We have a lot of upside on this one,” said Garnett. “MTI is a company that gets sold at some point.”

Naturally, there have been some failures along the way. Azingo, a software platform for mobile phones, looked like a sure thing—until Google arrived on the scene and made its Android software available to everyone for free. Azingo was sold to Motorola in 2010, presumably at a loss. Another disappointment was Openwater Software Inc., a provider of next-generation service networks that ultimately shut down after failing to acquire a critical mass of customers.

Even with those failures, the firm has delivered results. But are they good enough for today’s LPs?

Garnett said that even if he did try to raise a new fund, he’s not sure the venture buyout strategy—or that his firm in particular—would appeal to LPs. “This model is so boutique,” he said. “People are used to putting money in classic buyout or in classic venture, and when you have to explain something in between it’s a little off their roadmap.”

The reality is that, even with blockbuster returns in the first fund, Garnett & Helfrich is not the kind of firm most big LPs want to back. It’s small, it’s different, it doesn’t look like any of their other investments, which to inherently conservative, process-oriented investors is not a good thing.

“Terry is a hard-working, money-maker with great instincts and relationships, but I can understand why some institutional investors would be cautious,” said one investor in the fund.

It doesn’t help that the firm’s biggest supporters are no longer in their previous roles. Peter Dolan, who backed the first fund to the tune of $105 million while at Harvard, has left the university. And Mike McCaffery, who was responsible for the investment from Stanford, has also moved on.

Still, Garnett believes the venture buyout model is even more viable today than when he started the firm a decade ago.  “The tech industry today is probably twice the size it was ten years ago, so you just have to ask, where are those orphans?” he said. “You know they are out there.”

So will they or won’t they hit the fundraising trail again? “We are uncommitted, but I love building companies,” said Garnett. “I want to be involved in this business for the next ten years. I don’t know if it will be carveouts or maybe more early-stage venture, but something is in the cards.”