Banks Look to Unload VC Assets

Small and mid-sized venture capital firms looking to expand their portfolios have set their sights on an unlikely source for acquiring new holdings – investment banks.

These days, financial institutions are looking to unload anything causing distress to their bottom lines. That means the venture portfolios they launched or expanded in the late 90s are suddenly on the block, and in some cases so are the people who manage them. Fleet Boston Financial Corp. and Deutsche Bank are two institutions most likely to dump their venture capital holdings, according to sources.

In fact, Deutsche Bank eVentures is already on the market, and a number of small and mid-sized VCs are looking at it. Calls to Deutsche Bank were not returned by press time. A Fleet spokeswoman said: “While we have said that our goal is to reduce such assets, we have no specific transactions to announce at this time.”

The banks have no other choice. The small companies in their VC funds can’t tap the initial public offering market, but they need ongoing funding if they are to survive until the IPO market reopens.

“Some organizations that made major commitments to developing private equity funds now find that their commitments, and in some cases poor performance, are weighing them down,” says Lucy Marcus, managing director of U.K.-based Marcus Venture Consulting, a consultancy for both U.S. and European venture capitalists and startups. Smaller firms having difficulty raising money on their own see an opportunity to take over the management of these funds as a result.

Investment banks that actually maintain an interest in the holdings can reduce both their risk and costs of running their own venture funds, yet they still will be able to garner potential returns eventually. Small and mid-sized VCs can essentially raise funds cheaply while they add new investments to their portfolios. And they also have an opportunity to enhance their own track records and prepare for the time when the market improves and VC funding is readily available again.

“Since private equity is such a volatile business, you’ll see places really diminishing their emphasis on venture capital,” says one fund manager for a U.S. VC fund. “It’s a clever way of doing it and I think there’s some attractive arbitrage opportunities out there.”

So far, only a handful of investment banks have begun selling off their VC investments, yet industry observers say a number of firms are in negotiations.

“For the small VC funds these can be very good trades to do because they can buy these assets for nothing,” says Fred Destin, director of European Fund Technology Investments. “And there are lots of assets that are still on banks’ balance sheets that need to move, so it’s a trend to watch that is still in its beginning.”

He says there are a number of smaller VCs that have begun developing the equivalent of templates for approaching securities firms with bids for their VC investments – bids he says have been as minimal as $15 million for $100 million VC funds. Some smaller VCs have also begun taking things a step further, offering not only to take on securities firms’ funds but their management teams as well.

“People are taking the assets over and they’re also saying we’ll take your management team,’ which is kind of a free trade for them because they get the cash to pay for the team and will share the upside on the assets,” says Destin. “For the big banks they have a sort of pain point which says, I don’t want this on my balance sheet. It’s a small problem for me and I’m dealing with industrial assets.’ So their job is to make it go away, not to maximize the value.”

This story was printed with the permission of IDD.