Carlyle Closes Largest Venture Fund of 2002

Carlyle Group in late 2000 launched Carlyle Venture Partners II with a $750 million target, trimmed back to $500 million and recently closed it off with $600 million. At least the Washington-based private equity powerhouse can take credit for beating its second target, closing the year’s largest venture fund and setting itself up for a frenetic year of dealmaking.

Carlyle Venture Partners, an affiliate of The Carlyle Group, manages $13.5 billion for those that pull the strings of political and military power, from the Bushes to the Saudi royal family. Its venture arm was launched in 1997 with a $210 million fund named Carlyle Venture Partners LP. It made investments into young companies that played in the enterprise infrastructure space, in software and in security.

Since closing its debut fund five years ago, Carlyle Venture Partners has doubled its size to 20 investment managers, opened up a West Coast outpost in San Francisco and rejiggered its investment strategy.

While Carlyle’s first venture fund was driven by early-stage deals –, Blackboard Inc., Prime Street Corp. and RAINfinity Corp. are included in its list of investments – its newest fund will invest more in expansion and later-stage rounds.

“Why have we altered the mix between early-stage and later-stage deals? Because we can,” says Robert Grady, Carlyle Venture Partners’ managing partner in San Francisco. “In the first fund, the majority of companies were early-stage, but that was a function of the price environment at the time. When you would see a $300 million or $400 million pre-money valuation on a later stage deal, it wasn’t attractive. What we’re seeing now is later-stage deals at extremely attractive valuations – they’re later-stage deals at early-stage prices.”

Carlyle’s fund will invest about $10 million in each of its portfolio companies initially, and then reserve a similar amount for follow-on rounds of financing. Over a four- to five-year cycle, it will take stakes in 30 to 40 companies. Already, the fund has committed about $100 million into 12 deals – all but one of those are later-stage deals including CityNet Telecommunications Inc., Indigo Systems Corp. and ISR Solutions Inc. The firm is the lead investor in all but one of its 12 deals and holds a board seat as a result on each board.

This fund marks the first time Carlyle’s venture group has gone after institutional investors: about 80% of the fund’s capital comes from public pension funds, corporate pension funds and endowments. Its predecessor, Carlyle Venture Partners, was capitalized entirely by individual investors. This time, Carlyle has secured investments from Asian, European and North American investors.

But, like its predecessor, Carlyle Venture Partners II will focus on enterprise infrastructure applications like network security and storage, defense technologies, software and specialty semiconductors.

Now that the fund is a year old, its team in place with no more duties on the fund-raising court, Grady’s team has a single focus. “We’ve built the team over the last five years,” he says. “It seems stable and happy and eager to try to make money.”

Contact Carolina Braunschweig