Starting what could become a wave of venture capital secondary grabs after a long ride on the buyout bandwagon, Credit Suisse First Boston (CSFB) says it plans to raise CSFB Strategic Partners III, a group of three secondary funds totaling $1.85 billion, later this year.
The new triumvirate of funds will be anchored by an LBO focused fund targeted at $1.5 billion. This will be supplemented with a real estate secondaries fund with a target of $200 million that CSFB hopes to meet or exceed. And CSFB will raise a secondary fund focused on venture assets that it hopes to close between $150 million and $200 million.
CSFB announced this past December that it closed on $1.9 billion in two secondary funds. CSFB Strategic Partners II, which will invest in fund positions for buyout and mezzanine funds, closed with $1.6 billion and had an initial goal of $1.25 billion. That fund is now between 75% and 80% invested. The investment banking giant also closed on CSFB Strategic Partners II RE, a $300 million co-investment fund focused on secondary real estate investments
While CSFB was not forbidden to invest in venture secondary deals by its previous fund’s mandate, almost all of its venture exposure in its current fund comes from portfolios it picked up with larger transactions. CSFB avoided venture assets generally, following the conventional wisdom that venture assets do not provide stable returns on the same order as buyout funds and are more difficult to evaluate. But things have changed lately and deal flow may be catching up or starting to make inroads on the venture side.
“We have been seeing good deal flow in venture over the last four years now,” says Stephen Can, managing director with CSFB Strategic Partners. “The last six months we have started to get interested again for a couple of reasons. A lot of these venture companies are now at the point where they’re cash flow break even. You can evaluate them and you can see the potential for some value in these companies with a public market that’s accepting of realizations and public valuations.”
CSFB is becoming more active in making secondary venture investments. In the last six months, the secondary buyer has bought two stand-alone venture capital fund positions and executed a “synthetic” transaction in purchasing a portfolio of direct assets.
Can says that his group will begin going to its current limited partners by the fourth quarter of this year. If there’s still room after the current LPs have a chance to invest, then CSFB will seek new limited partners. The group may expand the size of the fund, depending on investor interest. “Depending upon the deal flow we see it could evolve into a bigger fund,” says Can. “Will it be a huge fund? No. Does it have the opportunity to grow? It could. It depends on the product quality and the velocity of the market. It’s a very interesting space right now.”
In addition to raising the new fund, CSFB’s secondary group will bring on three additional investment professionals this year, expanding its staff to sixteen. CSFB will also open a new office in the next six to 12 months either on the U.S. West coast, in Japan or in continental Europe. CSFB opened a London office in Q1.
CSFB announced this past March that it was uniting all of its alternative assets, private equity, and private fund group and hedge fund groups into one division named the Alternative Capital Division. CSFB also said it launched a new investment fund focused on leveraged finance assets.
Other secondary venture enthusiasts include W Capital Partners, which recently closed on a $250 million new fund. Earlier this year, London-based secondaries firm Nova Capital Management found some proper VC secondary guides. Nova announced last week that it added two senior executives to specialize in venture capital secondary deals and portfolio management.