Done Deals: Forstmann Little Plans Fund, Invests In E-Learning Co. –

Here comes number seven.

Forstmann Little & Co. is in the early stages of raising Forstmann Little Equity VII, which reportedly will target as much as $5 billion.

Separately, the firm this month invested $35 million in Capella Education Company, the for-profit parent company of Capella University, an Internet-based university.

As for the fund, partners at the firm declined comment, but a source close to Forstmann Little confirmed that Fund VII is on its way, noting that a formal launch has yet to occur.

New York-based Forstmann Little joins a host of other big-name buyout firms seeking capital for mega-funds this year. Apollo Advisors is targeting $4.5 billion for its fifth fund; Thomas H. Lee Co. is seeking $5 billion for its fifth fund; DLJ Merchant Banking Partners hopes for $3.5 billion for its third; Welsh Carson Anderson & Stowe is looking to raise at least $4 billion for its ninth fund; and Kohlberg Kravis Roberts & Co., is eyeing a reported $10 billion for the largest buyout fund ever.

Internet Education

Capella marks the firm’s first education investment, despite Theodore Forstmann’s well-publicized interest in the sector. Joshua Lewis, a Forstmann Little general partner, said the firm has been looking at the space for a long time, deciding which area would be the most attractive. Lewis is one of the newest members of Forstmann Little and he has made education-related investments in the past. He joined Forstmann Little from E.M. Warburg Pincus & Co. earlier this year (BUYOUTS Jan. 24, p. 12).

Forstmann Little invested in Capella for several reasons, Lewis said, including the market on which it focuses, its “high quality” management, products and business model.

Education and training is a $700 billion industry. Internet education is a very small piece of that, Lewis said, but is poised to transform the way people seek further education because it is effective and convenient. Lewis said Forstmann Little views the situation as follows:

Approximately 15 million Americans are currently pursuing a post-secondary degree. They spend approximately $240 billion a year on this education and training. The adult segment of that population, meaning those over 25, comprises approximately 45% of that market. That 45%, which equates to approximately six million adults, spends almost $35 billion a year on tuition. This group is focusing on career-oriented education, not college necessarily, but professional education that will advance their career prospects and improve their W-2s, Lewis said.

“While a very small slice of that $35 billion is delivered over the Internet today, sometime in the near future, a significant portion of that market will be Web-based or e-learning because it simply is far more convenient and can be an even more effective way to teach and learn,” Lewis said.

Capella will use the newly-acquired equity to fund its long-term growth plan, which includes the acceleration of its marketing initiatives, program expansion and the development of its technology and infrastructure. With Forstmann Little’s minority stake in the company, Lewis will join its board of directors.

Lewis said one aspect of the company that makes it stand out is the fact that it has been around for seven years. Evidently, it takes several years to get over the regulatory barriers, create a quality curriculum and gain a critical mass of students and faculty.

“That means this market simply is not available to Internet start-ups. You have to get accredidation from at least three different levels and this company is already there,” Lewis said.

Simultaneous with the Forstmann Little Investment, Capella gained an alliance with SmartForce, a provider of e-learning services.

SmartForce, which also made an equity commitment, will provide content and distribution for Capella University’s Bachelor’s degree program in information technology, making it available to SmartForce’s 2,500 corporate customers worldwide.

Currently, 1,500 students in the U.S. and 20 other countries are receiving interactive, Web-based education through Capella University in subjects ranging from business and IT to education, psychology and human services. The degrees offered include PhDs, Master’s degrees, MBAs and Bachelor’s degrees.

Even though the investment in Capella is Forstmann Little’s first in education, the firm lately has made several bets on tech and telecom companies, including McLeodUSA, a communications provider, Nextlink Communications, a facilities-based voice and data communications provider, and Intelisys Electronic Commerce, an Internet-based business-to-business procurement service company.