Falling dollar hampers Partech fund-raising

Partech International is nearing the final close on its fifth fund after expending massive efforts to design a new fund structure to shield its foreign investors from the effects of the falling U.S. dollar, PE Week has learned.

The San Francisco-based firm is targeting $300 million for an early stage fund, the same amount it collected for fund IV, which closed in 2000, but half the commitments will come from European limited partners and will be denominated in Euros, Managing Partner Vincent Worms told PE Week.

The firm had to find a way to keep those Euro investors in at parity for each new round of investment with their U.S. dollar-denominated brethren—not easy with the dollar rapidly falling against the Euro. Since 2002, the dollar has lost 50% of its value against the Euro, according to foreign exchange data. Pundits anticipate the dollar will weaken more based on an anticipated rate cut from the U.S. Federal Reserve.

“That’s the tricky part where we had to get pretty creative,” Worms says. “It’s very simple once you do it, but very complicated to set up.”

The trick, Worms says, is to have each group of investors treated almost as though they have their own sub-fund within the firm’s overall fund. Each sub-fund is denominated in the currency that the LPs prefer, and then converted at the time an investment is made.

“We had to make sure that the U.S. investors were not favored or disfavored in terms of gains,” Worms says. And that’s taken time, he says.

Partech also set up its European fund-raising efforts as a Fonds Commun de Placement a Risques. The structure, demanded by LPs, offers tax protections on earnings from an investment partnership. Since the beginning of 2006, earnings from an FCPR are treated as capital gains and are exempt from some taxes in European countries. Conforming to the regulations around the structure took time to set up, Worms says.

Worms says that personnel issues have not played a part in the slowness of Partech’s fund-raising efforts. In March 2006, the firm lost Partner Glenn Solomon, a late stage pro, who joined Granite Global Ventures. Since his departure, Partech has refocused to work more with early stage companies. “We’ve always historically been earlier stage investors,” Partech Partner David Welsh said last year. “We think that’s the best place to spend time.”

Kevin Carrington, who left late last year, had managed Partech’s late stage and public equity investments since 2001. Then Welsh left the firm this summer after seven years with the firm. He joined anti-virus maker McAfee Inc. as executive vice president of corporate strategy and business development. Partech has also lost up-and-coming junior investors, including Associate Ren Chin, who cut his teeth developing Brightmail. He left last year to join Storm Ventures as an entrepreneur-in-residence.

Also, associate James Buford, formerly with Battery Ventures, left last summer. He’s now working in business development at Amazon.com. Associate Mike Brown, who brought Partech such deals as RockYou, Wazap, mSnap Interactive and other new Internet investment opportunities, left earlier this year to become a principal at Foundation Capital.

The firm also parted ways with Christina Oropeza, its marketing and communications manager for seven years. She now works as a recruiter at Insight Recruiting.

“It’s very amicable with everybody, but their departures have nothing to do with the refocusing of the fund,” Worms says. “For 10 years, we had a successful late stage fund pre-bubble, but it’s a tougher space to be in. We had a few partners who were prominently or exclusively focused on late stage or public focused. It’s not a sign of Partech disintegrating.”

The firm has seen some recent liquidity, primarily in selling companies to strategic acquirers.

It sold French business process management software maker Cartesis to Business Objects in April for $305 million. The startup had raised $55.6 million as part of a buyout deal in 2004 from Partech, APAX Partners Worldwide, Advent Venture Partners, AXA Private Equity and CDP Capital-Technology Ventures.

It sold residential gateway software maker Jungo Software Technologies to NDS Group for $107 million, including earn outs, in December. Jungo had raised $17.5 million from Partech, Intel Capital, TeleSoft Partners and Cipio Partners.

Partech sold mobile network company SoloMio in October 2006 for an undisclosed amount to Openwave. The startup had raised $26.5 million from Partech, Austin Ventures, Koch Ventures, Techxas Ventures, Gemplus and AV Labs.

It sold Akimbi to VMware for an undisclosed amount in June 2006. The startup had a post-money valuation of $20 million in 2005 after its $8 million Series B.

The firm saw two of its portfolio companies launch IPOs in 2006, but neither has performed well in the aftermarket. Bandwith management company Allot Communications (Nasdaq: ALLT) went public in November 2006, raising $78 million at an offer price of $12 per share. The firm had raised $27.8 million from VCs before hitting the public markets. Last week, the stock was trading for about $5.04 a share.

Partech also backed Visicu (Nasdaq: EICU), which raised $18.25 million from VCs before floating a $96 million IPO to investors in April 2006. The company offered shares at $16 and enjoyed a first day pop to nearly $25. Last week, the stock was trading at $7.95 a share.