In a sign that the venture capital market’s misery is not abating, two more VCs – Carlyle Europe Venture Partners and BRM Capital Management – slashed their funds last week.
At the request of its limited partners, BRM on July 8 became the first venture firm to reduce an Israeli vehicle. It will return $100 million from a $253 million emerging tech fund, the third-largest cut this year at 40%. Two days after BRM announced its cut, Carlyle Europe slashed its fund by 11% to $642 million, citing a drop in valuations and a slower investment pace.
These latest reductions bring the total number of firms that have cut funds to 15 and the total amount handed back to LPs to $4.7 billion. Charles River Ventures gave back the most money when it slashed its 11th fund by 63% to $450 million in May. (For a complete list of cuts made this year see Pg. 10.)
“We had a number of LPs call us and say to us, “We are over-invested in technology and venture capital, can you help us out?'” says Charlie Federman, managing director of BRM. “If you start getting a few of your LPs calling, you respond.”
The fund squeeze leaves BRM’s second fund with almost $90 million to invest. BRM plans to allocate most of that amount to new investments in its bread – and – butter sectors: software and communications companies with strong ties to Israel. Its headquarters are in Fort Lee, N.J., but it has offices in Jerusalem and Herzelia, Israel
LPs began agitating BRM for relief about six months ago. The firm offered to defer its full fee of 2.5% on its second fund and collect 2.15% for a period of time, but the LPs wouldn’t go for it, Federman says. With a significantly smaller fund to manage, the 2.5% fee structure is still in effect.
Federman says he wouldn’t be surprised to see other Israeli funds follow suit. “I expect that other LPs will see that we are receptive, and will put pressure on other Israel funds,” he says. One of those funds could be Benchmark Capital’s. When the Menlo Park, Calif.-based firm cut its European fund by 33% in May, one of its partners said the firm had no plans to reduce the $220 million Israeli fund it raised last year.
Israel’s high-tech market has been especially hard hit with a combination of economic and political instability. Valuations for startups are extremely low, lower than in the United States, and it is hard to attract new money to the region. While that makes it difficult to raise new funds focused on investing in Israel, it also means that the money already raised goes much further.
Investors in BRM’s fund, which was raised in mid-2000, include Bezeq, IBM, Koor Industries, NTT Data and the Ofer Brothers. BRM GPs have more than a 50% stake in the fund, Federman says. He would not say which of the outside LPs made the call for BRM to cut the fund.
“I will say we have now contacted 100% of the LPs, which are about two dozen, and 100% support the decision,” he says.
In these tough economic times, BRM cannot afford to ignore the pressures its LPs are feeling, Federman says. “Our first priority is we have to show we can earn money for our investors,” he says. “We also have to show we are receptive to their needs.”
“Even with a 40% reduction we should be able to create a similar portfolio of companies for our [LPs],” Federman says. “And it still gives us sufficient capital to support the companies we have invested in with follow-on rounds as well.”
BRM, which has a total of $250 million under management, has a portfolio that includes ActionBase, BackWeb (Nasdaq: BWEB), Check Point (Nasdaq: CHKP), Eventra, Kamoon, NetOnCourse, PeopleLink, Percite, ProSight, Schema and Whale Communications.
The firm’s recent investments include a Series A round in Passave, a broadband communications and semiconductor company and a follow-on round for portfolio company ProSight.
Carlyle Europe also heard rumbles of dissatisfaction from its investors, but thought it could withstand the criticism. Although it was considering last fall reducing its $724 million fund that it raised in 2000, Carlyle was standing firm as late as last month, when company spokeswoman Daniela Zuin told PE Week that despite a slower investing pace, the firm would not cut its fund. Then last week, Carlyle Europe said it would cut its fund by 11% and hired two additional investment professionals, bringing its total to 18.
While Carlyle declined to name any of its LPs, a spokesperson did say that they were all given the option to increase or decrease their commitments. Some opted to decrease their commitment, while others increased their commitments.
“We made this decision at the end of June. Valuations are lower, less capital is needed, and our LPs thought it was a good idea. We are still seeing good deals in the pipeline, we just don’t need as much to do them,” said a company spokesperson, who declined to be named. “Look around at some of the other firms that have cut their funds. We made the smallest cut and still have the largest fund in Europe.”
Indeed, Carlyle has made the smallest cut yet. Two weeks ago, Viventures, a firm that invests in Europe out of a Paris-based office, reduced its $633 million second fund by 21%.
Although the fund is smaller, Carlyle still expects the life of the fund to be roughly 10 years. Thus far, the fund has invested in approximately 20 companies including Bigvine.com, Omiris Networks Ltd. and Yazam.com.
The spokesperson does not expect more fund cuts.
Contact Michael Copeland or Danielle Fugazy