US specialist IT investor Geocapital Partners is turning its attention to the booming European IT market and aims to raise a $50 million (ecu 45.5 million) fund for investment in high-growth computer-related enterprises in the UK and Continental Europe.
Geocapital partner Stephen Clearman said the firm, through the Geocapital Eurofund, “aims to extend its success with its US strategy into Europe”. He said Geocapital believes substantial investment opportunities are opening up in the European IT market, while competition in Geocapital’s target sectors remains less fierce than in the US.
Geocapital will target young businesses that, typically, were founded with modest resources and have developed to the stage where they have a product, a customer base and revenue between GBP2 million and GBP10 million. “Such groups are often heavily owned by the founders and tend to appreciate the support we can provide to a company with issues such as entry to the US market, which is a prerequisite for building large value, and recruitment, as well as the capital we provide”, Stephen Clearman said.
In the US, Geocapital has established a reputation as a value-added investor, normally taking minority stakes in return for investments in the $2-8 million range.
Historically, Geocapital Partners operated in the US through an affiliation with Broadview Associates, the specialist M&A adviser to the IT industry, which is a minority shareholder in the management company. However, this relationship does not cover Europe, where Broadview Associates formed an exclusive link with Electra Fleming to create the Kennet Capital IT investment business. There is a degree of overlap in the investment criteria of the Geocapital Eurofund and Kennet Capital, so the two groups will doubtless find themselves in the position of potential competitors – or collaborators – in certain situations.
For its venture into Europe, Geocapital is linking with another leading IT advisory group, Regent Associates, which will be an investor in the Eurofund and assume a role similar to Broadview’s in the US in terms of sourcing and evaluating IT transactions.
Geocapital takes a highly pro-active approach to deal sourcing, building long-term relationships within its target industry sectors: Stephen Clearman said 90% of Geocapital’s deals in the last five years had been identified through its active research and outreach programme. A similar strategy will be adopted in Europe, drawing on the local expertise and contacts of Regent Associates. Regarding the hurdle of “cultural differences”, which in the past has put a number of US private equity groups off their stride, Stephen Clearman made the point that IT entrepreneurs tend to share specific characteristics irrespective of national origin: “In Europe, just as in the US, they like to talk business with a credible outfit”.
Initial marketing of the fund in the US has drawn substantial commitments from existing investors in Geocapital funds and from other contacts. Stephen Clearman said the vehicle looked set to reach or exceed its $50 million target by the closing, which will be no later than June.
Geocapital, which was founded in 1984, began building the business in its current form in 1992 and has $200 million committed capital under management. The firm has made a number of investments outside the US through its previous funds. One, Axxon, has already been realised for a substantial profit, and a second profitable exit is expected during the course of this year.