Lexington, Mass.-based Highland began fund-raising in early spring with the intention of seeking half of the $800 million it raised in 2006 for fund VII, due to LP liquidity issues and the overall VC market malaise.
The firm said at the time that it began fund-raising, the plan was to raise less money initially and, if the environment improved, go back out for a larger fund sooner than it normally would. If times stay tough, then it’s sized appropriately for a normal investment cycle.
However, some of Highland’s investors still balked, which caused the firm to delay its first close, reduce its carried interest from 25% to 20% and make its “expense put” more LP-friendly.
Bob Higgins, general partner of Highland, says that institutional fund-raising all but closed by August.
“The fund size was really just math that takes three factors into account: The time it takes to raise the fund, the number of deals per year and the average dollar size per deal,” Higgins says. “We’re projecting a slightly lower number of deals per year, and will be more cautious on deals with high capital requirements.”
Highland may shy away from certain pharmaceutical or industry-heavy cleantech opportunities, and lean more toward lower-cost IT plays. When it does do a capital-intensive deal, the strategy would be to sign outside partnerships earlier than Highland has traditionally done. Case in point is Generation Health, which Highland helped to launch in November 2008. Just last week, Generation Health signed a contract with, and sold a minority stake to, CVS Caremark.
Higgins also says that the smaller fund size is not being married with a reduction in the size of Highland’s partnership. In fact, he says that the firm is slowly considering the addition of up to three new partners, he says.
The best-case scenario would be for one additional partner in each of Highland’s three offices—Boston, Menlo Park, Calif. and China—but Higgins admits that such an even split may be easier said than done.
Highland is expected to make a few more new investments out of fund VII, with the first fund VIII portfolio companies to be added in Q1 2010. —Dan Primack