Kennet IT Fund Comes In Well Over Target

Kennet Capital closed its maiden European IT fund on GBP47 million (ecu 70.7 million) in January. Electra Fleming and specialist IT investment banking and advisory group Broadview Associates formed Kennet Capital as a 50:50 joint venture last year (EVCJ April/May 1997, page 7) to invest in IT and communications technology sectors in Europe.

The original target set for Kennet Capital – the fund shares the same name as its management company – was GBP35 million. Managing director Michael Elias said that once fund raising, which kicked off relatively slowly, had gathered momentum, Kennet Capital decided to increase the target to GBP45 million. That the fund was oversubscribed even at the increased level is yet another indicator of growing international appetite for European technology – particularly IT – funds.

Kennet Capital rounded up around ten institutional investors, including Electra Investment Trust, the European Investment Fund, PARNIB Converging Technologies, Broadview Associates and BankAmerica Corporation. These groups are participating alongside some 20 private individuals, mostly key figures from the global IT industry, including the partners of TA Associates. Michael Elias said one of the reasons for the TA partners’ investments is “potential early access to interesting European deal flow”. Since Kennet is targeting companies with turnovers in the GBP1-10 million range and TA normally invests in larger, more developed enterprises, there is little likelihood of conflict between the parties: “In a way, TA view us as an incubator”, Michael Elias said.

Kennet Capital also features a GBP1 million co-investment pool provided by individuals within Kennet Capital itself, Electra Fleming and Broadview Associates.

Focus on Northern Europe

Kennet Capital will typically act as lead financial investor, providing between GBP1 million and GBP4 million to each company. It expects to be particularly active in the UK, Ireland, France, Germany, Benelux, Sweden and Denmark; although its remit does not preclude investment in Southern, Central and Eastern Europe, Kennet will not actively source deals in these regions and, according to Michael Alias, does not expect to make any investments outside Northern Europe. He also stressed that, despite Kennet Capital’s London location, the fund is genuinely an international vehicle, with no more than 20% invested in the UK.

The combination of Electra Fleming’s growing European network and Broadview Associates’ wealth of contact in the IT industry are expected to provide a unique and high-quality deal flow for the fund. The managers now also expect to capitalise on the experience and industry knowledge of the fund’s private investors, whom Michael Elias described as ” both a valuable-sounding board and a potential bank of non-executive directors”.

Activity in Europe’s IT and communications technology sectors is running at an all time high. Kennet is pleased with deal flow to date, and is looking seriously at two investment proposals, one in the UK and one in France, though Michael Elias said neither was yet close to completion. Kennet currently has a team of three following the recruitment of principal Roeland Boonstoppel and associate Martin Paulsen (EVCJ December 1997/January 1998, page 31). The firm expects to add a further senior executive to its team within the next few months.

The vehicle is structured as a ten-year closed-end Jersey LP; the managers expect that Years One to Four will be the prime investment period for Kennet Capital, and Years Four to Seven the target window for harvesting.

A 2.5% management fee is payable over the full life of the fund, with no reductions, and is also protected through a link to the UK Retail Price Index: “We could keep those features because of the level of demand”, said Michael Elias.