LP Notes, week of Jan. 14, 2008

Adams Street eyes VC funds

Gary Fencik

, who heads up business development for Adams Street Partners, a Chicago-based funds of funds manager, says that the firm plans to commit relatively more money to venture capital funds than most institutional investors investing across all asset classes. Adams Street also plans to add a yet-to-be-announced partner to its Silicon Valley-based venture investing team, which directly backs mid-stage to late-stage startups.

Fencik says that he wasn’t at liberty to provide specific target ranges for buyout and venture capital funds. “One of the benefits to raising a new fund of funds each year is the ability to react and adjust to market conditions quickly, as opposed to raising a fund every three of four years and having to guess on market conditions over a longer period of time,” he says.

That echos comments made at a conference last spring by Adams Street CEO Bon French, who said at the time that the firm views the buyout markets as overvalued and the venture class as undervalued. Exactly where the bulk of Adams Street’s money will go remains to be seen, though at least two groups appear to be getting the nod: venture firms and startups seeking venture financing.

In December, Adams Street wrapped up its Global Offering Program at $2.1 billion, and Global Opportunities Portfolio at $390 million.

“Top down, we want to have balanced representation” between buyouts and venture, says Fencik, who adds that the firm hasn’t typically invested with first-time funds unless run by “experienced” managers.

The Global Offering Program raises capital annually, but the firm invests the capital over three to four years. Half of its capital will go to U.S.-based firms, 40% overseas and the remaining 10% to direct investments in startups and buyout deals.

The Global Opportunities Portfolio commits capital to some 10 to 20 firms worldwide over a one-year period.

In related news, Adams Street does not plan to replace Dennis McCrary, who was responsible for primary and secondary fund investing. McCrary left late last year for rival fund of funds manager Pantheon Ventures.

CalPERS advisor warms to turnaround funds

The $247 billion California Public Employees’ Retirement System agreed last month to increase its target allocation to private equity from 6% to 10%, or from about $15 billion to $24.7 billion.

Whether CalPERS will do more or less investing in mega-funds remains to be seen. It recently committed $1 billion to Apollo Management’s Apollo Investment Fund VII , which is aiming to raise nearly $16 billion.

David Fann, president and CEO of PCG Asset Management, a long-time advisor to CalPERS, says that PCG is emphasizing more small and medium-size funds, as well as leveraged loan funds, strategies that could help CalPERS capitalize on the continuing credit vacuum, as well as ensure that the deals to which it is ultimately committing get done.

Fann likes health care, which he calls “extremely interesting to us.” Other appealing industry sectors include cleantech and financial services. “It’s a contrarian play,” says Fann, but “we think they might be oversold in this environment.”

“Default rates are at an historic low—about 1.5%, down from between 3% and 4%—so we see a lot of potential there in a deteriorating economic environment,” he says. “And a lot of folks think distressed is an interesting play given the softening economy.”

CalPERS may also do more co-investing to avoid rich management fees. “We’re definitely seeing more [co-investing by plan sponsors] because of lower management fees—in some cases as low as 0%—and it’s a way to get yield enhancement and to participate [in a deal] with a firm you already have a relationship with,” he says.

Venture capital firms will get their fair share of dollars from CalPERS, although Fann himself has concerns about the increasingly high valuations that early to mid-stage companies are commanding. “We’re seeing late stage [funds] attracting a lot more capital.”