Mercer Consults Private Market

In a series of moves designed to expand its role as a value-added investor, Mercer Management Consulting Inc. has formed a venture capital arm, a private equity consulting practice and an e-business incubator.

While all of the new groups will complement one another and provide some deal flow overlap, a Mercer spokesman said that the rapid-fire timing of the announcements was, for the most part, coincidental.

The venture capital vehicle is exclusively funded by Mercer’s parent firm, Marsh & McLennan Companies Inc., and is named the Marsh & McLennan Communications & Information Fund (C&I Fund). It will invest exclusively in wireless broadband and Internet-related companies.

The fund is officially uncapped but plans to invest between $50 million and $100 million in its first year of operation, said Robert Fox, a Mercer vice president and co-managing director of the new venture. He added that typical investments will range from $5 million to $15 million as part of a significantly larger Series B or Series C round.

Fox, who has been with Mercer for nearly twenty years, will share his managing directorial duties with former CIBC venture capitalist Robi Blumenstein.

“We have a tremendous opportunity here to not only provide capital to the next generation of technology companies, but to also introduce them to other segments of the Mercer organization that can provide resources unavailable from most other VCs,” Blumenstein said.

One such resource, however, might actually be other VCs themselves. After all, the primary activity of Mercer’s new private equity group is to identify strong venture investment opportunities.

“The private equity community has very different needs than our traditional client base so we decided to develop a different model to best satisfy them,” said Scott Birnbaum, vice president of the private equity group. “We will come in and proactively develop places that we think will make good investments.”

While not every C&I Fund deal will be shopped to private equity consulting clients, nor vice versa, there will indeed be a certain level of information sharing.

“The real driver of value here is co-investment: My ability to honestly say to a client that not only am I willing to swap fees for equity when appropriate, but that I am also willing to co-invest with you,” Birnbaum said.

Incendiary Firewalls?

This particular co-investment scenario, however, brings up the same type of client confidentiality and conflict of interest issues that have dogged other consulting firms when they chose to establish themselves on the equity buy-side.

For example, if the C&I Fund works on a closely-held venture offering that fits the portfolio criteria of a private equity client, does the client get a peak at the offering document? Or, on the other hand, what happens if an issuer says that the C&I Fund can only lead a particular deal if it can manage to bring a private equity group client into the fold as an additional investor?

In response to such concerns, Fox said that Mercer has set up “absolute Chinese walls” designed to proactively defuse any potential problems . “Confidentiality and client integrity is all you’ve got in the consulting business,” he explained.

Blumenstein said that significant firewall breaches would occur only if the C&I Fund receives unsolicited business plans that do not fit the venture vehicle’s industry focus. “We’d probably throw those back to the private equity arm,” he said.

Likewise, neither the C&I Fund nor the private equity group will share information with Mercer’s new e-business incubator without the consent of all the involved parties.

According to a prepared statement, the new unit was formed in conjunction with IBM Inc. and will help companies design, incubate and build new e-businesses. It is an outgrowth of previous development projects on which Mercer and IBM collaborated.