Morgenthaler Closes $850 Million Fund –

Established funds continue to garner the majority of LP investments (versus first-time funds), and Cleveland, Ohio-based buyout and venture capital firm Morgenthaler is no exception. The 33-year-old firm has just closed its seventh fund, Morgenthaler Partners VII, with a total capital commitment of $850 million.

What’s more, despite a contracting buyout industry, the fund target was $700 million and therefore oversubscribed. In fact the firm only began fund raising in the spring of this year as its $570 million sixth fund, which closed in early 2000, became fully invested. Additionally, Morgenthaler has added new deal-making professionals to expand assist in committing the new fund.

Peter Taft, a general partner at Morgenthaler in charge of the firm’s three areas of focus – industrial growth and manufacturing, communications, and health care – attributes the firm’s fund-raising success to its track record. “Our LPs regard us as very good at partnering with great people to build great companies,” he said.

LPs that committed to Fund VII include the University of Texas, Stanford, MIT, Ohio State Teachers’ Retirement System, and a bevy of funds-of-funds. In fact, 75% of the new fund came from previous Morgenthaler fund investors.

“Limited partners have told us they are more apt to invest in names they trust with a record of solid returns and consistency through up and down cycles,” General Partner Bob Pavey said in a release.

While the firm made 65% of its buyout investments in the industrial growth sector with its last fund (with the remaining 35% going to the communications and services areas), Taft said he expects to see a significant increase in both communications and health-care investments with the new fund.

To begin with, “Our firm is seeing more quality deal flow in these areas,” he said. Moreover, the firm has “a long history in life sciences,” said Taft, and life sciences/health care is “a robust area of the economy.”

Indeed, venture capitalists invested $10.6 billion in 982 companies in the second quarter of 2001 with a notable investment increase in the life sciences sector, according to Venture Economics and the National Venture Capital Association (NVCA). During the quarter, 13.8% of dollars invested went to Medical/Health/Life Science companies, whereas only 11.2% went to such companies in the first quarter of 2001 and only 3.95% went to such companies in the second quarter of 2000.

Keith Kerman, a general partner at Morgenthaler heading up the buyout health-care practice, said he “expects to do at least a couple of platforms in health care” with the new fund, in perhaps medical devises, new drugs or hospital services outsourcing – “a growth area,” he said.

Regarding the communications sector, Taft and Kerman agreed that despite today’s downturn, the sector will be attractive over the next 10 years.

Kerman added, “It’s still a large and growing part of the economy.”

With slight adjustments due to the expansion in these sectors Taft noted that in general the firm’s investing strategy will remain the same.

“Our footprint is well-established,” he said. “We want to stay focused in areas where we have domain and operational expertise, contacts and relationships.”

Morgenthaler’s buyout group focuses on opportunities of $50 million to $250 million in transaction size, with an Ebitda in excess of $7 million. The new fund is expected to invest a total of $20 million to $50 million in equity in each company. Taft said Morgenthaler will assume about 65% debt per deal “or slightly lower,” a percentage he attributes to the state of middle-market investing.

Morgenthaler did not use a placement agent to raise money for Fund VII. “Historically we’ve been able to do it ourselves,” said Taft, adding, “this way we stay closer to our investors.”

In other Morgenthaler news, the firm has promoted Scott Fine to the position of general partner in the new fund, and has hired a new operating partner, Mike Gaudiani, bringing Morgenthaler’s number of general partners to 13, and its total number of deal-making professionals to 22.

Since joining Morgenthaler in October 1999, Fine has focused on a broad range of private equity investments, including companies involved in communications services and equipment, information technology services and other outsourced business service opportunities. Prior to joining Morgenthaler, he was vice president of finance and CFO at RELTEC Corp., a $1.1 billion telecommunications equipment concern that focuses on “last mile” solutions. Gaudiani is president and CEO of Warrick Industries, a Morgenthaler portfolio company based in Elkhart, Indiana.