The approach of fall usually means a change in what’s fashionable. Designers bring out new lines, broadcasters usher in new lineups and not to be left out, venture capitalists appear to be introducing a new face as well, with a look that highly resembles buyouts.
Last month saw Battery Ventures and Austin Ventures try their hands in the LBO space with separate buyout investments (See Buyouts Sept. 8, 2003). Following their lead, MVC Capital announced a move toward the sector as well and rather than just dabbling in the space with the occasional buyout, MVC altered its entire business plan to be more buyout focused.
According to MVC’s press release, shareholders voted to implement a long-term strategy in which the firm will shift to “more traditional mezzanine investments, senior and subordinated loans and other private equity investments.” The move pits MVC against incumbent publicly-held buyout players such as Allied Capital, which targets the buyout universe through a mix of mezzanine, debt and equity investments.
To spearhead the new focus, MVC has tapped Michael Tokarz, a former partner with Kohlberg Kravis Roberts & Co. He will serve as chairman of the board and portfolio manager of the fund.
MVC said the shift toward buyout deals comes as an effort to “maximize total return.” Additionally, MVC said it would conduct a tender offer for 25% of MVC’s outstanding shares at a price of 95% of the fund’s net asset value. MVC, which trades on the New York Stock Exchange under the ticker symbol “MVC,” reported a net asset value of $144.1 million in July.
The migratory firm, formerly known as meVC Draper Fisher Jurvetson, was formed in 1999 amid the tech boom and the ensuing venture capital craze. It held a public offering in 2000, raising $330 million in an IPO that for the first time gave small individual investors a chance to get a piece of the venture capital pie. Initially, MVC invested in dot-com startups and other early-stage technology outfits, and not surprisingly-at least given hindsight of the tech implosion-the firm largely failed.
Soon after the public offering, MVC did away with its initial plan to partner with Draper Fisher Jurvetson on deals, and in October 2002 the firm announced, along with its name change, a plan to begin providing debt financing to startups. At that time, the end of Q3 2002, MVC had invested $134 million in 26 portfolio companies, which as of June, were valued at roughly $50 million.
In addition to the fund’s poor performance, MVC lost a proxy battle, which led to the ouster of the fund’s board of directors. The new board unanimously approved this latest shift toward buyout deals.
It remains to be seen whether a shift in focus will do the trick for the troubled firm. One buyout pro says, “There’s definitely been some downward pressure lately. As private equity returns have declined to the low twenties and high teens, that has put pressure on mezzanine.”
Added to that, the increasing number of players in the mezzanine market has brought additional pricing strain to the sector. The Carlyle Group has made its move into mezzanine, hiring three TCW Group fund managers to help launch a new $400 million fund, and private equity firm MapleWood Group has started fund raising for a $215 million mezzanine fund. New York Life has also made its way into the sector (see story p. 10).
The source adds, “I think it’s tough to change your model midstream like that. History shows that the buyout and venture capitalist worlds are different, and at the end of the day it comes down to the people in the shop and their skills.”