As corporations become slimmer models of their former selves, Pantheon Ventures is taking advantage of what is left behind. The buyout shop just completed an $11 million secondary purchase of Quantum Technology Ventures from Quantum Corporation and plans to make a habit of buying the corporate investment arms that are often shed when corporations pare down. In fact, to insure Pantheon won’t miss an opportunity, the firm is also readying to raise Pantheon Global Secondary Fund II.
Pantheon Global Secondary Fund I, which closed on $418 million in 2000, is almost 75% invested. Fund raising is expected to commence in the fourth quarter of this year or the first quarter of next year.
“Given the active pipeline we will probably start fund raising late in the fourth quarter. These one-off investments are unique and can be really exciting,” says Jay Pierrepont, managing director at Pantheon.
While the new fund is still being thought out, Pantheon expects it to close with somewhere between $700 million or $800 million of capital within six to nine months of when Pantheon hits the fund raising trails. The fund plans to tap its previous investor base, but with the size of the fund being almost double of its last, there will be plenty of room left for new investors.
“We’ll look to our current investors to anchor the fund, and we will be looking to add investors,” says Pierrepont, who also says that the firm will stick to investing in non-auction transactions.
Apparently, there are enough portfolios for sale so there is no need for an auction. “A lot of firms undertook too much in the late 90s and now they are trying to get back to basics,” says Pierrepont. “Quantum wanted to sell. We were not privy to the conversation but we believe there was a change in management and they decided to go back to basics. There are a lot of data points and selling the VC arm is just one piece of restructuring.”
The $100 million VC arm’s portfolio contained 18 companies in the storage, silicon, security and enterprise software sectors at the time of the sale. The corporate VC was founded in March 2000 and focused on early-stage companies.
How Things Have Changed
When Quantum Corp. formed the VC arm its then president told PE Week that its parent felt it was a “great way for Quantum to augment its research and development activites and market developement efforts. Couple this with all the activity that is going on right now and we thought it was best to make a full-court press and launch a fund, rather than simply invest haphazardly or on an ad hoc basis,” said Jim Schraith.
At the time, Schraith expected the firm to invest in 18 to 25 companies, which it did. Some of those investments include Eastern Mountain Sport, 3ware Inc., Confluence Networks and Sierra Logic.
Pantheon, which bought Quantum’s entire portfolio, will rename the firm QTV Capital.
Pantheon had been looking at this deal since the beginning of the year. The deal proved to be fairly complex because, in addition to buying the portfolio, Pantheon also bought Quantum’s management team.
“It was a long transaction but we wanted the management team. They are experienced and well-regarded, and the portfolio is showing excellent progress,” says Pierrepont. “Subsequent to the deal closing, two of the underlying companies had attractive rounds of financing.”
Under the deal’s structure, Quantum’s management team is going to focus exclusively on achieving liquidity for its portfolio investments over the next three years. Additionally, Pantheon is going to supply the companies with follow-on money so it doesn’t get diluted during future rounds of financing.
Pierrepont admits that some portfolio companies are stronger than others are, he expects some portfolio companies to go public while others will be sold at trade sales.
“If they build a successful track record, we will be a partner of theirs in the future. We like to invest in new fund managers. We can be a large backer of their next fund, they just have to do a good job now,” says Pierrepont.
Not Just Quantum
Pantheon is going to continue to look for corporate spinouts but having a management team is not a necessity, says Pierrepont. “We were lucky this time, but Pantheon is ready to take on any attractive investments,” he says.
Prior to the Quantum deal, Pantheon bought an undisclosed financial institution overseas. As for the future, Pierrepont says there are several corporations with VC arms that have approached the firm. “We have a very active pipeline and we have several outstanding bids for similar companies right now. We expect another sale to take place in a couple of weeks,” he says.
Pantheon manages $5.5 billion on behalf of a worldwide institutional client base through its regional funds-of-funds, segregated accounts, a dedicated secondary fund and Pantheon International Participants PLC.
Contact Danielle Fugazy