peHUB Wire: Friday, June 26, 2009

Coller Capital last week released a survey of limited partners, in which 65% of respondents said that they expect VC fund terms to become more LP-friendly over the next two years. This was portrayed by some as a sea change in the LP/GP power dynamic, although I suggested that “LPs would have more credibility if they began insisting on changes to funds that have already been raised.”

My dissent was rooted in the memory of late 2001 and early 2002, when LPs fought back against the obesity of VC funds raised during the dotcom bubble. Sixteen U.S.-focused venture capital firms “volunteered” to cut their fund sizes by an aggregate of nearly $4.5 billion, including brand names like Accel Partners, Battery Ventures and Kleiner Perkins. The argument for such cuts – which were technically agreements not to call down a certain percentage of committed capital – was twofold: (a) Valuations and investment opportunities had fallen post-bubble, so less money was needed; and (b) VC firms tend to perform better when they focus on earlier (read: smaller) investments, so this was a return to more successful knitting.

LPs were happy with the resulting fee reductions, and GPs were happy that their LPs were happy (butter ‘em up for the next fundraise). All hunky dory, except we’ve never actually looked to see if the fund reductions produced better returns. So let’s do that now:

I have obtained 12/31/08 IRRs for 13 of the 16 funds that cut their size, via a variety of sources (public filings, leaky LPs and research provider Preqin). These funds are: Accel Partners VIII, Atlas Venture VI, Austin Ventures VIII, Bay Partners X, Battery Ventures VI, Charles River Ventures XI, MDV VII (which was being “annexed” at last check), Mobius Venture Capital VI, Redpoint Ventures II, Sevin Rosen Funds VIII, Trident Capital V, Trinity Ventures VIII and Worldview Technology Partners IV.

I was unable to obtain 12/31/08 IRRs for the other three funds, so did not include them in my calculations. Those funds are: Kleiner Perkins X, Meritech Capital Partners II and Pacven Walden Ventures V. I’ve been promised data on these, and will update my calculations here if/when they arrive.

What I found was a mixed bag. The 2000 vintage of “reduced funds” easily outperformed industry benchmarks from both Cambridge Associates and Venture Economics. The 2001 group, on the other hand, did not. Here is data for the 2000 VC vintage, from which eight of the reduced funds came:

Mean IRRs for 2000 vintage

Reduced Funds: -1.17%

Cambridge Associates: -1.39%

Venture Economics: -2.1%

Median IRRs for 2000 vintage

Reduced Funds: 1.9%

Cambridge Associates: -3.37%

Venture Economics: -2.9%

The best performing of the 2000 “cut” class was Charles River Ventures XI, with a 9.93% IRR (according to Mass PRIM). The worst was Sevin Rosen Funds VIII with a -25.2% IRR (according to CalPERS). Now here’s data for the 2001 vintage, which had five reduced funds with available IRRs:

Mean IRRs for 2001 vintage

Reduced Funds: -5.7%

Cambridge Associates: 0.49%

Venture Economics: 1.3%

Median IRRs for 2001 vintage

Reduced Funds: -4.34%

Cambridge Associates: 1.07%

Venture Economics: -0.10%

The best performer in this class was Austin Ventures VIII with a 3.2% (according to CalPERS), while the worst was Bay Partners X with a -11.2% IRR (also according to CalPERS). I’m not a huge fan of fence-straddling, so I combined the mean IRRs for the 2000 and 2001 vintages:

Mean IRRs for 2000 & 2001 vintage

Reduced Funds: -2.39%

Cambridge Associates: -0.91%

Venture Economics: -1.04%

In other words, the average “reduced” VC fund underperformed VC funds as a whole (both cut and uncut). This isn’t to say that these particular funds would have performed better (or worse) had they stayed pat, but simply to say that the act of fund size reduction, on its own, did not spark outperformance. It’s also worth emphasizing that the number of reduced funds was very small in relation to the number of funds tracked by Cambridge Associates and Venture Economics, thus leading to possible sample size bias.

The median IRR for the reduced funds was 1.7%, but I couldn’t make a benchmark calculation out of the publicly available Cambridge or VX data. Now feel free to rip apart my calculations, or perhaps offer some constructive explanations are to why there would be such a marked difference between the cut class of 2000 and 2001. Or, simply have a great weekend…

Top Three

MailExpress Inc., an Atlanta-based provider of mail processing solutions, has raised $30 million in Series D funding. Lightspeed Venture Partners led the round, and was joined by return backers CMEA Capital, Logispring, XAnge Capital and Adams Street Partners. The company had previously raised $64 million.

Riverstone Holdings has acquired the wind development portfolio of Babcock & Brown LP, in partnership with the management of B&B’s North American energy group. The carved-out company will be known as Pattern Energy Group LP, while Riverstone’s equity commitment is $400 million.

Six3 Systems Inc., a provider of national security and defense intelligence services, has agreed to acquire Harding Security Associates Inc., a provider of identity intelligence, forensics analysis and security services to the federal government. No financial terms were disclosed for the deal, which is expected to close next month. Six3 Systems is a portfolio company of GTCR.

VC Deals

Tiempo, a Montbonnot, France-based, has raised €5 million in Series B funding. Viveris Management and Oddo Private Equity were joined by return backers EmerTec Gestion, Schneider Electric Ventures, INPG Entreprise SA and Alma Capital Finances.

Stentys, a Paris, France-based maker of stents for use in acute myocardial infarction and blocked coronary-artery bifurcations, has raised $4.2 million in additional Series B funding from Crédit Agricole Private Equity. The round total is now $22.2 million, including an original close last March from Sofinnova Partners and Scottish Equity Partners.

Escapia Inc., a Seattle-based provider of online management and marketing solutions for vacation rental managers, has raised $1.6 million. Return backers include Steven D. Murch, Buerk Dale Victor and Atlas Accelerator.

Red Mango, a Sherman Oaks, Calif.-based operator of frozen yogurt shops, has secured $1.2 million of an $8 million VC round, according to a regulatory filing. The company previously raised a $12 million in Series A round from CIC Partnersand John Antioco, former CEO of Blockbuster, Taco Bell and Circle K. Antiocoserves as Red Mango’s chairman.

Small Batch, a stealth developer of typography apps specifically for Web designers, has raised an undisclosed amount of first-round funding led by True Ventures. Other backers include Ron Conway, Ev Williams, Caterina Fake, Matt Mullenweg, Chris Sacca and Dave Samuel.

Buyouts Deals

LLR Partners has completed its take-private acquisition offer of I-many (Nasdaq: IMNY), an Edison, N.J.-based provider of enterprise contract management software and services. Under terms of the agreement, I-many stockholders received $0.61 per share, for an overall equity value of approximately $33 million.

Materis, a French construction chemicals company bought by Wendel Investissements in 2006, has completed a restructuring of its $2.8 billion worth of leveraged loans.

Fung Capital has acquired all non-management shares of ecVision, an Iselin, N.J.-based provider of supply chain management software. No financial terms were disclosed. EcVision raised around $20 million in VC funding between 1999 and 2000, from firms like GIC, Walden International, Morgan Stanley Private Equity and JPMorgan Capital.

PE-Backed M&A

Clear2Pay, a Brussels-based provider of payment solutions for financial institutions, has opened a Beijing subsidiary via the acquisition of ETH Tech Ltd. No financial terms were disclosed. Clear2Pay has raised over $50 million in VC funding from firms like AGF Management, IRIS Capital, Big Bang Ventures, GIMV and Trust Capital.

Healthy Directions LLC, a newsletter publisher and provider of physician-branded nutritional supplements, has acquired InnoVision Health Media, publisher of a magazine named Natural Solutions: Vibrant Health, Balanced Living magazine. No financial terms were disclosed for the purchase, which was made out of bankruptcy. Healthy Directions is a portfolio company of ACI Capital and American Securities Capital Partners.

PE Exits

Reader’s Digest Association Inc., a portfolio company of Ripplewood Holdings, has agreed to sell the assets of K-12 educational publisher Gareth Stevens Inc. to Roger Rosen (CEO of Rosen Publishing) and Gary Spears (co-founder of Gareth Stevens). No financial terms were disclosed.

PE-Backed Bankruptcies

Bodilsen AS , a Danish maker of wood flat-packed furniture, has filed for bankruptcy protection. EQT Partners bought the company in late 2006 for DKK 1 million, and invested approximatelty DKK 100 million.

Human Resources

Bob Borchers has joined venture capital firm Opus Capital as a general partner, according to the WSJ Digits blog. Borchers resigned last week as Apple Computer’s senior director of global product marketing for the iPhone. Opus is currently investing out of its $280 million third fund, raised in 2006.

Sven Guckelberger has joined Close Brothers as a managing director in the firm’s restructuring and debt advisory practice. He previously was with Deutsche Bank AG.

Terence Keyes is rejoining Morgan Stanley from Bank of America, Reuters is reporting. Keyes had joined Merrill Lynch (later acquired by BoA) last April as head of Asia corporate finance.

Stifel, Nicolaus & Co. has named Victor Nesi as director of investment banking and co-director of capital markets. He was previously with Merrill Lynch, as head of the firm’s global private equity practice for the telecommunications and media industry.

WP Carey & Co. hasnamed Greg Butchart as director of its Dutch subsidiary. He is a former director of Lehman Brothers’ real estate lending group.