Editor’s note: Today’s guest column comes from Georganne Perkins of funds-of-funds manager Fisher Lynch Capital.
Is venture capital broken? Worse, is it dead? Unfortunately, there’s no getting around the fact the overall venture returns for the past decade are uninspiring. But when have overall venture returns not been dismal? The median vintage year return over the past 29 years averages a mere 8%, which is hardly worth the effort. In fact, the ten-year pooled mean for venture went negative as of the end of 2009, and many investors concluded that it was indeed the end of venture.
So why should anyone be optimistic about the future of venture capital now? First and foremost, because inventors keep inventing but need help commercializing their innovation. Venture capitalists provide a unique skill-set to make this happen. VCs need money, and limited partners are willing to provide it. This is a virtuous circle of value creation: Capital from LPs and expertise from VCs transform entrepreneurs’ ideas into game-changing products and services building companies with real value. Sounds like Venture Capital 101, but too many investors have lost track of this model’s potential for success.
Second, there is a select group of experienced and visionary VCs that continues to support innovation with proven skills. As in poker, success in investing comes from taking educated bets under situations of uncertainty. All investors bet on the future—fixed income investors bet on the direction of interest rates, public markets investors bet on future earnings growth or relative value, hedge funds bet on any number of things. But none has control over the next card dealt. This is where experienced VCs have the advantage. They take the hand dealt and are then able to switch out some cards—tweak the strategy, change sales channel, improve management, etc.—to have a better chance at winning.
Third, there are lots of cards to play. Innovation is creating more areas of opportunity than ever before in information technologies, health care and now clean tech, each with many subsectors. Which will succeed? No one can know for sure, but successful VCs not only add value, they also have developed a vision for the future to guide their investment decisions.
Informed by the past, we invest in the future. The key for LPs is to be selective and patient. Venture capital is not for the faint of heart or those who can’t manage with some illiquidity because building value takes time. But invention never has a recession. Technology continues to evolve at a rapid pace, and entrepreneurs continue to actively start new companies and seek the most experienced VCs to help fund and build them.
Index returns for venture never have been, and never will be, worth the risk and illiquidity of the sector. But there should always be great returns for those few VCs who consistently make visionary, educated, valued-added bets on innovation. The average top-quartile break point in those same 29 years is 21%. For the past ten vintage years, the pooled mean for all top-quartile funds is already 9% (including those still in their j-curve phase). In a slow growth economy with volatile public markets and low interest rates, top-quartile venture capital should outperform other asset classes. Why? because venture capital—that virtuous circle—is the only investment opportunity that creates something out of virtually nothing. Selective and patient LPs will reap the rewards! .
Georganne Perkins is a managing director in the San Mateo office of Fisher Lynch Capital, which manages some $2 billion through funds of funds and co-investment funds. Previously she had been director of private equity at Stanford Management Company. Reach her at email@example.com
*** In a funk over the public’s negative view of the buyout business? Sure, you could repeat the phrase “I add value” three times every morning in front of the mirror. Or just check out a working paper posted online last week by Jarrad Harford and Adam Kolasinski of the Foster School of Business at University of Washington. ! Their study of 788 large U.S. buyouts from 1993 to 2001 demonstrates (to their satisfaction, anyway) that buyout shops do indeed create value in companies, rather than sucking the life out of them.
Spyglass Entertainment Group’s founders signed a letter of intent to take control of Metro-Goldwyn-Mayer, a movie studio owned by Providence Equity Partners, TPG, Quadrangle Group, DLJ Merchant Banking Partners, Sony Corp. and Comcast Corp. On Wednesday, The Los Angeles Times reported on the tentative agreement MGM reached with Gary Barber and Roger Birnbaum.
Gryphon Investors is in talks to buy Ann’s House of Nuts Inc. from Olympus Partners, according to sister publication Buyouts. Ann’s House of Nuts, founded in 1973, sells trail mixes and nuts under the Ann’s House, Ann’s House of Nuts and Nature’s Harvest brands. The company also provides private-label nuts for wholesale clubs and other outlets, including Costco Wholesale Corp. and Wal-Mart Stores Inc. Financial terms were not disclosed. The deal could close by the end of the month, Buyouts said.
Members of Goldman Sachs Group Inc’s New York Principal Strategies team are in talks with several groups, including KKR, Perella Weinberg, BlackRock Inc and Carlyle Group, to possibly join one of the firms, a source familiar with the matter said. Goldman’s proprietary trading desk has been in limbo as the firm works to comply with the Volcker rule, which limits the extent to which banks can make bets with their own capital.
Row 44 Inc. secured $37 million from investors through a Series B Funding round. The Westlake Village, Calif.-based company provides Internet connectivity services for airline passengers. The latest round includes participation by two new institutional investors along with PAR Capital Management, which led Row 44’s $21 million Series A investment round.
G Square, a Paris-based private equity shop that is focused on health care companies, invested €15 million in Zahnarztzentrum.ch, which is a dental services provider in Switzerland. Zahnarztzentrum.ch operates 10 dental service centers and is expected to generate sales of around €28 million in 2010.
DataSphere Technologies raised a $10 million series C round of funding led by OVP Venture Partners. DataSphere is a Web technology and hyperlocal ad sales company.
Expensify, maker of an expense reporting application, has landed a $5.75 million Series A led by Redpoint Ventures and joined by its $1 million seed round investors, Hillsven Capital, Baseline Capital and angel Travis Kalanick.
Socowave secured €3 million from a Series A investment in a round led by Balderton Capital. Socowave is a Dublin-based developer of wireless access systems for mobile communications. It plans to use the capital to accelerate development of its technology. Barry Maloney, a partner at Balderton Capital, will join Socowave’s board.
Careerminds Group, a Hockessin, Del.-based startup that makes a Web-based outplacement and career transition services platform, has raised $800,000 from Innovation Ventures, an SBIC fund based in Wilmington, Del.
London-based private equity investor Actis LLP has acquired Vlisco Group for $151 million. Vlisco designs, makes and distributes 51 million yards of branded fabric a year for consumption primarily in West and Central Africa. The seller was Gamma Holding NV.
For $60 million, St. Paul, Minn.-based medical device company St. Jude Medical Signs has acquired a 19% ownership stake in CardioMEMS with an exclusive option to buy the Atlanta-based privately held company for an additional $375 million if certain commercial milestones are met. CardioMEMS is a portfolio company of Boston Millennia Partners.
The Gores Group LLC acquired substantially all of the assets and assumed certain liabilities from National Envelope Corp. through a Section 363 transaction under of the U.S. Bankruptcy Code. The acquired Frisco, Texas-based company makes 37 billion envelopes each year. The bankruptcy court approved the transaction on Aug. 23.
San Francisco Equity Partners, a private equity firm focused on expansion-stage companies in the consumer industry, bought Zoom Eyeworks Inc., a Berkeley, Calif.-based designer and marketer of eyewear. Pacific Community Ventures and Simon Equity Partners partnered with San Francisco Equity Partners in the transaction.
Firms & Funds
H.I.G. Bayside Capital closed H.I.G. Bayside Loan Opportunity Fund II LP, a special situation loan fund focused on distressed transactions, with $1.1 billion in commitments. The target was $1 billion.
Charterhouse Group Inc., Highlander Partners and MTS Health Investors signed a definitive agreement to sell Chamberlin Edmonds & Associates, Inc., one of their portfolio companies, to Emdeon Inc. (NYSE: EM) for $260 million in cash. Chamberlin Edmonds is an Atlanta, Ga.-based provider of government program eligibility and enrollment services to over 200 acute care facilities in 30 states.
Clairvest Group Inc. has sold Casino Marina del Sol, Latin Gaming Chile S.A. and Latin Gaming Osorno S.A. at original cost to a Chile Holdings for $15.9 million and a 35.6 percent stake in the new holding company. Additionally, Clairvest Equity Partners III LP sold its investment in Casino Marina del Sol to Chile Holdings at cost and received a 40.9 percent in the holding company.
3M signed a definitive agreement to acquire Arizant Inc. for $810 million in cash. Arizant is a Eden Prairie, Minn.-based maker of patient warmers designed to prevent hypothermia in surgical settings. It is a majority-owned business of Court Square Capital.
Cressey & Co. sold its CCRx Holdings Inc. portfolio company to Omnicare Inc. CCRx, is a Harrisburg, Pa.-based institutional pharmacy that provides medications to residents in nursing and assisted living facilities. Harris Williams & Co. served as an exclusive adviser to CCRx.
European Capital Ltd. received proceeds of about £40 million for exiting its investment in Inspicio PLC, which is engaged in the testing, inspection and performance conformity markets. In February 2008, European Capital invested £35 million pounds in 3i Group’s take-private of Inspicio. European Capital is an investment company that is managed by an affiliate of American Capital Ltd.
Evolution Capital Partners LLC has sold Innerpac Inc. to a strategic buyer. Innerpac is a Cicero, Ill.-based maker of corrugated and chipboard partitions. Evolution Capital added the business to its portfolio in November 2006.
Lion Capital LLP has hired Citigroup and RBS to explore a potential sale of Hema, Reuters said. Hema is a Dutch retailer that Lion Capital bought in July 2007 from Maxeda. The retailer has 530 stores in five countries.
Miranda Technologies Inc. has acquired U.K.-based OmniBus Systems for C$48.7 million ($47 million) from private equity firm Palamon Capital Partners. Miranda Technologies expects the deal will add to earnings within the first full year of operation, and should generate product and distribution synergies.
Avolon named Lucas Mollan as its chief technical officer. Previously Mollan was managing director of Thomas Cook Group plc’s Thomas Cook Aircraft Engineering. Avolon is an aircraft leasing concern that has Cinven, CVC Capital Partners and Oak Hill Capital Partners as backers.
Matrix hired Vincenzo Narciso as a partner in its private funds group, where he will focus on both originating and raising capital for international private equity and venture capital funds. Prior to joining Matrix, Narciso was head of UBP Private Equity activities.
General Atlantic LLC has named Gary M. Reiner as a special advisor. Reiner will also serve as a director of, and offer deep operational expertise to, the firm’s portfolio companies. He previously served as General Electric Co.’s chief information officer.
Winston & Strawn LLP has hired both C. James Levin and Warren Loui as partners in the firm’s Los Angeles office. Levin was a partner at O’Melveny & Myers LLP, where he served as former co-chair of M&A/Private Equity practices. Loui comes from Mayer Brown LLP, where he was a partner in its banking and finance department. Loui was also the Los Angeles Finance practice leader.