Spectrum Equity Investors has reduced the target capitalization for its fifth fund, following consultation with prospective limited partners.
The firm had sent out offering books with a $2 billion cover price, and indicated that it would accept upwards of $2.5 billion. Investors, however, reacted poorly to the proposal, and convinced Spectrum that a $1.5 billion fund size would be more appropriate.
There was some speculation that Spectrum’s hand was forced by the defection of several large LPs, but a source close to the firm denies such cause-and-effect. “Every firm is going to have some LP turnover from fund to fund, but that isn’t the reason for going from $2 billion to $1.5 billion,” the source says. “Limited partners said they’d be more comfortable investing at $1.5 billion because they felt it was a better fit with Spectrum’s strategy, and that was a feeling that was honored.”
The firm’s strategy has been to invest in expansion capital and leveraged buyout opportunities throughout the domestic media and communications sectors, with some attention also given to IT and business services companies. It insists on enterprise values of over $100 million, and almost all of its deals are done in the United States – Spectrum has offices in Boston, Menlo Park, Calif., and New York – although it has done a handful of deals in Western Europe and Canada.
Spectrum raised more than $680 million in 1999 and nearly $2 billion just one year later. Some LPs now suggest that current tastes have shifted toward further specification. In particular, they say that they’d prefer a VC-only communications fund or LBO-only investment fund, as opposed to Spectrum.
“I’m glad that they don’t do real early-stage stuff, but I’d prefer to have diversification throughout my entire portfolio, instead of within a single fund,” says a pension system manager familiar with Spectrum. “That may have been part of their problem, particularly because there were other [LBO-focused] communications funds from [Providence Equity Partners] and ABRY Partners out at around the same time.”
A source close to Spectrum insists that while the firm’s size has grown since its 1994 inception, its ratio of expansion-to-buyout deals has remained relatively consistent. Moreover, he suggests that firms like Providence – which closed on $4.25 billion in September – were aided by a pre-marketing effort that Spectrum did not make, due to its lack of an in-house marketing or investor relations partner. That vacancy is expected to be filled before any future fund-raising efforts, were they to occur.
Neither Spectrum nor its placement agent Lazard commented on the fund-raising process, due to SEC marketing restrictions. The fund is expected to hold multiple closes, although no timing details were available as of press-time.