Tech-focused buyout shop Accel-KKR downloads $600M

After burning through its second fund in two years, tech-focused Accel-KKR has raised a new fund that it hopes will last up to twice as long. The Menlo Park, Calif.-based firm closed Accel-KKR Capital Partners III after hitting the $600 million hard cap in August. The fund was targeted at $450 million.

The firm, born from a partnership between VC firm Accel Partners and buyout shop Kohlberg Kravis Roberts & Co., raised $300 million for its first fund in 2000 and $350 million for its second offering in 2006. Accel-KKR focuses on control investments in growth-oriented technology companies in which it can partner with existing management.

Every fund II limited partner re-upped for the third fund, while a handful of mid-sized endowments and European investors joined for the first time, according to Managing Director Tom Barnds. “That’s a very strong signal to potential new investors about the prospects for the firm and for the fund,” he says.

It’s also a sign of great returns from fund II. Accel-KKR, following a strategy light on leverage, has generated an IRR of more than 50% on an annual basis since 2002, says a source familiar with the firm. Many of the firm’s successes have come via sales of portfolio companies to larger, publicly traded tech giants.

Last November, for example, Accel-KKR realized a 6.2x return on its investment in Saber Corp., when developer of government solutions software was sold to EDS Corp. for about $420 million.

In January 2006, Accel-KKR and Teachers’ Private Capital exited their respective investments in 3D graphics company Alias, after the firms sold it to Autodesk Inc. for $197 million, or 3.4x what they paid for it in June 2004.

In December 2005, Accel-KKR exited CRS Retail Systems, a point-of-sale software provider, through a $121 million sale to Epicor Software Corp. after acquiring the company three years earlier for $45 million.

However, despite the stellar performance from recent investments, the firm’s first fund has returned an IRR of 6.1% through the end of 2007, according to the Washington State Investment Board, an investor in the fund

No investments have been made using equity from the third fund III, as of late last week. Barnds says that the first investment made with the new fund could be made to help facilitate an add-on acquisition for fund II portfolio company iTradeNetwork. Owned by Accel-KKR since December, iTradeNetwork, develops supply chain software for the food industry. It agreed to merge with a similarly focused business called Amphire Solutions Inc. earlier this month.—Ari Nathanson and Alexander Haislip