Two Telecom Breathe More Than $800M Into Market

Perhaps the only aspect of the telecommunications market expanding faster than bandwidth is the private equity capital raised to invest in the sector. In the past several weeks two telecom funds, both based in Denver, closed on an aggregate of $840 million.

On Jan. 10, Denver-based Telecom Partners held a final close on $500 million for Telecom Partners III LP, a fourfold increase of the $125 million raised for Telecom Partners II LP, which closed in 1997.

Capping the fund at $500 million, the maximum amount the firm told its limited partners it would raise, will not change the firm’s investment strategy, said William Elsner, managing member. Rather, the firm intends to use the more sizable base to take larger stakes in its portfolio companies.

“Telecom II invested in seven companies, and the average size was $15 million to $18 million per company,” Elsner said. “In this fund, we intend to invest in 10 to 12 companies at $40 million to $50 million per company.”

Limited partners in the fund include the Washington State Investment Board, Brinson Partners, Massachusetts Institute of Technology, Norwest Equity Capital, Pantheon Ventures and HarbourVest Partners.

C.P. Eaton & Associates acted as placement agent on the fund.

Meritage Private Equity Fund LP, a vehicle led by Centennial Funds co-founder and special limited partner Jack Tankersley, held the final close of its debut effort Dec. 22, netting $340 million from a limited partner base that included BankBoston, BankAmerica, CIBC Oppenheimer, Delta Airlines Pension, GE Capital Corp., VentureBank@PNC, The Communications Fund-a new fund-of-funds-the University of Tennessee and Travelers Insurance Co., Tankersley said. Focused exclusively on the communications network and services sectors, Meritage will make two types of investments through its inaugural vehicle. The firm offers the Fast Start program, which serves as an incubator investing as much as $1 million to support the development of a business. Tankersley said there is one company, Open Access Broadband Networks, in that program thus far.

The second and more common approach will be to participate in late-stage rounds of more developed companies.

“We are intentionally putting opportunities with early liquidity potential into the portfolio to build its history,” Tankersley said.

Investments made since the first close (PEW June 28, 1999, p. 7) include Diginet Americas,Completel, InFlow and Gabriel Communications.

Buyout Firms Welcome

Neither partner viewed the increased participation of buyout funds in the telecom sector as a threat. Indeed, Elsner and Tankersley spoke hopefully of the opportunity to work with deep-pocketed partners.

“I think buyout firms are a great source of capital to some of these firms as they get to the second-round financings,” Elsner said. “Buyout firms are great if they are enlightened and interested in the sector.”

Added Tankersley: “We need to think more carefully when building syndicates to consider groups we haven’t before, specifically these well-capitalized buyout funds.”

Michael Mortell, head of private equity at Prudential Securities, said the telecommunications sector has always presented a wealth of opportunities to private equity investors, and he expects the sector to continue to create deals.

“Look at the opportunities and it is clear there will still be [telecom] opportunities 10 years from now, with or without the Internet,” he said.