VCFA Wraps Up Fourth Fund, Its First For LBOs –

Secondary firms large and small are buying more diverse assets than before. Credit Suisse First Boston specifically allocated $210 million in funding for venture buys in its latest $2.4 billion fund. Willowridge Inc., which recently closed its fourth secondary fund, also widened its purchases of secondary assets to include more of a balance between venture and buyout assets (see story, 20). Now VCFA Group, the New York-based firm credited with starting the secondary market, has broadened its reach into the LBO market with VCFA Private Equity Partners IV, a $250 million fund.

VCFA stuck to its fundraising goal and, though oversubscribed, would not take more than $250 million. The fund held its first close over a year ago and its final close this past April.

At least 90% of the fund’s capital will be used to purchase limited partnership shares in leveraged buyout funds. This is a departure for the firm. VCFA, which stands for Venture Capital Funds of America, has up until now been more focused on purchasing venture assets. The last fund VCFA raised, VCFA Venture Partners III, closed in 2000 with $100 million, dedicated at least 75% of its capital to venture interests and up to 25% for LBO secondaries. The firm expects to raise another venture-focused fund later this year. Up to 10% of the new fund can be used to purchase LP shares in venture funds.

So far VCFA Private Equity Partners IV has called down 13% of its capital and done nine deals, all for interests in leveraged buyout funds. VCFA Private Equity Partners IV is expected to take about four years to invest.

Limited partners in the fund include previous VCFA backers American Family Insurance, Liberty Mutual and the University of Richmond. New LPs include the New York State Common Retirement Fund and Teachers’ Retirement System and the UK-based East Riding Retirement System. The firm has added some smaller university endowments that invested between $3 million and $5 million apiece. VCFA also gained two additional foundations to its LP roster.

“We felt we could do LBO secondaries as well as venture,” says Dayton Carr, founding managing director of VCFA Group. He says that the addition of Edward Hortick, a former Bank of America Capital president and managing director who oversaw investments into middle-market buyout and other private equity funds, has been a big help to the firm.

VCFA Group increased its focus on buyout assets in 2001 out of concern that many of the venture funds on the secondary market were overvalued and saddled with potentially bad portfolios. It prefers smaller deals and generally avoids auctions. “We’re trying to find smaller, non-competitive deals,” says Carr. “There’s no point in getting involved in an auction, because the winner of an auction can be the loser.”

Launched in 1982, VCFA Group has made secondary purchases in more than 170 partnerships. The firm has four partners working from its offices in New York, Chicago and San Francisco. VCFA, which is affiliated with the London- and Paris-based ARCIS Group, is looking to add one additional partner to its staff.