Kennet gathers momentum

Taking advantage of the cheaper US technology market has seen Kennet Capital make its first investment from its latest fund Kennet II. The firm has put $5m (E5.5m) into Aarohi Communications, a Silicon Valley based company that develops storage processing semiconductors.

The fund, whose investors include Harbourvest, Bank of America, Allianz, Swiss Re and Swiss Life, has been in no rush to invest its money, although it had taken only four months to raise its $250m total last year.

As with the firm's first fund, Kennet I, the investment team again waited nine months to make their first investment. “If you don’t find anything interesting to invest in, don’t invest,” remarks Michael Elias, the managing director of Kennet Capital.

The geographic focus of Kennet II is 70 per cent Europe and 30 per cent US. Nonetheless, Elias believes that the US is, for the first time in history, actually cheaper than Europe. “In the old days European valuations of companies were a third of US companies, like for like. Now European valuations are at least a third higher than US ones.” He does, however, believe that this is set to change very soon. “Things are looking like they are falling in Europe with valuations dropping almost monthly.”

Elias is also very clear about how the technology market is changing. He believes that only certain specialised areas will be actively supported going forward. “One of the biggest differences between this year and last year was that last year so many segments were interesting to everybody, while this year there are few. People are excited about storage technology generally and telecoms OSS (operational support systems),” he says.

Exits are also much more difficult in today's chill climate. Kennet I for instance is still sitting on investments made in 1998 and 1999, although it achieved some spectacular exits last year, two of which set new European records. These include a £1.2m investment in UK software company Paragon which was sold to Openwave for $540m and a £1m invesment in Swedish company Altitun, sold to ADC Telecommunications for $872m.

Elias believes that funds that are rich in cash are in an enviable position following the dramatic downturn in technology valuations. “Although you have to be very cautious about where you invest, for the right companies the investment terms are very interesting,” he observes.

Kennet seems now to be gathering speed: the new fund has three more investments in the pipeline, two of which are in UK companies.