Merrill sells venture debt interest

Investment bank Merrill Lynch has sold €150m-worth of limited partner interests in Kreos III, a €200m European venture debt fund.

Merrill Lynch, the investment banking group that was bought for $50 billion in September last year by Bank of America, has sold €150 million-worth of limited partner interests in Kreos III, a European venture debt fund.

Five buyers bought stakes from Merrill Lynch in the €200 million fund, with New York-based secondaries specialist Paul Capital taking by far the largest. Merrill Lynch, who originally seeded the fund in 2007, is now the second largest LP behind Paul.

The other four investors which have bought in to the fund are AIG PineStar Capital – the secondaries private equity team of AIG Investments – Boston-based private equity investor HarbourVest Partners, French fund of funds manager Access Capital Partners and SVB Financial Group, the parent company of venture debt giant Silicon Valley Bank.

Merrill Lynch had always intended to syndicate out a large portion of its $200 million fund interest as this was part of the original limited partner agreement, according to the firms involved.

New York-based Azla Advisers advised Merrill Lynch on the sale. David Waxman, managing director of Azla said that while many secondaries deals – in particular those in the buyout space – were not transacting because of difficulties valuing the underlying assets, this deal was feasible because of the nature of venture debt investments. “Repayments start early and there is little downside risk,” said Waxman.

Venture debt is typically used by venture capital-backed businesses as either growth capital or equipment financing. In both cases capital is provided and paid for by way of interest and principal payments – typically over a period of between 24 and 48 months – and stock warrants to give the lender access to the venture capital upside.

The €200 million Kreos III fund has already invested in 80 businesses across Europe. Because venture debt funds tend to return capital earlier than venture capital funds, the capital can be reinvested. So far Kreos III has put €330 million to work and will continue to invest for another two years.