In what will likely be the last venture capital/buyout hybrid vehicle for Morgenthaler Partners, the Cleveland-based firm has closed on $450 million (€373 million) for its eighth fund.
The $450 million cap represents a significant dropoff from the firm’s previous fund, the 2000-vintage Morgenthaler Partners VII, LP, which had closed on around $870 million. The reason, Morgenthaler general partner John Lutsi said, is because the firm is starting to move away from the combined venture capital-buyout model it has used since 1991, the year Lutsi arrived at the firm.
Prior to Lutsi’s arrival, Morgenthaler had invested strictly on the venture side, primarily targeting the information technology and life sciences sectors. However, for the past 14 years, roughly a third of the firm’s capital has also been directed toward buyouts.
“The key reason we dropped our fund size is that we’re listening to our limited partners,” Lutsi told PEO. “The message we were getting is that they wanted us to get away from the hybrid concept. So the smaller fund will allow us to go on a two to three year investment cycle, and after that we’ll move toward raising separate buyout and venture funds.”
The firm has no intention of splitting up, Lutsi said, and in time Morgenthaler will simply raise two separate funds under one roof.
Morgenthaler had used the hybrid model as a way to shift its allocation depending on the market. “One of the advantages of the hybrid model is that if the venture business is not going well, you can put more money into buyouts. But what we found fundraising, is that now the LPs would rather make those adjustments themselves,” Lutsi said.
In the past, Morgenthaler has not used a structured allocation model to distribute its investments, although Lutsi indicated that generally speaking, the firm’s capital was roughly split in thirds between its two venture mandates, IT and life sciences, and buyouts.
The buyout group focuses on the middle market, and primarily targets deals in the mission-critical manufacturing space and the business services sector. Just ahead of the fund close, Morgenthaler realized two exits, selling Precision Parts International and GED Integrated Solutions in September.
Morgenthaler maintains offices in Cleveland, Boston, Boulder Colorado, Menlo Park and Princeton New Jersey. Lutsi anticipates the firm will open up a European office in the next two to three years, identifying London or Frankfurt as two possible locations.
Investors in the new fund include The Board of Pennsylvania State Employees’ Retirement System, The Pennsylvania State University Endowment, The University of California, New York State and the University of Texas, among others.
Law firm Jones Day advised Morgenthaler on the fundraising.