The contrarian

Sat in his Cavendish Square office in London, Jeremy Coller can't help showing that he likes his latest investment a lot. ?It's Eff-A-Be? he says, and the big grin on his face gives away just how pleased he is about the deal he and his colleagues struck with Lucent Technologies shortly before Christmas.

Coller spent $100m on an 80 per cent stake in Lucent's New Ventures Group (NVG) of 27 portfolio companies, a deal that has brought home to many that 2002 looks set to be a massive year for secondary funds. Coller believes it also puts him well ahead of the competition: ?Everyone claims to be contrarian, but nobody's had the balls to buy technology yet.?

Part of what his firm, Coller Capital, bought from Lucent is a big stake in Celiant, the largest maker of wireless base station amplifiers in the US. Celiant's closest rival is Powerwave Technologies, a Nasdaq-listed business with a market capitalisation of $1.2bn. Another key asset in the portfolio is iBiquity Digital, whose digital radio technology has become the sole standard in the US market. NVG was the largest shareholder in the company when Lucent sold.

Coller is certain these companies will fly. It's the deal that he and his colleagues spent close to two years looking for. ?We were convinced that yesterday's corporate venture is today's secondary, so we were trawling around, we wanted to get into technology,? he recalls. He says he isn't a techie, and whilst some of his colleagues are, the firm used consultants to help with the due diligence. It was made easier by Lucent's selling what Coller describes as ?old technology,? namely assets that had come out of Lucent's renowned Bell Laboratories in the late 1970s and 1980s. There already was a trading history. ?Take Celiant: it's profitable, it's EBIT positive and growing, and it has a five-year order backlog? he says, suggesting that there were some solid numbers to go on when valuing the assets.

The deal took five months to complete, which is pretty short considering that even straightforward buyouts can take longer to close. Three-way negotiations with Lucent and NVG's management began in August after a friend of Coller's had introduced the parties to each other. As is often the case in secondary deals where the vendor is eager to sell, price was not the issue for Lucent. What mattered to the struggling switchmaker, which in 2001 was forced to cut almost 30,000 jobs, was to get the deal done, and get it done fast. ?We managed to turn the chit-chat into an exclusive. They knew we had the money, liked the way we structured the offer and knew the portfolio was going to a good home,? says Coller. To meet Lucent's expectations on timing, up to 16 Coller executives were busy crunching the numbers.

When the work was done, many in the firm took a deep breath. There hadn't been a deal from the firm for 18 months after it led the $1bn purchase of NatWest Equity Partners' private equity portfolio from The Royal Bank of Scotland in 2000. Over 100 proposals had been looked at and rejected. 20 per cent of committed capital was left in Coller International Partners III, and investors were waiting for the firm to make the final cash call.

But, according to Coller, the real pressure to do another deal came from within the firm. ?Many of our executives are in their thirties. They had joined just before or after NatWest and not done a deal since. On top of that, we wanted to raise another fund. So there was enormous pressure from everyone including myself to just go and invest the fund quickly in an average transaction.? Coller says he and his colleagues are proud to have resisted the temptation to cut corners. ?Investors are only going to back winners, and it's just taken us too long to get here.?

The beauty of sole ownership
Questions about how the pressure to invest was dealt with internally quickly lead Coller into a debate about executive compensation and in turn to a declaration about how to build a private equity company. This clearly is a pet subject. Having set up Coller Capital in 1990 at the age of 32, Jeremy Coller remains the sole shareholder in the business and holds strong views on the merits this has when it comes to growing the company.

Coller says the firm's staff participate in the success of each fund by way of generous carried interest provisions. He rejects the idea that for a private equity firm to be successful, it needs to be run as a partnership with a number of executives sharing ownership in the management company. He thinks what's really needed is a strong vision, be it from an individual or an institution, able to build a business according to their own blueprint. ?Many successful groups had one owner with a strong vision at one point in their lives. For BC Partners it was Barings, for Apax it was Ronnie Cohen, for Warburg Pincus it was Lionel Pincus. You need a visionary to turn a small business into a leading group of 60 ? if you do it by committee, it's bound to be mediocre.?

The other weakness of the partnership structure according to Coller is the dilution that the founding partners face from the word go, making it difficult for them to give up any more at a later point – be it equity, carried interest or the management fee. ?When there is too many owners, no one cares about spending the firm's money to build. Here, to spend the management fee on building the firm is in everyone's interest ? except from mine, but I'm the one who wants to do it. I've got the ambition.?

This approach is certainly unusual in an industry where most organisations are set up as partnerships. The lack of equity participation will be an acquired taste to some, and a number of executives have left the company in recent years. At the same time, judging by their track record, the senior people currently on Coller's payroll would hardly have agreed to join the firm without a deal that would make it worth their while.

The jury is probably still out on the model, but Coller himself is convinced he has got it right. What remains to be dealt with is the issue of succession: ?Our goal is that within the next couple of years I will be able to be hit by a bus,? he says. If that happened tomorrow, the money in the fund would automatically go back to investors, but Coller wants the firm to last and says he is impressed with groups where the original anchormen were able to retire successfully. To get to this point himself, he will have to divide up the company's equity eventually, which will be lucrative for those around him: ?The beauty of being the sole owner is there's lots to give away,? he says.

Secondaries to get into business
Getting Coller Capital off the ground was not an easy undertaking. Coller's obvious strong-mindedness leaves you with the impression that it was the depth of his convictions as much as anything that helped him get through the early years.

In 1990, he was working as an investment manager at ICI Pension Fund. Having returned to the UK after a six months sabbatical at a US buyout firm, Coller wanted to be a venture capitalist. His big idea was to set up a European private equity fund of funds, partly investing in funds, partly making direct investments. He took the idea to the late Tom Heyes, then Chief Investment Officer at ICI, who liked the idea but warned it would take the corporation two years to approve it, and they wouldn't give him a pay rise either.

Coller took Heyes' advice and left, sold the idea to Baring Brothers who agreed to sponsor him, moved into an office on Park Lane and began raising a ECU50m fund. A month later the Gulf War broke out.

?It was very hard. Everyone in Europe hated private equity, or venture capital, as it was known then.? At one point Coller secured ECU5m from Bishopsgate Investment Management, but the money disappeared again in the swamps of the Robert Maxwell scandal. Other millions were raised here and there, but never enough to have a business. Eventually he concluded there wasn't a market for a fund of funds in Europe yet. But going back to being an employee wasn't an option. That meant that a different product was needed.

?Everyone claims to be contrarian, but nobody's had the balls to buy technology yet?

Whilst still at ICI Coller had done some secondary investing and felt his track record was good enough to give him a credible pitch to his sponsors. ?At the end of 1991 I thought, ?if everyone hates venture capital, why not buy it?? Meanwhile Arnaud Isnard, then his joint venture partner, was investing in US secondaries for the Venture Capital Fund of America, which helped convince investors that the right skill set was there.

So the offering memorandum was rewritten, and Coller was off raising a secondaries fund. This was not because of any particular passion for a niche that at the time was virtually unheard of in Europe and even dismissed by many as ?other people's rubbish?, but because it seemed the only way of meeting that all-important objective ? to get the firm into business.

Baring Brothers went along with the new pitch, as did some other investors who had already committed, but fundraising in Europe remained a hard slog. It was only after Coller went to America and approached US institutions that the proposition took off. The Rockefeller Foundation agreed to invest and, after numerous meetings, the State of Michigan put in $5m too. What seemed a tentative step for a major public fund has turned into a lasting and important relationship: the state fund has become a major supporter of Coller's, committing $38m to the second fund and $60m to the third. But it was their initial commitment that helped Coller finally close his first fund in 1994.

?Our goal is that within the next couple of years I will be able to be hit by a bus?

A number of small transactions followed, most notably the purchase of Standard Life's US venture capital and buyout portfolio in 1995. In 1998, the second fund closed at $240m, followed shortly by the deal that finally put the business on the map: Coller bought five venture, seven buyout and two mezzanine funds off Shell Corporation for $265m. ?We got really hit in the market place by groups saying we had overpaid on the deal,? Coller recalls, adding that what his US rivals didn't realise was that his people had much better access to the 30 per cent of the Shell portfolio that were located in Europe. In 2000 came Natwest, which saw Coller Capital take on 292 individual private equity investments, making it the second largest owner of private UK businesses behind 3i.

Coller is highly competitive, and what the competition says about his business obviously matters to him. He is right to think that the three big deals he has done to date make it difficult for anyone not to take him seriously. ?When we did Shell, everyone said it was happenstance. Natwest was coincidence. Now Lucent is on all the enemies' radar screens? he says, and delivering this line gives him immense pleasure.

Lucent marks the concluding investments for Coller Capital International III, which had total commitments of $681m. Raised in 2000 to track down attractive opportunities in a declining private equity market, it has returned 46 per cent of its capital to investors to date. According to Coller, it is poised to become the firm's best-performing fund so far, with a predicted 40 per cent plus IRR and a 2.5 times cash multiple.

The next fund, about to be raised, is targeted at a billion dollars. Coller believes that it is still the start of the market, although ?everyone says there is too much money raised for secondaries. US investors are questioning it. But it won't be difficult to find deals ? the challenge will be to buy the right ones.?

Among the right ones could be other Lucents ? ?we are very interested in technology? affirms Coller ? but the firm also remains keen on its original bread and butter, i.e. buying small positions from institutions or individuals in any sector. But it's a great market for doing deals big and small he thinks, pointing out that today's environment is very similar to that of 1990, when a recession was looming and numerous opportunities presented themselves to go against the flow.

Coller has proved that he can grab such opportunities as and when they come along. He calls his style ?opportunistic? and likes to think of the company's approach as one of being consistently contrarian. Most commentators would agree that there should be plenty of deals in the market going forward. There is also far more competition than there used to be, but that doesn't seem much of a concern to him. He is focused on taking the business to the next level: ?I think there's a chance to build something great.?