America news<br/>FUNDS AND BUYSIDE

Raising a fund that is $350 million less than the last one may spell defeat for some in the private equity industry. But for life sciences-focused MPM Capital, it was a conscious decision to keep life a little simpler, says founding general partner Luke Evnin.

The 10-year old US-German investment house recently closed its fourth fund, MPM BioVentures IV, on $550 million (€417 million); in contrast, its $900 million third fund, closed in 2002, was at the time the largest healthcare-dedicated venture fund ever raised.

“When we raised a larger fund, part of what we wanted to be able to do was a handful of $50 million to $100 million deals,” Evnin explains. “We did end up doing one of those deals – [with the backing of] a company called Xanodyne – and we looked at a lot of others, but we just didn't win [the bids].”

The consequence, he says, was “we ended up with a larger portfolio than we had wanted” of approximately 40 early-, mid- and late-stage companies, in which MPM invested an average of $20 to $30 million.

MPM will apply the same general investment strategy to its current fund, but aims to create a portfolio of about 20 companies. That size portfolio is much more manageable, Evnin says, “just in terms of the amount of effort you can put behind it”.

Roughly 80 percent of the fund's assets will be invested in the US, with the rest heading to Asia, Europe and emerging markets such as India and China. Of those investments, approximately 85 percent will be biotechnology-related, while 15 percent will focus on medical technology, tools and diagnostics. The fund may also participate in private investments in publicly traded entities.

One aspect on which MPM will concentrate, Evnin says, is ensuring the companies it builds have a chance to play into industrial pipelines.

Large players in the medtech and biotech spheres, particularly Big Pharma, Evnin says, are increasingly “buying-in additions to the pipeline in the early- to mid-stage of clinical development – they're buying-in whole companies to plug holes in their pipelines.”

Though for now MPM has chosen to stick with opportunities that have 8-figure price tags, Evnin admits the firm still finds many of the larger deals quite interesting.

“The thing we're going to continue to experiment with is: What about those larger deals?” he says. “Can they be part of a core fund? Or do they need to be a separate activity?”

For future MPM funds, Evnin acknowledges, “it may make sense to scale back up”.

Providence Equity Partners, a private equity firm based in Providence, Rhode Island, has closed its sixth fund, Providence Equity Partners VI, on $12 billion (€9 billion). The new fund is nearly three times larger than the previous one, which closed at $4.3 billion in 2004. Jonathan Nelson, Providence's chief executive officer, said it took only four months to raise the new fund. Its limited partners include corporations, pension funds, university endowments, private foundations, funds of funds and high net worth individuals. The close of the fund brought the firm's total assets under management to about $21 billion. Founded in 1990, Providence invests in the media, entertainment, communications and information sectors. Market sources say the pace of Providence investing Fund V and coming back for Fund VI was indicative of the private equity cycle's recent acceleration.

Waltham, Massachusetts-based venture capital firm Commonwealth Capital Ventures closed its fourth fund, Commonwealth IV, at $250 million (€190 million) in March. At the time of the close, it was in the process of closing the first three investments to be made with the fund. Two of those investments are in start-ups and valued at about $3 Billion each, general managing partner Mike Fitzgerald said. The third one is a more substantial investment in an existing portfolio company, he added. The fund will make investments between $3 million and $5 million and will focus on software and technology companies located in the Northeastern US. A majority of the fund's limited partners are existing investors. They include the Massachusetts Institute of Technology, the Teachers Insurance and Annuity Association-College Retirement Equities Fund and the Investment Fund for Foundations.

Private equity real estate funds raised a total of $59.5 billion (€45.4 billion) in 2006, according to data compiled by sister publication Private Equity Real Estate. The funds far surpassed the total of $37 billion raised in 2005. “Given the amount of leverage typically employed by private equity real estate firms, the funds raised in 2006 have buying power of approximately $180 billion,” said Paul Fruchbom, the magazine's editor. “A significant amount of this money will be spent in international markets as firms spend more and more resources building up their capabilities in the emerging markets of Eastern Europe and Asia.”

Greenwich, Connecticut-based Littlejohn & Company has completed an additional round of fundraising for Littlejohn Fund III early in March. The fund closed at $850 million (€643 million). The firm said it received approval last year from its limited partners to amend the fund's terms and broaden its investment mandate to include acquisitions which may not result in a controlling stake. Littlejohn specialises in acquiring distressed companies with revenues between $150 million and $800 million. Littlejohn Fund III is the largest of the firm's funds to date. It closed at $650 million in May 2005 after a first close of $380 million in January 2005.

New York-based private equity firm Lightyear Capital has closed its second fund, Lightyear Fund II, at $850 million (€649 million), in March. The firm surpassed its target goal for the fund by $50 million. Like the firm's first fund, Lightyear Fund II will invest in financial service companies, including asset management, banking, brokerage, financial technology, insurance and leasing. It will be invested over five years. At the time of the close, the fund was already 20 percent invested, Mark Vassallo, a Lightyear managing director, said in a statement. The firm had made two investments: one in Flagstone Reinsurace Holding Company, a Bermuda-based reinsurance company focused on property catastrophe and other casualty coverage, and another in Delos Insurance Group, a Delaware-based specialty insurance program underwriter. The firm did not disclose the details of either transaction.

Scale Venture Partners, a venture capital firm based in Foster City, California, closed its second technology- and healthcare-focused fund, Scale Venture Partners II, at $400 million (€305 million) in March. The firm's original sole investor, Bank of America, transferred its interest in the existing fund to a mix of 12 limited partners, the majority of which are funds of funds. They include Montague Newhall, Lexington Partners, Pantheon Ventures and Macquarie Global Private Equity Fund. Scale Ventures, formerly known as BA Venture Partners, spun out of Bank of America in January. Bank of America was the sole limited partner in its first fund, which closed in 2000.

New York-based private equity firm Aquiline Capital Partners has closed its debut fund on $1.1 billion (€837 million). The financial services buyout firm was founded in 2005 by Jeffrey Greenberg, who also enlisted New York-based private equity firm Venturion Capital in the enterprise. Greenberg, the son of former embattled AIG head Maurice “Hank” Greenberg, resigned from insurance broker Marsh & McLennan in October 2004 amid bid-rigging and price-fixing allegations levied by New York's attorney general. Marsh eventually reconciled those charges via an $850 million settlement. Among Aquiline's 13 investment professionals is Ian Smith, the chairman and CEO of Marsh prior to Greenberg.

In the May 2007 issue of Private Equity International, look out for:

Leveraged finance: is the debt boom set to maintain its momentum, or are we witnessing signs of a cooling off?

Private equity's top 50: a global ranking of the 50 largest private equity firms by assets under management

Special supplement on private equity real estate

Plus other topical features and all the news, interview, columns and profiles you expect from PEI, the global magazine for private equity.