Project Optics: the divestiture of a corporate venture capital program

Lawrence E. Penn III, Managing Director of The Camelot Group, provides a case study of how corporates can achieve liquidity from their venture capital investment activities via the secondaries market

Rationale

 

The Camelot Group International was engaged to advise on the divestiture of a major corporate venture capital division, Corning Innovation Ventures, LLC (CIV). Corning’s venture investment program strategically invested in venture capital to provide financial returns as well as long-term strategic benefits including access to new technology. By mid-2003, CIV had invested in over 17 companies which met their investment criteria. The portfolio company investments included several promising optics companies, including Akara Corporation, Celion, IoLon, Optical Solutions, Inc., Word Wide Packets and Xanoptics, Inc. Most of the portfolio companies were in the high-growth stage of their development, building revenue and market share both domestically and internationally.

 

Despite the fact that the corporation had previously made public announcements relative to its intention to divest the portfolio and several interested parties had conducted superficial due diligence on the portfolio, no transaction had ensued and no adequate offer had been received by the seller during a nine month period. The reasons cited in this context by Corning and potential acquirers included the lack of clarity relative to the operational and management quality on the portfolio company level, lack of visibility regarding the near-term prospects of the portfolio companies, as well as an insufficiently defined strategy regarding the ongoing management of the portfolio and desired inclusion of members of the legacy management team. Additional crucial impediments to a timely and beneficial execution of the divestiture included the lack of independent and professional management of the sales process, including concise compilation of the salient portfolio information for prospective acquirers, assembly of a targeted group of likely and motivated buyers, as well as the professional organisation and execution of the divestiture process.

 

Execution

 

Within five weeks from engagement, The Camelot Group completed its due diligence, valued the portfolio, introduced the eventual acquirer and executed the  transaction in the form of a management buyout.

 

Integral components of The Camelot Group’s due diligence comprised a thorough analysis of the portfolio, including a detailed bottom-up analysis of each portfolio company’s financial results and market position as well as the respective projections for near-term financial and operational developments. Furthermore, a fair view of the up-to-date valuation of the portfolio and related follow-on financing requirements was established, thereby verifying and confirming management’s conservative assessments, in order to provide accurate guidance to the eventual acquirer. In addition, the appropriate organisational, financial and management structure for the portfolio post-closing of the divestiture was determined. Specifically, The Camelot Group recommended the creation of a new structure and determined the appropriate ongoing staffing level for the portfolio. Accordingly, it was determined that only one member of the legacy management would be required to subsequently manage the portfolio with a new buyer.

 

Upon completion of due diligence and the initial structuring of the divestiture, it was possible to derive a favourable view of the portfolio characteristics, both in terms of its degree of diversification and its potential to generate adequate returns to an acquirer. This analysis was condensed and communicated in the form of an Offering Memorandum to prospective acquirers along with the salient information, reports and statistics regarding each portfolio company.

 

From its database of international clients and contacts in the private equity industry including international investors, The Camelot Group subsequently assembled a detailed list of potential acquirers whose investment strategy was in line with the proposed opportunity and who possessed the capacity for timely consummation of the transaction. The list comprised strategic and financial investors, including four dedicated secondary investment firms, four international private equity firms, two strategic investors, one family investment vehicle and one domestic foundation, each of which had previously communicated their desire to pursue this specific type of investment during an in-depth buyer interview.

 

Out of the likely acquirers, a select group of buyers analysed the information in a limited access data room arranged by The Camelot Group and the seller. Subsequently, each interested acquirer submitted – in accordance with transaction-specific instructions – a marked-up purchase agreement in conjunction with its offer, thereby indicating the procedural and structural negotiating requirements and their implications for the timing of the execution. Several offers for the portfolio were received and subsequently the optimal offer was selected and formally presented to the seller. Relevant criteria for the offer selection comprised a) the ability and motivation on the part of the bidder to close the transaction in a timely manner, b) the financial capacity to satisfy future funding commitments associated with the portfolio companies, as well as, c) the ability to provide managerial and strategic inputs to the newly created management holding company for the portfolio.

 

The winning bid was submitted by Scimitar Capital Partners, an international investment firm that is focused on a differentiated and value-based investment strategy. The Camelot Group worked closely with the seller and the managing members of Scimitar Capital to structure a mutually beneficial solution, which allowed a smooth continuation of the management and funding of the underlying portfolio companies by a highly motivated and properly incentivised manager.

 

Summary

 

The Camelot Group was able to complete its contractual mandate ahead of schedule and deliver an optimal solution for both buyer and seller and – more importantly – assure the continued existence and progress of the underlying portfolio companies. Increasingly, institutions are turning to leading advisors like The Camelot Group International and others to manage the complexity of private equity secondary divestitures. Institutional sellers are realising that several elements of these transactions require an independent third party to manage the valuation process, due diligence process, and sale process of secondary market transactions.

 

 

The Camelot Group is a leading advisory firm that provides independent advice to institutions, corporations, partnerships, governments and individuals on the divestitures of limited partnership interests and portfolios of direct company interests in the alternative asset and private equity industries. Through its offices in New York, San Francisco, London, Geneva, Frankfurt and Dubai, The Camelot Group has completed transactions of varying types and sizes and has developed an unprecedented number of value-added relationships to industry participants around the world.

 

The preceding article was extracted from Routes to Liquidity, a 224-page Research Guide recently published by Private Equity International. To order your complete copy click here or call the order hotline on +44 (0)20 7906 1181.