Spectrum sees profits without deal fees

Spectrum Equity generated a record volume of exits and refinancings last year while continuing its policy of not charging deal fees to its portfolio companies.

Growth equity investor Spectrum Equity generated $1.25 billion in exits and refinancings in 2011, a record amount for the mid-market firm.

Spectrum has also been active on the acquisition front, having completed six investments from its $680 million sixth fund that closed in 2010. Like all of Spectrum’s funds, Fund VI does not charge deal fees.

“We’re solely focused on growing the value of the fund, making good investments and realising those investments versus along the way trying to create fees to put in our own pocket,” Spectrum managing director Michael Kennealy told Private Equity International. “I think it makes for better alignment with LPs when you have an arrangement where you’re solely focused on capital gains with no incentive to be focused elsewhere.”

Spectrum, which operates out of Boston and Menlo Park, California, focuses on three sectors: software and information services, Internet and digital media and communications, media and entertainment. The firm typically uses leverage in only about half of its investments, and pursues growth strategies at its portfolio companies without using operating executives.

We're constantly finding private companies that are growing and profitable and got there frankly without a lot of capital or infrastructure

Michael Kennealy

“We are extremely hands-on at the board level, and that could mean suggesting operational changes, but you won’t see someone at Spectrum with a business card that says operating partner, as we are all heavily engaged with the portfolio” Kennealy said. “What we do is much more around strategy, business development, recruiting, capital markets and acquisitions versus sending our guys in there to run the company.”

Investments from Spectrum’s sixth fund, which is roughly 30 percent invested and has invested heavily in Internet and digital media businesses, include online and mobile food ordering service Seamless, formerly known as SeamlessWeb; online video creation service company Animoto and healthcare software company HealthMEDX.

“We made our first investment in the [digital media] space back in 2003 and that felt a bit contrarian at the time, coming out of the internet bubble of 2000 and 2001 but what we saw frankly was the internet growing across all the key metrics: users, IP traffic, search, ecommerce, etc.,” Kennealy said.

In 2009, Spectrum invested from its $1 billion fifth fund alongside Bain Capital Ventures to acquire roughly 60 percent of online survey company SurveyMonkey.

“Survey Monkey scaled up to become a very substantial company on very little capital,” Kennealy said. “We’re constantly finding private companies that are growing and profitable and got there frankly without a lot of capital or infrastructure.”

Spectrum’s fifth fund completed 18 investments, of which five have been exited. This year, the firm has completed a $125 million debt refinancing for cable company RCN and the $400 million sale of insurance services firm Arrowhead.

While Spectrum invests in a number of segments within what the firm calls the “information economy”, digital media and internet companies – which account for half of the investments in Spectrum’s sixth fund – continue to look particularly attractive, according to Kennealy.

“We’re optimistic about the future of that space.”