More private equity firms active in the European secondary market are capitalising on direct investment opportunities, and within this increasingly important segment of the secondary market, a growing number of specialist investors are concentrating on venture deals.
One such specialist is Shackleton Ventures, a small London-based firm that acquires deal portfolios and individual companies from investors seeking liquidity before maturity. Shackleton announced in December that it agreed to buy the secondary investment business previously owned by AIM-quoted venture house Strathdon Investments.
Hugh Stewart, the former CEO of Strathdon, leads the team at Shackleton. He says that part of what makes the firm unique is that it is “completely dedicated to direct venture capital investments”.
Shackleton has made one direct investment since its fund was launched in July 2006, acquiring from 3i a 20 percent interest in Pancredit Systems Limited, a UK supplier of lending systems to the financial services industry. Shackleton has £20 million under management, and aims to acquire two portfolios of early-stage businesses, each worth £5 million or more, and various individual companies valued between £1 million and £2 million.
The arrival of venture-focused groups like Shackleton speaks to the continuing development of the private equity secondary market. Since its creation in the early 1990s, the secondary market has mainly comprised the buying and selling of limited partnership interests rather than direct deals. It thus afforded fund investors greater liquidity in a previously illiquid asset class, enabling them to escape from unattractive partnerships and access other, more attractive ones on a partially funded basis.
More recently, the secondary market has evolved to facilitate direct deals as well as the trading of LP interests. While investments in LP interests still represent a much larger proportion of the market overall, direct investments are becoming increasingly prominent.
Some of the biggest players in the market, such as Pantheon Ventures and Coller Capital, are now pursuing hybrid strategies comprising both fund investments and direct secondaries. Other groups, such as Vision Capital and Nova Capital Management in London, invest in direct secondary LBOs only, preferably purchasing entire portfolios of buyouts rather than individual companies.
The most recent arrivals on the secondary stage are the dedicated direct venture specialists. Apart from Shackleton, other European proponents of the strategy are Tempo Capital Partners, which was set up in 2004 and spun out of Nova Capital Management a year ago, and Cipio Partners in Munich.
Tempo, which is led by David Tate and Olav Ostin, has purchased four investment portfolios with roughly 50 companies and advises funds with some €200 million of committed capital.
Cipio Partners, created in 2003 by Tom Anthofer, Werner Dreesbach and Hans-Dieter Koch, has made direct secondary investments in more than 50 individual companies, buying assets out of the corporate venturing divisions of large European corporations such as DaimlerChrysler, Infineon and Deutsche Telekom.
The fact that these firms are making progress bodes well for Europe's venture capital industry. Considering that European venture funds have struggled to regain the support from investors that they lost after the technology bubble burst in 2001, the existence of a viable route to liquidity in the direct secondary market could help clear the path towards a more positive future. For a thriving market for secondary venture deals develops, it will help Europe's venture capitalists realise investments – and thus do wonders for the perceived attractiveness of this part of the asset class.