Private equity firms are undergoing some radical mutations as they flee early stage ventures: but have they got the timing right?

It was back in the technology heyday of January 2000 that Washington DC-based Carlyle Group launched its &€730 million ($865 million) Internet Partners Europe fund to capitalise on the entrepreneurial spirit sweeping the Continent. For the first two years of its existence, the fund did exactly that by providing funding for fledgling businesses such as DPT Global, the London-based credit card start up, and Bfinance, the French asset management and banking platform.

But then the downturn struck, and Carlyle decided to reduce the size of its fund from &€730 million to &€650 million (it has since been cut further to &€553 million). Since renamed Carlyle Europe Venture Partners (CEVP), the fund's strategy was steered subtly towards the later-stage end of the spectrum via expansion capital deals until a more conspicuous about-turn last month when it completed the £34 million leveraged acquisition of Kingston Inmedia, the UK satellite specialist. The step-change had been signalled in January 2004, when David Fitzgerald, a former Apax partner responsible for later-stage telecom deals, was hired as co-head of the fund alongside Wolfgang Hanrieder.

At the time Carlyle launched CEVP, it was in good company as a high-profile buyout group prepared to embrace the venture boom. For example, ([A-z]+)-based Doughty Hanson unveiled its $272 million Technology Ventures fund in the same year while Kohlberg Kravis Roberts launched its Accel-KKR joint venture with early-stage specialist Accel Partners, also in 2000.

Equally, Carlyle is not alone in the post-downturn world by introducing more of a buyout flavour to a venture fund. In the US, experienced venture capitalists Terry Garnett and David Helfrich have launched their new $250 million Garnett & Helfrich Capital fund to target “venture buyout” opportunities. This involves taking controlling stakes in spinouts from under-performing and non-core units of established technology companies.

Meanwhile Prospect Street Ventures, the New York-based venture firm, has filed with the Securities and Exchange Commission (SEC) to launch a business development company “that will primarily lend to and invest in middle market private companies in the energy-related industry”. Such investments will include “secured and unsecured senior and subordinated loans”.

But will this apparent shift from venture into buyouts and even quasi-debt products be regretted as much as the original enthusiasm for such deals? Neil Foster, a partner at international law firm Morrison & Foerster, says startups and fledgling firms are now jumping into bed with corporate partners rather than waiting for VC funding. He claims to be advising on an increasing number of venture capital-style investments by US corporates in young European businesses, such as satellite firm EchoStar Communications' recent strategic investment in Reality TV, a London-based reality programming specialist.

Says Foster: “US venture capitalists piled into Europe during the late 90s and then many disappeared when the downturn kicked in. The general view seems to be that all US strategic investors disappeared too. However, that's simply not the case. Many of them never stopped seeking out opportunities in Europe, and now feel many of the assets are under-valued.” If this is true, how long before we see one or two buyout investors-turned-venture investors-turned-buyout investors once more reviewing the attractiveness of venture investments?