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Wednesday, November 12, 2014

NVCA Advocates More Confidentiality on Returns

The Private Equity Analyst WEEKLY Page 6 of 7 NOVEMBER 12,

MARKET INTELLIGENCE

NVCA Advocates More Confidentiality on Returns By Sree Vidya Bhaktavatsalam

Could it be a coincidence that GPs are getting touchier on the

issue of confidentiality of fund performance data at a time when

private equity returns are plummeting?

The National Venture Capital Association recently distributed

a list of suggestions for GPs to reduce unwanted

disclosure of information included in reports to their LPs,

particularly public pension funds, presumably to spare GPs the

shock of seeing their fund returns posted on a Web site or in a

trade press article.

Many state, municipal and local pension funds have fair

disclosure regulations, which, in the interest of transparency,

may require that the information be made available to the

public. NVCA’s suggestions include entering into confidentiality

agreements with LPs and tailoring the data distributed to

minimize the “harmful effects of subsequent public disclosure.”

Advocates for keeping performance data confidential

argue that the private equity industry relies on imperfect

information about private companies, which can be too

sensitive to reveal to the public. Also, they say that in the

absence of any standardized method of reporting private equity

returns, performance data presented in the form of IRRs can be

inaccurate and misleading.

President Mark Hessen of the NVCA says his concern is

that individuals (reporters, for example, or retirees whose public

pension program is used to invest in private equity funds) may

not be well-versed in the intricacies of performance data and

thus will get a distorted view of overall fund returns by looking

at quarterly reported returns.

‘A quarterly perspective is not representative of the entire

fund,’ he says. “We need to educate the public before we can

throw this information out there.”

Still, some like Michael Smith, director of research at

Atlanta-based consulting firm Hewitt Investment Group, believe

that transparency is the only way for prospective

Sources of private equity fund performance data

Venture Economics, Newark, N.J.: A division of

Thomson Financial. Provides industry wide private

equity performance benchmarks. Reach the firm at 973-

622-3100.

Cambridge Associates, Boston: Provides private

equity performance benchmarks and consulting services.

Reach the firm at 617-457-7500.

InsiderVC.com. Austin, Texas: Provides performance

data on individual venture capital firms. Its Web

site is at http://www.insidervc.com.

investors to separate “the wheat from the chaff.

“This is a market that two years ago did not need new

quality institutional investors,” he says. “Clearly that is different

now-if (VCs) want to broaden their appeal, the way to do it is by

making it more transparent.”

NVCA’s suggestions come at a time when GPs are still

smarting from California Public Employees’ Retirement

System’s decision earlier this year to post fund performance

data on its website. Calpers posted the IRRs of the 163

partnerships it had invested in since 1990, and had downgraded

some firms as “not performing up to expectations.” (See Private

Equity Analyst Weekly, June 4, page 5.) A few months later,

Calpers yanked the returns data from its Web site, after receiving

complaints from its GPs.

So, how can prospective investors gain access to the

performance data of venture capital and private equity firms?

Some public pension funds do make their quarterly performance

reports available to the public as a matter of course. Others,

like Florida State Board of Administration, make information

available, if the public requests it. And then there are quarterly

benchmark numbers for the whole industry released by Venture

Economics and Cambridge Associates. (See table below.)

One source of fund performance data is the Web site

InsiderVC.com, whose founder, Stephen Lisson, has received

both brickbats and bouquets from venture capitalists for his

analysis of performance data and his provocative commentary.

His Web site provides performance data of hundreds of venture

capital and private equity funds including those managed by

New Enterprise Associates and Matrix Partners.

In an interview, Mr. Lisson declined to reveal his sources

of information. “The reason people share information with us is

that we are very discreet, and we are very careful about who

sees our information.” Indeed, Mr. Lisson carefully screens

applicants before allowing them to subscribe to the performance

data contained in his Web site.

Mr. Lisson stresses that his data is not intended for the general

public. “My data is for insiders to improve their own game. VCs get to

benchmark themselves against their peers-it’s a confidence level

thing,” Mr. Lisson says. Mr. Lisson acknowledges that the VC

community could benefit from a healthy dose of transparency and

humility. “Sunlight is the best disinfectant,” he says. But he questions

the value of making public IRRs and interim valuations, which by

nature are based on subjective evaluations. “There should be less

focus on returns and interim valuations, and more focus on building

world class companies.”

Copyright 2014 Asset Alternatives, Wellesley, Mass.

Labels: STEVE LISSON, STEVE LISSON AUSTIN TX

posted by Steve Lisson @ 3:02 PM 0 comments

Venture Capital Financing Is Further Sapped by Events

TECHNOLOGY; Venture Capital Financing Is Further Sapped by Events

By MATT RICHTEL

SAN FRANCISCO, Sept. 25— Venture capital investing, the high-risk financing of early-stage companies that has been markedly curtailed in the last year, is being further challenged in light of the recent terrorist attacks and growing signs of recession, those investors say.

The venture capitalists assert that the slowing of the economy, coupled with an uncertainty about the public markets, is affecting all facets of their industry, including their ability to raise new funds, their decisions about which and how many companies to invest in, and their expectations about when their existing investments will become profitable.

Putting a fine point on the concern, the National Venture Capital Association issued a statement today saying the industry ''is preparing for an extremely difficult economic environment'' in the next 12 to 18 months.

At the heart of the issue is a question about how venture capitalists can expect to sell the investments they make. Typically they take their companies public, or sell them outright. But those so-called ''exit strategies'' are sharply limited, said Mark Heesen, president of the National Venture Capital Association, a trade group based in Arlington, Va., with 400 member firms.

''We were already in tough times,'' Mr. Heesen said. ''What Sept. 11 did was make the likelihood of the I.P.O. market opening in the next four quarters pretty unlikely. A lot of V.C.'s are saying it might not open until 2003,'' using the abbreviation for venture capitalists.

The investors say that as a result, they must put more money into companies in which they are already invested, making sure to keep them afloat until an exit strategy emerges. The numbers on investments made in new companies bear that out: this year, venture capitalists will invest about $50 billion in start-up companies, Mr. Heesen said, compared with $105 billion last year.

Still, venture capitalists point out that this market appears to be so difficult because this year is being compared with the two years previous, which were anomalies, with exorbitant returns being driven by the dot-com boom, and the expansion of the public markets.

Steve N. Lisson, editor and publisher of InsiderVC.com, said recent events were reminiscent of the time around the gulf war, when the industry had its last downturn. At that time, the ability to attract capital to invest in start-ups ''fell off dramatically,'' but he said the industry bounced back within several years to have the ''best period in its history.''

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Labels: STEVE LISSON, STEVE LISSON AUSTIN TX

posted by Steve Lisson @ 2:59 PM

Matrix Bets on Wireless

http://www.businessweek.com/stories/2001-09-16/matrix-bets-on-wireless

Matrix Bets on Wireless

September 16, 2001

Since the great tech wreck of 2000, life for most venture capitalists has been rough. They're making fewer investments, marking down the value of those they have, and facing headaches raising new cash. Not Paul J. Ferri, however. In the past 12 months, the managing partner of Matrix Partners of Waltham, Mass., has invested $101 million in 13 companies, mostly wireless communications startups. And in May, he raised $1 billion for his latest fund--more than double what he raised in the 1990s.

Matrix is a magnet for new money because it was one of the nation's most profitable VC firms through the 1990s, says Steven Lisson, who tracks venture funds at his Web site, InsiderVC.com. The best performer among Ferri's three funds returned 20 times its investors' money from its formation through Dec. 31, 2000, and his worst seven times the original investment (table). Matrix sold many of its big winners near the top of the market. For example, it paid 20 cents a share for optical networking company Sycamore Networks Inc. in 1998 and sold last year at $107 a share, for a 53,400% gain. Just six companies out of 60 that Matrix backed--including the only two dot-coms--were losers. "What's unique about Matrix is that most top firms do have an occasional weak fund," Lisson says, "but Matrix does not."

GROUND RULES. The Italian-born Ferri sidestepped the tech meltdown by following strong, even rigid, investing rules that he has developed over a 30-year career as a venture capitalist. For starters, he steers clear of fanciful theories--such as the idea that Webvan Group Inc., which filed for bankruptcy in July, would create a whole new business model for grocery distribution. Instead, Ferri focuses on technology equipment companies headed by top engineers able to build products that can produce revenues within two years. Most are referred by successful entrepreneurs that Matrix already has funded. Plus, Ferri insists that Matrix must always be the first-round--and lead--investor in a company because it gives him more influence on strategy. Another rule: One of its 11 partners, many of them experienced engineers and executives, must be on the board.

Now, despite the extensive overcapacity that's wreaking havoc on telecom startups and giants alike, Ferri is betting big on wireless technology. He doesn't consider the strategy to be all that risky, as the wireless business is still growing fast--at a nearly 30% clip, according to Merrill Lynch & Co. "All our startups are selling into markets where there is still demand for new products," Ferri says.

All the same, Matrix's new investments are focused on one of the most volatile sectors of the tech industry. But Ferri says he's much happier now than where he was in then 1980s. Back then, he diversified into tech, retail, and health care. The results were not spectacular, and the experience left him focused almost exclusively on tech equipment and software companies.

Winphoria Networks Inc. is typical of the companies currently being funded by Matrix. The Tewksbury (Mass.) startup was co-founded by Shamim Naqvi, a former top Lucent Technologies Inc. engineer. Next year, Naqvi says, Winphoria plans to release new wireless switching equipment at half the price but four to five times the capacity of today's switches--making it potentially a high-priority purchase by battered wireless carriers. "We're not a sexy company, but it won't be hard for our customers to justify the cost of buying our product," says Naqvi.

Ferri admits that near-term the weak economy could prevent many customers from buying the products Winphoria and others are developing. So he is prepared to wait three or four years--instead of one or two--to earn a return on his investments. And he is planning to invest more money in his companies--double or triple the $8 million to $10 million investments that he typically made over the past 10 years. "We know we'll never have the returns we had in the past," says Ferri.

No doubt Ferri's winning streak will be sorely tested in the next few years. Not only is the tech industry struggling, he has also got far more to invest than ever before. But Ferri's disciplined approach may see him through. By Geoffrey Smith in Boston

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posted by Steve Lisson @ 2:57 PM

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