Please route to the name in top left corner MARKET INTELLIGENCE // Forecast for Job Hunters: Mostly Cloudy P.5 December 23, 2002 | Vol.II Issue 49 CONTENTS Calpers Settles San Jose Mercury News Suit, Ohio May Reduce Commitment Pace---------------2 Posts Private Equity Return Data on its Web Site OVP Defers management fee on Fund V----------2 The industry appears to be conceding that state open records laws require Leonard Green & Partners eyes $1.9B close-----3 disclosure of individual fund IRRs, but remains firm in opposing release of Blum Capital wraps up $950M fund----------------3 portfolio company valuations. Fox Paine sows seed with $650M deal----------3 California Public Employees’ Retirement System last week settled a law- suit filed by the San Jose Mercury News, agreeing to release IRRs, capital commitments and distributions for the 200-plus partnerships in its portfolio. Calpers posted the data on its website, at http://www.calpers.ca.gov/in- LIMITED PARTNERS vest/private-equity-press-release.pdf. Calpers Board President William D. Crist said in a statement that set- Oregon and Washington State tling the suit will allow the pension plan to “work proactively on developing Say No to Investment in KKR an industry standard for private equity reporting that allows us to do our fiduciary duty and provide maximum transparency.” New York-based Kohlberg Kravis Roberts For GPs, the message is loud and clear — IRRs are subject to disclosure under & Co. apparently won’t be receiving a open records laws. However, much to GPs’ relief, the Mercury News agreed as couple of eagerly anticipated gifts this part of last week’s settlement not to pursue release of portfolio company infor- holiday season. mation. GPs say release of such information would cause them competitive harm. One of the firm’s long-time investors, The Mercury News sued Calpers in October after the pension fund re- Washington State Investment Board, has decided not to take up KKR’s offer to (continued on page 6) invest directly in the firm, while another, Oregon State Investment Board, will likely take a pass as well. Atlas Venture Cuts Fund VI for Second Time, A KKR spokesperson declined com- ment. Closes West Coast Offices, Reduces Staff KKR first approached Washington Atlas Venture has gone back to the chopping block. and Oregon in the early fall about mak- The Waltham, Mass.-based firm—one of several venture firms that cut ing a direct investment in the firm. its fund size earlier this year—has asked its limited partners for approval to Joseph Dear, executive director of pare Atlas Venture VI, L.P. from $850 million to just $600 million. Atlas the Washington pension fund, said his also is closing its two West Coast offices and shedding six of its 21 partners. group’s decision not to invest in KKR Fund VI closed last year on $967 million. Last summer, LPs approved stemmed largely from a move by three cutting the fund to $850 million while at the same time freeing $120 million of the 11 plans that make up the in reserves from Fund V to invest alongside the newer fund. As technology pension’s co-mingled trust toward em- spending continued to deteriorate through the summer the firm became ployee-managed retirement investments worried that Fund VI was still too large, said Atlas Senior Principal Christo- and away from a board-managed pro- pher Spray. “We thought we could deliver a better return on a smaller fund,” gram. He said the new structure requires he said. Mr. Spray expects the LPs to approve the move next month. a greater degree of liquidity, as plan par- Going forward, Atlas plans to concentrate its U.S. investment efforts ticipants can withdraw money from the on the East Coast and will close its Seattle and Menlo Park offices. As a funds at any time. result, Senior Principals Laura Jennings and Jay Shiveley, Venture Principal However, Mr. Dear emphasized that Bill Bryant, and six other employees will leave the firm. Atlas, however, will continue to support its existing West Coast portfolio companies through its (continued on page 2) (continued on page 6) Copyright ©2002 Alternative Investor, Wellesley, Mass. (www.AlternativeInvestor.Info). Reproduction prohibited without permission. To subscribe, see page 6. PE Wire Page 2 of 6 December 23, 2002 his pension still has faith in KKR’s invest- ously intended to deploy $1 billion per Wash.-based OVP Venture Partners ment strategy, and described its relation- year for the next few years as part of is deferring management fees on its ship with the firm as “very solid.” a plan to ultimately reach a 4 percent $148 million OVP V Venture Fund, As for Oregon, a source said the target allocation approved in 2000. which closed in 2000. pension fund is not planning to pursue But because general partners have General Partner Gerard direct investment in KKR because the taken longer to digest capital in their Langeler said the deferral would state is already at its maximum 13 per- current portfolios — effectively delay- continue until the firm has returned cent alternative asset allocation level. ing new fund launches — the pension 100 percent of the 10-year fund’s Despite the explanations, the two plan has decided to reconsider its com- committed capital, and “even then, funds’ decisions not to invest in KKR come mitment pace. we may not choose to take it.” as a surprise, as both states have deep and Ohio Public Employees still plans Although Mr. Langeler would not longstanding relationships with the firm. to eventually reach its 4 percent tar- disclose the size of OVP’s manage- Washington has invested or commit- get allocation, albeit in a longer time ment fees, he estimated that the de- ted more than $3.4 billion to KKR over frame. The pension system also plans ferrals will total $5 million to $10 mil- the course of a 20-year relationship with to stick to its strategy of deploying lion. A clawback provision does not the firm. Most recently, the state made larger amounts of capital into a small apply because OVP’s policy is to re- a $1.5 billion commitment to KKR Mil- number of funds, particularly ones that turn all committed capital to LPs be- lennium Fund, L.P., which closed on offer co-investment opportunities. fore taking any profits. $5.1 billion this year. Even with just $600 million in dry Mr. Langeler also said that with Meanwhile, Oregon has committed powder available for new commit- continued uncertainty in the more than $3.44 billion to KKR since ments, Ohio Public Employees still economy, OVP has twice strength- 1984, including a $1 billion commitment promises to be one of 2003’s more ened its reserves policy in recent to the Millennium Fund. active limited partners. years. But the two pension plans’ very dedi- In early 2002, the pension fund In earlier funds, OVP reserved one cation to KKR’s funds might have helped hired Pacific Corporate Group Inc., La third of its capital for follow-on rounds. put the kibosh on any plans to make di- Jolla, Calif., to recommend potential But the firm upped that to 50 percent rect investments in the firm. commitments to the pension fund’s for the 2000 fund, then to two thirds Currently, KKR commitments repre- board, which retains discretion over for the current $190 million Fund VI, sent nearly 62 percent of Washington’s final investment decisions. which closed in June. $5.39 billion exposure to alternative assets, Since then, Ohio Public Employees So far, OVP has made only two as well as 34 percent of Oregon’s $9.2 bil- has only committed about $276 million, investments from the VI fund, and has lion invested and committed to class. investing in two funds: Blackstone Capi- no plans to defer fees on that portfo- At the same time, KKR’s returns have tal Partners IV, L.P., New York, a $6.45 lio. Mr. Langeler expects that when been respectable but not incredible, with billion buyout fund; and Coller Interna- fully invested, the 2002 fund will have an annual IRR of about 17 percent for tional Partners IV, L.P., London, a $2.5 a portfolio of roughly 15 to 19 com- Washington. No IRRs were available for billion global secondary fund. panies, putting an average of about Oregon’s KKR investments. Prior to 2000, Ohio Public Employ- $10 million in each corporation. Reach Oregon at (503) 378-4111; ees had invested less than 1 percent According to VentureOne, OVP reach Washington at (360) 664-8900. of its portfolio in private equity. Until currently has a total of $502 million the mid-1990s, state law required the under management, and has in- Ohio PERS Considers Cutting pension system to only invest with vested in 58 companies. About half Annual Commitments by $400M Ohio-based firms. Those that got busi- of the firm’s investments have gone ness from the pension fund included to software companies, with about The $54 billion Public Employees’ Retire- Linsalata Capital Partners, Mayfield another 20 percent in health care ment System of Ohio may shift its nascent Heights, Ohio; and Primus Venture (although the firm recently decided private equity program into low gear in an- Partners, Cleveland. Reach Ohio Pub- to stop making new health care in- ticipation of a reduced fund supply next year. lic Employees at (614) 387-2712. vestments). OVP has spread its re- At its December board meeting, the maining investments among commu- pension system planned to vote on a plan OVP Stops Charging LPs nications, electronics, retail and con- to cut annual private equity commitments Management Fees on Fund V sumer/business services.