Highland Capital Partners Closes Eighth Fund

Highland Capital Partners today will announce that it has closed its eighth fund with $400 million in capital commitments, which matches its original target. And I couldn’t be happier. Not because I hold any particular candle for Highland, but because this particular fundraise has bedeviled me for months.

You see, Highland began fundraising in early spring with a novel strategy: Seek just half of the $800 million raised in 2006 for Fund VII, due to LP liquidity issues and the overall VC market malaise. I lauded the decision:

Highland will raise less now and, if the environment improves, go back out for a larger fund sooner than it normally would. If times stay tough, then it’s sized appropriately for a normal investment cycle.

Some of Highland’s investors still balked, however, which caused the firm to delay its first close, reduce its carried interest from 25% to 20% and make its “expense put” more LP-friendly. All of this led to a good deal of speculation among other Boston-area VCs and LPs, with a pretty even split between “they’ll be fine” and “they’re in trouble.”

For its part, Highland wouldn’t discuss its progress. Not just on the record (which is to be expected) but not even off the record during casual encounters around town (which is unusual). Just two weeks ago, a Highland pro came to our Boston cleantech event. I asked him about the fundraise, while we were both holding alcoholic beverages. The booze did no good, as he just smiled and said he couldn’t discuss it. Very impressive messaging discipline.

All of which leads us to today, with the fund close announcement. Bob Higgins of Highland says that institutional fundraising mostly wrapped up in August, but that the firm waited until several entrepreneurs and other individuals got their paperwork in order.

“The fund size was really just math that takes three factors into account: The time it takes to raise the fund, the number of deals per year and the average dollar size per deal… We’re projecting a slightly lower number of deals per year, and will be more cautious on deals with high capital requirements.”

What that last part means is that Highland may shy away from certain pharmaceutical or industry-heavy cleantech opportunities, and more toward lower-cost IT plays. When it does do a capital-intensive deal, the strategy would be to sign outside partnerships earlier than Highland has traditionally done. Case in point is Generation Health, which Highland helped found in November 2008. Just this week, Generation Health signed a contract with, and sold a minority stake to, CVS Caremark.

Higgins also said that the smaller fund size is not being married with a reduction in the size of Highland’s partnership. In fact, he said that the firm is slowly considering the addition of up to three new partners. The best-case scenario would be for one additional partner in each of Highland’s three offices — Boston, Silicon Valley and China — but Higgins admits that such an even split may be easier said than done.

Highland is expected to make a few more new investments out of Fund VII, with the first Fund VIII portfolio companies to be added in Q1 2010.

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