Highland Capital Delays Fund Close

Highland Capital Partners has pushed back the first close for its eighth venture fund from the end of June to mid-July, according to multiple LP sources. The Lexington, Mass.-based firm also has reduced the fund’s carried interest from 25% to 20 percent.

Highland began marketing in in early spring with a $400 million target, which was just half of the $800 million it raised for each of its prior two funds. I lauded the move, writing that Highland was one of the few VC firms willing to put common sense above fee-mongering. After all, the deflated fundraising and deal-making environment makes it the perfect time to raise less. If things pick up, you can always go back for more.

Of course, I also assumed that Highland’s lowered target would make fundraising a breeze. For example, it could lose half of its LPs, so long as the other half committed pro rata. Or lose 25% of existing LPs, and let the returnees lower their commitments by 25% (particularly for the cash-strapped endowment class). Just mail out the docs, turn on the fax machine and let the rest take care of itself.

But it doesn’t seem to have been that easy. First, the firm lowered its carry. Second it made its “expense put” more LP-friendly at an 80/20 split, compared to an industry standard of 99/1. Third, and most important, Highland has sought out “new” limited partners (or at least prospective ones), even though it shouldn’t really need any.  

None of this is to say that Highland won’t get the fund raised. It will get done, with sources indicating that there are approximately $300 million in soft and hard commitments so far (after that, I’ve heard things all over the map). 

Instead, Highland’s experience is just further evidence that the fundraising market seems to be increasing in its brutality. The firm’s recent returns aren’t exceptional, but they also aren’t horrible. Its sixth fund (2001), for example, had an IRR of 8% as of 12/31/08, compared to a Cambridge Associates benchmark of 0.49%. Its fifth fund (2000) is underperforming at -2.9% compared to an industry benchmark of -1.39%. Its seventh fund (2006) is struggling at -16.1% — thanks, in part, to dunderheaded participation in the Harrah’s buyout — but is still less than 50% called (i.e., too young to pass judgment on).

I left a message for a highland spokesman, but have not yet heard back. Even if I do, there chances are between zero and nil that he’ll discuss fundraising…


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  • Dan, you should inscibe this as a law on your desk. “PE firms never reduce target fund size for any other reason other than difficulty in raising money.” The corrolary to this law which dates back to 2001 is “PE firms never return capital commitments for any other reason that they are so under water that they would rather invest a new fund than salvage one that is underwater.”

  • The biggest blow for Highland is going to be Cash for Gold. Negative publicity plus negative results. Jeff Aronson makes Bernie Madoff look like Mother Teresa.

  • What’s an “expense put”?

  • A tough group to figure out. When they pitch you, they seem like good guys and are very articulate. Then, when you dig in you hear that: many of the best LPs dropped out of their previous fund; they’ve had a lot of turnover among investors and support staff–and most of it has been people wanting to go and then going to really good opportunities; many partners aren’t working hard; there’s a lot of fighting internally; quite a few entrepreneurs they’ve backed go to other venture firms the next time around; and, rumor is that people there are interviewing around or thinking of spinning off to start a new firm.

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