Hamilton Lane founder Les Brun is back in the private equity market, with plans to raise a $1 billion leveraged fund-of-funds that would invest in venture capital managers. It’s a novel approach that Brun hopes limited partners can wrap their heads around. It’s also, in part, a favor to old friends.
Brun cashed out of Hamilton Lane about 18 months ago, after which he used some of the proceeds to buy up Philadelphia-area auto dealerships. He also was part of the Bruce Toll-led group that acquired the Philadelphia Inquirer and Daily News from McClatchy. It seemed like he was done with institutional investing.
And then his phone rang. On the other end were Bob Keith and Mark DeNino, TL Ventures managing directors who once had worked with Brun at Fidelity Bank in Philly. Their firm was in deep trouble. Its biotech team had left to form their own firm (Devon Park BioVentures), and most of their IT investors followed suit (Guggenheim Venture Partners). There had been talk about raising a $400 million for a sixth fund, but there was simply too much uncertainty and too few experienced partners. TL Ventures had joined the walking dead – managing existing investments, without much hope of making new ones.
“Bob and Mark and I had a few chats about the difficulty of raising venture capital funds in this environment, and at some point a light-bulb went on,” Brun says. “Why not apply a leveraged buyout model to a fund-of-funds that invests in venture capital?”
Brun and Keith searched for a relevant example, and learned that Nomura of Japan had used a CLO structure with buyouts as the underlying asset. Not quite apples to apples, but close. Brun went to the rating agencies with his idea, and they signed off on it – albeit not with as high a degree of leverage as Nomura had done.
The result was a new affiliate of TL Ventures, which has its own investment team and advisors like capital icon Alan Patricof, Proskauer Rose attorney Robin Painter and HBS professor Josh Lerner. It plans to raise a total of $1 billion, including investment-grade, non-recourse leverage. Up to $100 million of that will go to anchor TL Ventures’ new fund.
To be sure, this is not an easy endeavor. Brun expects a first close in early 2008, but acknowledges that it has been a tricky pitch to limited partners. “LPs usually want to check a box – ‘venture capital’ or ‘fixed income’ – so this is a bit difficult for some of them.” He also acknowledges that his effort partially looks like a bailout for a VC firm that can’t raise money on its own.
“The core TL team is still there, but this isn’t just about raising money for TL,” Brun says. “It’s about a new model and a new fund that will invest in dozens of venture capital funds. I have a lot of longstanding relationships with general partners, and hope to apply economy of scale in a new way.”
We’ll check back early next year, to see if it worked.