The VC stoush

By Denise McNabb and Fiona Rotherham

Monday 1st March 2004

Venture capitalist Caltech Capital Partners has been wound up after a stoush with its joint venture partner, AMP Private Capital. The move follows an out-of-court settlement that unravelled the two companies' four-year-old association. Caltech Capital Partners closed the doors of its Auckland office at Christmas. But Caltech Development Capital Fund No.1 (CDCF), its $4 million venture capital fund with around 70 private investors, will continue under the management of Caltech's four former directors until its existing handful of technology investments are exited.

The venture capital industry wanted news of the AMP/Caltech dust-up kept hush-hush, fearing it would deter investors - in particular the institutions it is desperately trying to attract. Veteran venture capitalist Jenny Morel says it was in everybody's interest that Caltech be successful. "We'd like to see the venture capital industry building. What we all need is demonstration of successes. We all need proof for investors that it is worth doing." Instead AMP has lost interest in early stage venture capital after suffering heavy losses. What went wrong?

Let's go back to the beginning. Caltech began life as a venture capital bank in 1995, specialising in raising funds for young technology companies. The company originally had three partners - John Cunningham, Wendie Hall and Paul Gregory. Douglas Paul joined a year later.

AMP Private Capital (part of the newly renamed AMP Capital Investors) decided in 1999 it wanted to move into venture capital on a global basis. AMP Private Capital in New Zealand was the first to become active in this area, setting up a joint venture arrangement with Caltech, which put up deals for it to invest in. AMP had already used similar models successfully in later stage private equity investments. At times, Caltech would also invest in the same venture capital deals through its much-smaller CDCF fund, but its main source of funds and revenue was AMP.

It didn't take long for the press releases to start flying out trumpeting each investment by the joint venture. All up AMP is understood to have invested $40 million through Caltech. That's about 20% of the $200 million the private capital arm has invested in New Zealand private equity in the past six years. Some of the venture capital investments, such as Netlogic, QED, Slab International and the IBS Group, struck financial problems. That's when AMP started losing the stomach for the VC rollercoaster ride. AMP Capital Investors managing director Catherine Savage won't confirm the total invested through Caltech because some of the money was sourced from an internal AMP fund and its figures are not made public. She says $12.75 million was invested through Caltech via the public AMP Henderson Private Capital Fund. The value of these investments has since been written down to just $2.2 million.

Savage is quick to point out the unit price of the public fund is only down slightly because, taking Caltech aside, there have been good returns from the later stage investments. AMP's recently resigned Private Capital head Martin Turner admits the early-stage technology investments ran into difficulty, particularly with the tech wreck.

AMP's dissatisfaction with its venture capital foray came to a head in 2002. It called in Australian consultant Accretion Partners to do an audit. Later that year, it ditched Caltech, citing non-performance. The industry consensus is that Caltech was good at stitching together VC deals but lacked hands-on management experience to help out the investee companies when they got into trouble.

Unsurprisingly, Caltech was none too happy at the break-up and took AMP to court. It claimed a clause in its contract meant it couldn't be removed from managing the existing investments through to exit. VC fund managers get a small annual management fee - around 2.5% of the money committed by the fund - but traditionally make the bulk of their profit on exit from the investment. This profit carry-over often takes many years to bear fruit.

A confidential out-of-court settlement was reached between the two parties just before a four-day hearing was due to be heard in October last year. It is understood Caltech was paid a sum of money to end the joint venture. Savage won't comment other than to say the stoush was resolved "very satisfactorily" from the point of view of fund investors.

Accretion, run by the former head of the Australian Venture Capital Investment Association, Peter Chapman, has now replaced Caltech to look after AMP's two remaining VC investments, Zeacom and Prism. The Caltech fund is also still a Zeacom investor.

Having learnt its lesson the hard way, AMP is backing away from early stage venture capital though Savage says it is not "off limits". Since the December de-merger of AMP, the global ownership model has been dissolved and ownership of investments devolved to country of origin. This has allowed Savage to take a long, hard look at future investments. She has set up a new division, Alternative Assets, that will include private capital. Murray Gribben (who Savage replaced when he went to the UK) will return to head Alternative Assets from April. Martin Turner will report to Gribben until he leaves in June (he remains chairman of the New Zealand Venture Capital Association after giving assurances he will stay in the industry once he leaves AMP).

Savage says the private capital arm remains keen on later-stage private equity and also wants to move into new asset classes such as forestry and hedge funds, and, in particular, infrastructure. AMP Capital Investors in Australia has been a significant player in the infrastructure market across the ditch and has spotted opportunities in the New Zealand market.

The question is whether AMP's withdrawal from VC and Caltech's demise will have any impact on the venture capital industry. Views are mixed, but one venture capitalist close to the action says it will make other fund managers scrutinise their own contractual performance criteria and exit options more closely.

Caltech's Cunningham fears AMP's VC experience will deter other institutions. The biggest issue hampering New Zealand's VC industry is the lack of institutional investment. In Australia, the superannuation funds - fuelled by the compulsory savings regime - are the big investors in the $A7.5 billion venture capital industry. Here, the $1 billion industry has had to rely on retail and wealthy private investors.

There have been some faint stirrings of interest of late from the institutions. Morel claims to have convinced two institutions to invest in her latest No 8 Ventures Fund (but won't name them yet). She reckons AMP simply used the wrong model for its VC foray.

Savage says with the benefit of hindsight AMP would "go back and do things differently". And just maybe, not do some investments at all.

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