A unique investment strategy

Sam Schwerin says venture investment managers are hungry for a significant source of liquidity, and his firm is poised to provide it to them. Dave Keating reports.

When Daniel Burstein’s Millennium Technology Ventures closed its first $150 million fund in 2000, venture capital investing was at a very different place than it is today. The fund, launched as a traditional early-stage technology vehicle, made a number of early-stage investments as originally planned. But as the bubble burst and high tech companies got further and further into trouble, the firm realized it had to make some quick changes in strategy.

In 2002 Burstein was joined by his former Blackstone Group colleague Sam Schwerin, and the two set out to devise an investment strategy more in line with today’s business environment. The result: Millennium restructured itself to focus not only on traditional venture capital deals, but also secondary deals in which it provides liquidity to non-traditional assets, bringing a much more private equity, value-added approach to late stage technology companies. Fortunately, Burstein had built some flexibility into the first fund that allowed it to make both types of investments.

Sam Schwerin says his value strategy is timely.

“In 2002 there was a volatile situation in the technology markets,” Schwerin said. “We really sat down to white board how you can be successful over the next 20 years if you’re going to invest in growth stage-type opportunities. We thought there’s probably an interesting innovation that we can bring to the venture capital model. We think we can combine the best of venture capital, and that’s vision and operations and technology understanding, with the best of what we were good at at the Blackstone Group. So we tried to merge the best of venture with the best of private equity.”

The strategy paid off so well that the firm decided to launch a second entity, Millennium Technology Value Partners, which will be dedicated exclusively to the firm’s value investing strategy. The first value-focused fund, called TVP, closed this week on $130 million. It will pursue a broad strategy including direct secondary acquisitions of private equity securities, restructurings and recapitalisations, corporate spinoffs, leveraged buyouts, public market PIPEs, going private transactions and other special situations, though its target market will be late stage and emerging growth companies. Schwerin said this will free Millennium Technology Ventures to focus on traditional venture investing.

TVP’s first investment, a debtor-in-possession facility that provided liquidity and working capital to First Virtual Communications, a small publicly-traded company going through the bankruptcy process, was realized in 2005 through a sale to RADVISION, yielding a return of two times the fund’s initial equity investment in less than two months.

“What we’re trying to do is create an institutional market that offers liquidity on all types of assets, and the vast proportion of those assets will be in venture capital, venture debt and private equity investments,” said Schwerin. “But it will also include things like royalty stream that nobody would ever think that they might want to obtain liquidity on, but in fact what we’re trying to do is really be the leader in creating that liquid market.”

Schwerin said that a central part of this strategy is to become a trusted partner in providing liquidity that organizations will return to again and again. He said that 60 percent of the companies that have completed transactions with Millenium have come back to do more deals with the firm.

“We believe that the market we’re helping to create will over time be just as large as the market for limited partnership interests,” he said. “I think we’re at the very tip of the iceberg of this as a trend.”