The management company of the Jerusalem Venture Partners group will within days be announcing first closure for the fourth venture capital fund under its wing, JVP IV, TheMarker.com has learned.
The fund has apparently secured about $170 million. Altogether it plans to have $500 million under management. But given the chill winds sweeping through the venture capital industry, JVP IV may have to moderate its ambitions. Sources in the VC industry guess that the fund may have to settle for around $350 million. About two months ago press stories appeared that some potential investors in JVP IV were reconsidering making commitments because of the diving financial markets and the resumption of hostilities in Israel. The reports said that certain potential investors, including two leading German insurance companies, were also backing out of financing commitments already made.
Israeli and other venture capital funds have been reporting increasing trouble in collecting capital. The crash of tech stocks on Nasdaq means that the favorite form of exit, a Nasdaq issue, is not feasible. Also, the diving valuation of publicly-traded companies weighed heavily on privately-held companies, which found their valuations dropping hard and fast. VC funds found themselves writing off major sums. An atmosphere of gloom descended over the whole VC industry.
Moreover, while VC funds lost their attraction as an investment option for institutional investors, the investors themselves found the value of their own equity investments shrinking, leaving them with less capital to lavish on risky young companies.
A relative success
Under these freezing conditions, securing any money at all for investment must be considered a success. Especially a major sum like $170 million.
But there's another factor that could ultimately hinder JVP from realizing its goals, although at first it's more likely to arouse envy. The management company is thought to have increased its part in the fund's carry to 30%.
To understand the significance of the carry, one has to understand how a VC fund works. The VC fund is incorporated under law as a limited partnership. Its investments are chosen by a management company. The owners of the management company could also be investors in the fund. The fund's managers may also be investors, and if so, are known as managing partners.
In the case of JVP IV, the management company is probably fully owned by its management, headed by Erel Margalit, Glen Schwaber and Yuval Cohen. The management company makes its money by charging a management commission, usually between 2% to 2.5% of the money it manages a year. The management commission is used to pay salaries and to finance the management company's costs. But the lion's share of the management company's income comes from a bite of the fund's profits.
After returning investments to investors, otherwise known as limited partners, plus a certain rate of interest, the management company distributes remaining earnings if any to the limited partners. But first the management company deducts its carry. The usual proportion of carry among Israeli funds us 20%. Boosting that proportion to 30% would be a major achievement for the managers. Management commissions can reach millions, but the big money naturally lies in successful exits. The profits on selling a startup for billions of dollars are a whole other ball game.
JVP's management company demands the right to command a 30% bite because of its stunning success with the group's three previous funds. The biggest coup of all was the sale of startup Chromatis Networks to
(NYSE:LU) for around $4.5 billion. Although the value of the deal contracted together with Lucent stock in the Nasdaq crash, JVP has a long list of good choices.
JVP's list of investors is also very impressive. The Massachusetts Institute of Technology, for one. Horsley Bridge Partners, Flag Venture Partners, AXA, Merrill Lynch, and from Japan it can boast Jafco and Mitsui. It can also boast a long list of major corporations among its backs, from France Telecom to Boeing.
A partial list of investments since the group's establishment in 1993, Chromatis aside, includes
(Nasdaq:PRSE) and Fundtech (Nasdaq:FNDT).