AIG Will Disclose Plans To Invest in Venture Fund
By STEVEN LIPIN and KARA SCANNELL
Staff Reporters of THE WALL STREET JOURNAL
April 19, 2000
GREENWICH, Conn. -- Silicon Valley this isn't. But in a humdrum office complex in this town known more as home to Wall Street and CEO types than a hotbed of venture investing sits one of the nation's most influential private-investment firms.
Though General Atlantic Partners LLC is low-profile compared with flashy venture-capital firms elsewhere, its successes aren't: Priceline.com Inc., E*Trade Group Inc., Legent Corp., Sierra Online and Baan Co. In 20 years, the firm hasn't issued a news release on its own letterhead.
That's by design. Known to venture-capital pros as simply "GA," the firm was founded by two partners from McKinsey & Co., the big consulting firm, to help manage the assets of Charles F. Feeney, the reclusive co-founder of Duty Free Shoppers Ltd. GA now has seven limited partners from the outside; between them and GA employees' own capital, it has $3 billion on hand with which to invest and $6 billion already invested. But it has no institutional money.
That's about to change. Wednesday, in a sign that money continues to pour into tech investments -- even with the pounding that tech companies' shares took last week -- big New York insurer American International Group Inc. will disclose plans to invest $1 billion over five years in General Atlantic and acquire a 5% stake in the firm to help fund a global expansion. AIG confirms the impending announcement.
Boost to Global Aspirations
General Atlantic already has 25% of its investments outside the U.S., primarily in Europe, but the AIG venture will not only increase the firm's kitty to $4 billion but allow it to boost its global aspirations.
"It behooves us to find a global partner," explains Steve Denning, the firm's managing partner, in his end-of-the-hall office scattered with art and business books. "It wasn't the capital that drove" the AIG partnership, he adds, but the "deep global experience AIG had developed over 80 years."
General Atlantic has racked up returns that investors say are 2.5 to three times the average 20-year returns for venture-capital firms of 17% annually, as tabulated by Venture Economics. Its $14.4 million investment in E*Trade is valued at over $500 million.
But with everything going well now, what could throw General Atlantic off its game? The firm faces fierce competition from the flood of capital chasing ideas and early-stage companies. Every banker and leveraged-buyout firm has been cast as a venture capitalist these days. And being low-profile can cut both ways: "They're probably not as well-known as other venture-capital firms," said Bob Emery, president of Fleet-Boston Financial's Robertson Stephens investment bank.
Also, given the firm's aspirations, it needs "a larger scale of resources to stay in the game the way they want to play it," said William Pade, managing partner at McKinsey, who advises some General Atlantic companies.
Not All Home Runs
Like most venture firms, General Atlantic has had some strikeouts.
In addition, some of its stocks have crashed lately, such as Eclipsys Corp., an e-health company whose stock has sunk 63% since mid-March despite a deal to sell to Neoforma.com. Tickets.com has also been crushed, falling to under $5 a share from highs of $32. And Predictive Systems, a network consulting firm, is off 58% from its highs. Those investments are still in the black, though.
But unlike many VC firms, which expect to lose money on one-third of their investments, General Atlantic says that of more than 80 investments, only three have lost money -- including the first one, a $4 million investment in 1981 in Transportation Management Systems, turn-key systems for the moving and storage industry. Still, its conservatism also resulted in missing a big success with Amdocs Ltd., but the firm had a rival in the same business that believed the investment would be too competitive.
Indeed, one of General Atlantic's strengths is being a close partner for entrepreneurs, willing to be active in management both before and after going public. It has done deals recently with Zagat Survey and Staples.com. At a time when many of dot-com companies have watched their share prices plummet, many companies may need a lifeline from their VCs.
'Best Partners'
"They're the best partners I've ever had," said Jay Walker, founder of Priceline.com, in which General Atlantic made a major investment, and head of Walker Digital, an intellectual-property incubator. "I only invited one firm to invest in [Walker Digital]. It was GA."
As tech stocks struggle, assuming rallies like Tuesday's don't become the norm, "there's going to be much more discrimination in the marketplace" for initial public stock offerings and private-equity investments, said Richard Braddock, whose ties to General Atlantic help land him the position of chief executive of Priceline. "As the flight to quality happens, people who are credibly able to place investments on a substantial basis will be much better equipped."
Now, the firm is clearly upping the ante. General Atlantic is doing more deals than ever before -- 20 to 25 investments a year, up from 15 a year -- and will invest in any stage of a company's life. It is also investing $150 million to co-found efinanceworks, an incubator that is focused on financial-services companies. "The next 10 years will prove to be much more challenging for venture-capital firms, and General Atlantic will have to keep changing," said David Hodgson, a partner at the firm.
Finding the Right Partner
Enter AIG. Mr. Denning said General Atlantic retained Greenhill & Co. to review which firm to try to align with and concluded that AIG would be the best partner to maintain its competitive advantage.
M.R. "Hank" Greenberg, AIG's chairman and chief executive, said, "We've had some technology investments but were less than satisfied where we were. That call from Bob Greenhill sparked our interest and we pursued it from there."
Besides its cash, AIG brings a global presence, particularly in Asia. AIG hopes to shepherd opportunities to General Atlantic from AIG's private equity business "if it's something in technology where they had the knowledge and are better able to analyze it," said Mr. Greenberg.
General Atlantic's 11 partners are a mix of McKinseyites and Wall Street bankers, executives with experience at smaller tech companies and International Business Machines Corp. It recently brought in as partners Matt Nimetz, the former managing partner at Paul, Weiss, Rifkind, Wharton & Garrison, and Clifton Robbins, a partner at Kohlberg Kravis Roberts & Co.
The firm takes a McKinseyesque approach to investing: First, it does significant top-down analysis of the major trends or new markets, then it figures out where the opportunities were.
For example, when it wanted to invest in wireless in the mid-'90s, it found a small company in Germany, LHS, that sold software for billing and collections and made a $30 million investment in 1995. General Atlantic moved the operations to Atlanta and helped build it into a publicly traded company listed both on Nasdaq and Germany's Neuer Markt for new companies. In March, Sema Group PLC agreed to acquire LHS for $4.7 billion.
'Build It Ourselves'
If it likes a sector but can't find a company in which to invest, "we'll go build it ourselves," said William Grabe, a partner at General Atlantic and former top executive at IBM. So it founded and invested $55 million in Exult Inc., a human-resource outsourcing company.
Once the partners decide to make an investment in a certain sector, they don't wait around for companies to look for venture money. General Atlantic partner Bill Ford courted E*Trade founder and Chairman Bill Porter for nearly a year in the mid-'90s.
About the same time Mr. Porter needed capital, Mr. Ford was calling. Mr. Porter, who had eschewed all venture money, was impressed with Mr. Ford's vision of online trading as a business. The firm invested, and soon after Mr. Ford helped persuade Christos Cotsakos to take the CEO position.
"They were very instrumental in the success of E*Trade," said Mr. Porter. "It's like getting consultants for free."
Says Mr. Cotsakos, "These are the guys who you want in your foxhole when someone yells 'Incoming!' "
Write to Steven Lipin at steve.lipin@wsj.com and Kara Scannell at kara.scannell@wsj.com |
