Investcorp closes IT fund at $500m
Investcorp Technology Partners, the New York- and London-based technology private equity arm of Bahrain’s investment group Investcorp, earlier this month closed its
Investcorp Technology Partners III fund at $500m (Dh1.8bn), above its original target of $400m.
Investors in the new fund include Grove Street Advisors for the California Public Employees’ Retirement System (CalPERS), Cornell University, the Doris Duke
Charitable Foundation, QVT Financial and Bank of Scotland with ITP itself committing more than $11m to the fund.
On a whirlwind trip to Dubai recently, Savio Tung, Head of Technology Investment, Investcorp Technology Partners (ITP) said the company’s total accumulated assets under management today stand at more than $1bn.
“Tech stocks present a good opportunity for this year as valuations are low even as research and demand is fast growing,” Tung told Emirates Business in an interview.
Following the closure of Fund III, what has been the response from investors?
We experienced a very strong demand for the ITP Fund III.
The fund, which had an original target of $400m, was heavily oversubscribed and we closed the fund with $500m in total committed capital, although we could have extended the size of the fund even further given the subscription levels.
ITP focuses on creating value for the investor by generating growth and operational improvements at portfolio companies, rather than depending on significant leverage.
That is a quality we believe will continue to serve us well in the current lending environment.
What are the kind of investors that you see investing in technology funds – are they mainly institutional investors from the Gulf or the West?
About 40 per cent of the investors in our fund have been institutional investors, while the rest have been ultra high net worth individuals.
But, the important aspect is that while 50 per cent of our investors in Fund III are from the Gulf, the other 50 per cent is all made up of Western institutional investors.
That is a big vote of confidence for a technology fund like ours.
In the US, our investors include Grove Street Advisors for the California Public Employees’ Retirement System, Cornell University, the Doris Duke Charitable Foundation, QVT Financial and Broward Health.
European investors in the fund include AlpInvest Partners, Bank of Scotland, CNP Assurances and UBS Sauerborn, while ITP’s own team committed more than $11m to the fund.
What kind of investments will you target with Fund III?
We cover quite a broad spectrum in terms of our investments.
For our Fund III, we will target enterprise software, internet-based telecommunications infrastructure, wireless mobile and digital content.
By internet-based telecommunications infrastructure, I mean security software systems that protects firms against hacking and help in the protection of data.
The wireless mobiles sector we target includes Wi-Fi and wireless data – for example 3G technology – a business that is growing rapidly and will continue to do so in the future.
The last sector is digital content, which is nothing but a means of using the internet for products available in digital form, such as music and images.
So you don’t think investment opportunities will flow from research efforts in emerging technology sectors such as nanotechnology or gaming?
These sectors are definitely attractive, but we don’t have the expertise to make investments in them.
Right now, we want to focus on the areas where we have knowledge of the market, we think we can add value to the bottom line and where we think we can optimise our returns.
Besides, most emerging tech sectors such as nanotech or gaming are start-ups.
To invest in such businesses would be venture capital and we don’t do venture capital.
These are businesses that want to invent the next Google, the next Facebook and we are not smart enough to do that.
So why have you chosen to focus on these sectors?
That goes back to the macroeconomic trend that started in the late 1990s when major technology companies started making acquisitions globally.
That coincided with the huge investments tech companies had to make as a result of the new millennium issues.
So, quickly, the internet dot-com bubble collapsed and the whole IT industry became conservative in its investments.
That is where a lot of opportunities were created for us to enter the industry.
So, that’s when we began the tech fund in 2001 to take advantage of the low valuations in tech companies.
People don’t often associate low price with hi-tech, but we have seen with our investments it is possible to make hi-tech investments at low multiples.
Which is why we target mainly management buyouts and carveout investment transactions.
What are carveouts? And what other kinds of transactions do you focus on?
Carveouts are divisional acquisitions of smaller businesses within a large business.
A good example of a carveout deal would be our Dialogic, which we acquired from Intel’s media and signaling business in September 2006.
We combined it with another Canadian company that also specialised in the same business.
The company, which we bought, was worth $15m. Following the synergy, the combined entity now has revenues of more than $200m.
So, that is a deal that we look at for buying divisions within a business that are not so high-value and then apply an appropriate strategy to a growth target.
Another important transaction we focus on is the private investments in public equity or Pipe. In such a transaction, we acquire a key stake in a public-owned entity.
A lot of public tech enterprises companies have either potential for growth or slow down in business because of lack of capital.
We look at entering such firms with the required capital, if we see enough value in the company.
What is your investment geography? Do you have any deal flow coming from tech nology firms in the Gulf?
We target investments mainly in the United States and Canada. Firms in the Gulf are quite young.
As far as technology firms are concerned, we don’t think the time is right for us to enter into the market.
Even India and China, which offer a lot of opportunities for private equity investments in the technology sector, are quite overvalued.
There will be a correction in the valuations some time soon; we will enter the market then.
Which sector offers the best returns within the technology universe?
The wireless mobile sector offers good returns. It’s potentially high-risk, but it also offers high returns.
That will be one of our key thrust areas.
What internal rate of return do you target for your funds? What is your investment period like?
Well, target IRRs are classified information but according to data published by Cambridge Associates for 2005, the top quartile IRR for investments in the US and Canada is around 20 per cent.
We beat that. As far as exits are concerned, we focus on potential exit opportunities from day one of our investment. We look to exit from a deal within three to five years.
The investment period for a fund is usually three to four years.
What is your outlook for tech stocks for this year?
The outlook is good. The valuations are relatively low in the tech sector, so we will see a lot of acquisitions along with divestitures.
If you look at the sector, it is relatively cheap. And if you look at the portfolio managers, they are all light on tech stocks.
IT spending remains good this year, volatility or no volatility.
Growth in the IT and telecoms will be in the high single digits. So, tech stocks should be a good pick.
Savio Tung joined as head of Investcorp Technology Partners in 2001.
Before joining Investcorp, Tung was a senior banker with Chase Manhattan Bank, establishing Chase’s Bahrain office and marketing presence in the Gulf.
Savio has served on the boards of many Investcorp portfolio companies, including Club Car, Circle K, Saks Fifth Avenue, Simmons Mattreses, Star Market, Stratus Computer, CSK Auto and Ultimaco.
He is currently chairman of Wireless Telecom Group (WTT) and Vaultus and director of Viewlocity.
Tung holds a Bachelor’s degree in Chemical Engineering from Columbia University.
He is a Trustee of Columbia University and serves on the board of the Columbia University Investment Management Company, an endowment of more than $5 billion (Dh18.4bn).
He is also a director of Bank of China, Hong Kong.
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