The out-of-towners
Plenty of Chicago private-equity firms don't invest in Chicago companies
By By Sarah A. Klein
February 21, 2005
For the third year in a row, Chicago-based private-equity firms struck fewer deals with hometown businesses than the year before.
Just 12% of the financial transactions reported by Chicago private-equity firms last year involved local businesses, down from 19% in 2002 and 13% in 2003.
What gives? Have Chicago businesses fallen out of favor? Or do Chicago-based private-equity firms have their focus elsewhere?
The answer is a little of both.
In 2004, the big dealmakers in town put their money into buyouts and debt financing. Competition for that business is fierce, forcing private-equity firms to look beyond Chicago for investment.
"You have to go after the deals," says Gregory Wilson, a partner with Chicago-based CIVC Partners. "They could be anywhere."
CIVC, which controls $1.3 billion in capital on behalf of institutional and pension fund investors, made just one new investment in 2004: the $35-million management-led buyout of electronics manufacturer Epic Technologies LLC, based in Rochester Hills, Mich.
A SHORT LIST
But the competition for deals doesn't explain why local investments in early-stage companies are down since 2002.
Money for those riskier investments tends to stay close to home, because investors want to keep an eye on fledgling businesses.
The number of venture capital investments in Illinois fell 10% to 36 in 2004 from 2002, according to a report by Ernst & Young LLP and VentureOne. (On the upside, the average amount raised per round increased 48% to $9.2 million over the same period.)
"There's a rather short list of (private-equity) companies that are aimed at early-stage, technology-based investing. It makes it a bit harder to find money," says John Banta, CEO and managing director of Illinois Ventures LLC, a consulting firm owned by the University of Illinois that advises start-up companies and makes investments.
Venture investors say Chicago, unlike San Francisco and Boston, simply doesn't present the opportunities they're seeking.
Many of the industries that flourish here — manufacturing, financial services and consumer products — don't offer high enough returns to justify venture investments.
"I need to have a convincing reason why a company is not only going to exist, but thrive," says Reeve Waud, managing partner of Waud Capital Partners LLC in Lake Forest. "There's a lot of uncertainty in the industrial world." Waud Capital Partners controlled $400 million in capital from endowments, insurers and wealthy individuals in 2004.
Christopher Girgenti, managing partner of New World Ventures in Evanston, looks for companies whose businesses make other industries more efficient. Software firms that improve manufacturing and distribution are one example.
ENTREPRENEURIAL SPIRIT LACKING?
In theory, Chicago should be rich with such ideas. With a well-trained labor force, a large number of engineers and an abundance of universities, there would be appear to be all the necessary ingredients.
But New World didn't invest in any Chicago companies last year. "We have a very high bar we need to hit," says Mr. Girgenti.
Some say Chicago lacks the entrepreneurial spirit of places like the Silicon Valley.
"If you have an idea (there), your neighbor next door or the one across the street will loan you money," says David Evans, chairman and CEO of Glencoe Capital LLC, a $950-million Chicago-based private-equity firm that specializes in middle-market buyouts and recapitalizations.
If there is a silver lining in the lack of local private-equity shops investing locally, it's that a lot of venture capitalists call Chicago home.
Ken Gaebler, president of Gaebler Ventures LLC, a Chicago-based private-equity company that focuses on software technology and business services firms, says he'd rather do business in Chicago than Silicon Valley. He says it's easy to travel from Chicago, and that there are great universities, big companies and wealthy families.
In the Silicon Valley, he says, "It's difficult to keep secrets. Every deal gets walked door-to-door. And people are leaving in the middle of the night to start a competing shop."
©2005 by Crain Communications Inc.> |
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