NEW YORK - This may not appear to be the best time to back small information technology entrepreneurs or companies in the health care field, but a small private equity fund wants to follow its three predecessors in capitalizing in just those two industries.
Euclid Partners Corp. is raising Euclid Partners IV, its fourth venture capital fund aimed at early stage information processing and health-related companies.
The new fund is scheduled to close at the end of the year with $50 million in commitments from institutional and individual investors willing to make a minimum investment $2 million, said general partner Stephen K. Reidy. Euclid Partners IV already has closed on $20 million in funds and expected another $10 million to $15 million in commitments by the end of September.
Euclid Partners I was capitalized at $4.1 million in 1971 and returned $25 million when it was liquidated in 1983; the net annual rate of return was 18%. Euclid II, launched in 1983 with $23 million, is now being liquidated. Euclid III, a $25 million fund launched in 1989 has deployed all of its funds and shown gross annualized returns of 32% and net annual returns of 18% so far, said partner Frederick R. Wilson.
The clientele of Euclid Partners is mainly institutional, according to Messrs. Wilson and Reidy. Twenty-nine percent of its investors are state pension funds, 30% are insurance companies, 18% are corporate pension funds and the remainder are individuals and endowments. Euclid's largest single investor is the New Hampshire Retirement System, which has invested a total of $8 million in Euclid Partners III and IV.
Euclid wants to keep the fund small, to avoid the traps of what Mr. Wilson calls "megafunds" of several hundred million dollars. By virtue of the amounts they have to invest, those funds run the risk of buying into riskier investments and larger, more mature companies with less potential for growth, he said.
The firm believes in financing clients in the early stages, but does not invest in seed money, said Mr. Wilson. About 25% of its investments are in company start-ups, 50% are in early stage financing and 25% are in expansion stage financing. It tends to pay an average of $3 million to $5 million to purchase 20% to 25% of companies, and seeks good-quality, entrepreneurial management.
Among its existing investments are Therion Biologics, a Cambridge, Mass. company working on an AIDS vaccine; Upgrade Corp. of America, Buffalo, N.Y., a provider of direct marketing services for the software industry; and Software Developer's Co., Hingham, Mass., a maker of software development tools.
It may seem paradoxical to seek profits from small health care companies while the health care reform debate rages on, or in information technology, where many giants are striving to monopolize the field; Euclid's management disagrees.
"We've had a lot of questions about that. The health care industry is not dying, the health care industry is changing," said Mr. Wilson. The industry is seeing a redistribution of profits away from large service providers such as hospitals and pharmaceutical companies, and toward smaller companies within the reach of Euclid Partners, he said.