Several private equity managers have begun cautiously investing in homeland security, but Paladin Capital Group has raised the first fund that invests exclusively in the sector.
Venture capitalists have shied away from homeland security because the long sales cycle tests the patience of investors. But "some of the criticism in approaching the market has subsided," said Tom Siegel, managing director and co-founder of Shepherd Ventures, San Diego. However, most venture capitalists investing in homeland security are not creating dedicated funds, he said. Shepherd is investing in homeland security through its various Southern California technology investments, Mr. Siegel said, including its stake in Voyager Systems, San Diego, a defense systems technology company.
Kline Hawkes & Co., Los Angeles, also is investing in homeland security through its information technology funds, said Frank Kline, founder. The firm, which manages $300 million in three venture capital funds, sees homeland security as a growth sector, Mr. Kline said.
Homeland security investing can require some interesting strategies, Mr. Kline added. Recently, he got William Webster to serve on the board of one of Kline Hawkes' portfolio companies, which he declined to name, to help get through CIA hurdles, he said.
Washington-based Paladin built a homeland security fund after investing in software companies in the Internet gaming area, said Hal Brown, principal.
"Gaming was taking off on the commercial side, and the government wanted to get into it after Sept. 11" because officials thought it has civil defense applications, he said.
Paladin Capital sees opportunity in homeland security and is raising money for its fund. Mr. Brown declined to say how much it has raised so far or the fund's ultimate goal. He also declined to reveal investors. He did say that the fund aims for returns that are 500 basis points above the Standard & Poor's 500 index.
Mr. Brown added that Paladin has the best geographic location for a homeland security fund. "Venture capital firms in Washington do better because they know government." Paladin addresses the need for edging around the gatekeeper by having on staff a former director of the CIA, a former director of the National Security Agency and a private sector science adviser to President Bush, Mr. Brown said, declining to name any of the officials. "These three guys built the fund."