A barnesandnoble.com vet, a private equity firm and an investment bank have teamed to launch a $100 million fund that will invest solely in direct marketing and e-commerce companies, a venture capital industry first.
Chicago-based private equity investing firm Madison Dearborn Partners contributed $99 million toward the fund, Direct Equity Partners L.P. New York investment bank Gruppo, Levey & Co. invested $1 million and will serve as adviser to the fund.
Direct Equity Partners' newly tapped president is Patricia Campbell, formerly VP-interactive marketing at barnesandnoble.com. Madison Dearborn Partners might contribute as much as $400 million more to Direct Equity Partners, but no timetable has been set.
Direct Equity Partners' laser-beam focus is part of a specialization trend among Internet venture capital firms. For example, J.P. Morgan & Co. and Schroders plc both recently launched units that will invest only in financial services start-ups.
Venture capital insiders are mixed on whether Direct Equity Partners' specialization strategy is sound. "The upside of a specialization model is you get a real knowledge base in a vertical market," said Julie Allen, partner-iPractice head at Proskauer Rose L.L.P., a New York law firm that is involved with start-up companies. "The downside is if you pick the wrong vertical, you might lose performance and risk alienating your investors."
Campbell said any fears about direct equity partners' niche investing approach are unfounded. "We're looking at a huge industry, and there's a great range in it to have a diversified portfolio," she said.
Internet strategy required
Direct Equity Partners will invest in up to 10 companies over the next 18 months, Campbell said; most investments will range between $10 million and $20 million. It will invest in direct marketing-oriented companies with an evolved Internet strategy, a combination Direct Equity Partners' executives believe to be rare--and potentially lucrative. "We want to pursue models where direct marketing and the Internet reinforce each other," said Benjamin Chereskin, managing director of Madison Dearborn Partners.
At least half of New York-based Direct Equity Partners' investments will be in b-to-b companies, Campbell said.
Direct Equity Partners, which launched in January, made its first investment-- $19 million--in Atelier America Inc., an art reproduction company. It is giving business advice as well as capital to Atelier America, something the fund will do with all the companies it invests in, Campbell said.
The fund is helping Atelier America, which currently focuses on consumers, develop a b-to-b strategy. It will include a Web site that will allow businesses, including restaurants and hotels,
to buy paintings online. "We believe the b-to-b opportunity is huge. A hotel doesn't mind if the same painting is in every room," Campbell said.
Direct Equity Partners is close to making several additional investments, Campbell said. "We're looking at companies in the direct marketing services area, looking at b-to-b plays and at portals where a catalog company has a niche in the marketplace," she said.
The fund will invest only in established companies seeking a second or third round of financing. "We have a healthy degree of skepticism [regarding start-ups]. We believe it's a lot easier to leverage a pre-existing community," Chereskin said.
Direct marketing legacy
Gruppo, Levey will use its direct marketing legacy and contacts to help the companies in which Direct Equity Partners invests.
The company was founded in 1992 and has since become the nation's top mergers and acquisitions boutique for direct marketing companies. Despite a recent rush by white-shoe investment banks into the space--Bear Stearns & Co., for one--Gruppo, Levey has been able to defend its direct marketing turf by leveraging its founders' experience.
Claire Gruppo, the firm's managing director and co-founder, was previously CEO of Special Interest Video, a consumer catalog company; before that, she oversaw direct marketing at American Express Publishing.
Hugh Levey, the company's other managing partner and co-founder, previously owned U.S. Banker magazine.
Convinced that the direct marketing venture capital space was untapped, Gruppo and Levey decided to put their contacts and know-how to use with a new investment fund. "We saw direct marketing and Internet corollaries were beginning to merge, and we were in the middle of that space," Gruppo said.
Gruppo and Levey approached Madison Dearborn Partners, with which it had done business. The private equity shop offered to be Direct Equity Partners' sole bankroller, saving Gruppo, Levey execs the painstaking fund-raising routine. "We told them, 'Look, we've got the capital, you've got the contacts, let's partner together,'" Chereskin said.
Madison Dearborn Partners will leave most of the advising to Gruppo, Levey and Direct Equity Partners, but will help with its contacts and expertise in the b-to-b financial services and health care industries. Gruppo said she would be spending at least a third of her time advising Direct Equity Partners and the companies it invests in.
Gruppo, Levey plans to hire an undisclosed number of people to concentrate on the fund. Direct Equity Partners intends to hire up to five employees who will concentrate on building the companies in which it invests, said Campbell, who is currently the fund's only employee.