Deal in Focus: DFJ acquires TTP's venture portfolio

In early November, UK-based DFJ Esprit made its 10th direct secondary acquisition by taking over the £34m venture portfolio of Cambridge technology consultancy, TTP Group. The deal means the VC has now obtained stakes in around 150 businesses through direct secondary investments.

The latest transaction saw DFJ Esprit acquire a further stake in portfolio company Displaydata, a provider of digital displays, which it originally invested in alongside TTP last year. Additionally, the acquisition provides it with significant stakes in pharmaceutical company Pulmagen Therapeutics; power conversion and lighting business Cambridge Semiconductor; and imaging systems company TeraView.

While direct secondary deals tend to be somewhat convoluted, owing to the number of businesses involved, DFJ Esprit's acquisition was less complex, explains David Gee, formerly CEO of TTP Ventures: "The main reason we came to an agreement with DFJ was its status as an existing shareholder in a number of the portfolio companies. We knew DFJ and they knew us, so there was no need for corporate finance advisers, just lawyers."

The key driver behind TTP's decision to sell was the age of its fund, which launched in 1999. With its portfolio companies maturing and potentially requiring additional funding, the vendor took the decision to explore liquidity options around two years ago. However, the prospect of selling to DFJ Esprit only arose earlier this year. Thereafter, according to Gee, the decision and sales process that followed was "relatively straightforward".

For its part, DFJ typically looks to make additional primary investments in companies it has acquired through direct secondary transactions. "The secret is finding businesses with strong potential sitting in old portfolios, where the funds perhaps don't have the money to invest," explains Simon Cook, CEO of DFJ. "We buy the vehicle but then also put money into those companies in order to help them grow."

Business building
Despite the relatively low number of direct secondary deals in the broader market, DFJ has been actively investing in the area in recent years. In 2010, it recruited Oxford Capital Partners' Richard Marsh as partner and Jeffries International's Jonathan Freuchet-Sibilia, who has since been promoted to partner, as investment manager. Two years later, it merged its venture secondaries businesses, Encore Ventures, with Tempo Capital's to form DFJ Esprit Secondaries. Shortly after the merger, the VC acquired a portfolio of eight businesses from Top Technology Ventures, with its previous such investment dating back to the 2009 acquisition of 3i's European venture portfolio.

"We see it as a unique way of getting into great companies," explains Cook. "We're looking to find companies that could be worth between $100m-2bn. It's an interesting way to buy into several good businesses in one go. We believe Displaydata and Pulmagen, for example, are going to be very successful companies and we would have looked to invest in them anyway."

Owing to the historic relationship between the parties, the stakes acquired from TTP align themselves neatly with DFJ's core investment remit; companies operating in the technology and biotechnology sectors. However, the transaction is more than just a marriage of convenience. "We look at direct secondary investments in exactly the same way as we would with primary investments," says Cook. "We use the same skills to identify and build big international successes. The revenues in this portfolio were growing at over 50%, the companies were looking for investment and their shareholders looking to make exits, so it really was a win-win situation."

With Cook conceding DFJ is set to announce further – and larger – direct secondary deals, it is likely there will be more challenging acquisition processes ahead.

Advisers
Equity – O'Melveny & Myers (Legal).
Vendor – Taylor Vinters (Legal).

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• Topics
• UK / Ireland
• Early-stage
• Expansion
• Secondaries
• Deal in focus
• DFJ Esprit
• Direct secondary
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• Unq2015Jan