Accel Partners VII
Accel Partners VII by Steven N. Kaplan1
Graduate School of Business, University of Chicago
As the summer of 1999 began, Julie Robins, the chief investment officer of the Angel
Foundation, was considering whether to invest in Accel Partners’ latest venture capital fund –
Accel Partners VII. Accel was seeking to raise $500 million. The Angel Foundation had been a limited partner (investor) in Accel’ previous three funds – Accel Partners IV, V, and VI. Those s funds had generated returns well above those typical for venture capital funds. In fact, the net returns to limited partners on Accel Partners IV and V were running above 100% per year.
Exhibit 1 provides a recent record of historical returns for venture capital funds by vintage year.
While 100% plus returns were obviously spectacular, Julie was concerned that Accel had decided to raise the fees it would charge its limited partners. In its previous fund, Accel had charged a management fee of 2.5% and a carried interest (or profit share) of 25%. This already exceeded the industry standard of 2.5% and 20%. In Accel Partners VII, Accel proposed to raise the carried interest to 30% of profits. James W. Breyer, Accel’ managing partner, argued that: s “the higher profit share would help it retain and attract new talent. We have the same investment team that has been investing the last three Accel funds, and at the same time, we have greatly strengthened the team with new additions … ”2
At a 30% carry, Accel would join a select group of private equity firms that included Bain
Capital, Kleiner, Perkins, Caulfied & Byers, and, under some circumstances, Benchmark Capital.
1.
The Structure of Private Equity Partnerships3
A.
Compensation
Private equity partnerships (PEPs) are compensated primarily through a management fee and through a carried interest or profit share.
1
Some information and facts have been disguised. Copyright @1999 by Steven N. Kaplan.
Private Equity Analyst,
Graduate School of Business, University of Chicago
As the summer of 1999 began, Julie Robins, the chief investment officer of the Angel
Foundation, was considering whether to invest in Accel Partners’ latest venture capital fund –
Accel Partners VII. Accel was seeking to raise $500 million. The Angel Foundation had been a limited partner (investor) in Accel’ previous three funds – Accel Partners IV, V, and VI. Those s funds had generated returns well above those typical for venture capital funds. In fact, the net returns to limited partners on Accel Partners IV and V were running above 100% per year.
Exhibit 1 provides a recent record of historical returns for venture capital funds by vintage year.
While 100% plus returns were obviously spectacular, Julie was concerned that Accel had decided to raise the fees it would charge its limited partners. In its previous fund, Accel had charged a management fee of 2.5% and a carried interest (or profit share) of 25%. This already exceeded the industry standard of 2.5% and 20%. In Accel Partners VII, Accel proposed to raise the carried interest to 30% of profits. James W. Breyer, Accel’ managing partner, argued that: s “the higher profit share would help it retain and attract new talent. We have the same investment team that has been investing the last three Accel funds, and at the same time, we have greatly strengthened the team with new additions … ”2
At a 30% carry, Accel would join a select group of private equity firms that included Bain
Capital, Kleiner, Perkins, Caulfied & Byers, and, under some circumstances, Benchmark Capital.
1.
The Structure of Private Equity Partnerships3
A.
Compensation
Private equity partnerships (PEPs) are compensated primarily through a management fee and through a carried interest or profit share.
1
Some information and facts have been disguised. Copyright @1999 by Steven N. Kaplan.
Private Equity Analyst,
References: Gompers, Paul and Josh Lerner, 1999, The Venture Capital Cycle. (Cambridge, MA: MIT Press). Lerner, Josh, 1996, Acme Investment Trust, Harvard Business School, Case 9-296-042. Lerner, Josh, 1998, A Note on Private Equity Partnership Agreements, Harvard Business School, Case 9-294-084. Mercer, William M, 1997, Private Equity Survey and Key Terms. Private Equity Analyst, 1999, “With Fund VII, Accel Partners Asking for 30 Percent Carry Fee,” July. Sahlman, William, 1990, “The Structure and Governance of Venture Capital Organizations” Journal of Financial Economics 27, 473-521. 17