Freeman Spogli Plans $1.5-Billion Venture Fund

Los Angeles buyout firm Freeman Spogli & Co. said Tuesday that it plans to raise $1.5 billion in a fund that will partially invest in “earlier stage” companies, a move that echoes efforts by other buyout specialists to transform themselves into venture capitalists.

If the target is reached, it would be one of the largest investment funds raised in Southern California. At least 10 venture funds of more than $1 billion have been announced nationwide since the start of 1999, according to a data firm.

“It’s been remarkable this year,” said Tom Kusner, an analyst with Venture Economics, a New Jersey data firm. “Private equity firms are trying to mirror the success of venture capitalists.”

Indeed, leveraged-buyout shops are attempting to capitalize on the nearly 100% annualized returns averaged by venture capitalists in recent years. Last week, one of the 1980s’ best-known LBO firms, Kohlberg Kravis Roberts, said it would form a company with Silicon Valley venture firm Accel Partners to pursue Internet deals.

“There’s been an evolution of our business,” agreed Brad Freeman, a founding partner of Freeman Spogli, which typically makes debt-financed buyouts or investments in publicly traded, established companies in slower-growth businesses.

Formed in 1983, Freeman Spogli is one of Los Angeles’ oldest private equity firms; Mayor Richard Riordan was once a partner. It has invested more than $1.6 billion in more than 30 companies.

While it hasn’t raised any money yet for the new $1.5-billion fund, it expects to close the fund in the fourth quarter. About 10% of the new fund will be devoted to “earlier stage” businesses, primarily those with at least $50 million in annual revenue, while the bulk will be in more established companies.

“We’re not doing seed investing here. Some of our new investments might be a little earlier than what we might have done in the past, but we think we can be helpful in helping these companies grow their businesses,” said founding partner Ron Spogli, noting that the firm wants to help bricks-and-mortar businesses, young and old alike, develop their online operations.

Whether these buyout specialists will succeed is another matter, analysts said Tuesday. Venture capitalists typically make a five- to eight-year commitment to a small company and actively help it grow. But a buyout investor typically invests to see a company quickly sold or merged, or to break up a company and sell the pieces.

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Bloomberg News was used in compiling this report.