The chaos of unbridled investment activity and the subsequent fear-induced idleness has been replaced by some optimism and an environment ripe for investment activity. Interest rates have lowered, the recession has passed, public markets have recovered, and in some cases, pent-up funds stalled during previous years are ready to go to work. In Tennessee, a variety of investment sources are active—including firms managing family money, small business investment companies, private equity, debt sources and venture capital. Each has a story to tell, but a common thread is the recent jolt of activity that has shaken the industry out of its doldrums.

For Larry Coleman at Coleman Swenson Booth, most of the health care industry “just buckled down and waited it out” when technology companies were hot and federal investigations cast a shadow over the health care industry. Until recently, Coleman had concentrated on getting his portfolio companies profitable, but now the public market is improving, and the private market is following suit, he says. Many venture capital and private equity firms across the state have seen a break in the clouds. The following pages present highlights of how the state’s private equity firms are planning to spend their time and funds during this more clement climate.

ANDREW W. BYRD & CO.
At the end of December, Andrew W. Byrd & Co., which runs Tennessee Valley Ventures Fund, closed on a $25 million fund to invest in management buyouts across the Southeast. At the time of publication, Byrd said he had three letters of intent out, with interest in small- to mid-sized companies in North Carolina, Georgia and Kentucky. According to Byrd, who has been active in the market since 1985, the markets are now in recovery, and the mergers and acquisitions business is heating up. He adds that he is seeing strong multiples for companies in manufacturing and distribution.

CLARITAS CAPITAL
Claritas is raising its second fund with a focus on early-stage health care and information service companies. Some additional funding remains in Claritas’ first fund, which was $10 million.

CLAYTON ASSOCIATES
Franklin-based Clayton Associates currently is investing FCA III (Friends of Clayton Associates), a $50 million fund that is about a third invested. The firm’s next fundraising efforts likely won’t start until later this year or in 2006.

COLEMAN SWENSON BOOTH
Larry Coleman says Coleman Swenson Booth is “kicking the tires on fundraising.” Coleman adds that if the firm raises a new fund, it will continue its focus on health care services and health care information technology, primarily in early-stage companies. Coleman says now that some of the clouds have passed from the burst technology bubble and highly publicized fraud in health care, the firm is now starting to harvest. It has positions in three publicly traded companies, and a couple in the elder health sector. Baltimore-based Elder Health should generate $200 million in revenue this year, Coleman says, adding that the company has been profitable for the last three years. He expects the company will be a candidate for an initial public offering in another year. Last year, Coleman Swenson Booth distributed about $32 million.

FIRST AVENUE PARTNERS
This Nashville firm is raising its second fund, and David Wilds of First Avenue Partners says the firm is aiming for about $65 million to $70 million. Wilds says, “Our plan is to follow the same investment strategy as with the first fund,” which was $39 million. In its first fund, the firm made commitments of $1.5 million to $5 million. With this second fund, Wilds says First Avenue Partners will commit to $3 million to $7 million in its investments. The firm’s two notable successes in Nashville were iPayment, a provider of debit and credit card processing services, and surgery center company Symbion. The companies’ initial public offerings were in May 2003 and February 2004, respectively. Wilds says First Avenue Partners distributed those shares to its partners.

GEN CAP AMERICA
One of the largest funds currently being raised in the state is Gen Cap America’s fifth fund, at roughly $100 million, more than was previously expected by the firm’s leadership. “We had more success than we expected,” says Barney Byrd of Gen Cap, a buyout firm. Byrd says the majority investment in this fund is from institutional investors and state pension funds. Gen Cap’s fourth fund is fully invested, and some of it is being liquidated. Gen Cap recently exited two companies when management bought out Gen Cap. Byrd says he expects to exit three or four companies this year.

HARBERT MANAGEMENT CORP.
Harbert currently is raising its second mezzanine fund. The firm’s first mezzanine fund was $150 million, with a focus on providing $3 million - $10 million in subordinated debt.

MB Ventures Partners
Gary Stevenson says that since co-founding MB Ventures with Pitt Hyde in late 2001, he has encountered a challenging fundraising environment. But in many ways, MB Ventures’ activity ran opposite to what other venture capitalists were experiencing during the past few years. MB Ventures raised its first fund in 2002, with $22.5 million from corporate, institutional and individual investors. The firm, which benefited from a financial commitment from the high-net-worth Hyde, focused on biotech and medical devices (often resistant to macroeconomic down cycles). MB Ventures’ investments include publicly traded GTx in Memphis, BioMimetic in Franklin and Knoxville-based Protein Discovery. By mid-2005, five of the firm’s eight portfolio companies will have raised new rounds of financing—all at higher valuations. While Stevenson says he cannot comment on plans to raise a second fund, he says the typical cycle between funds is three years. Stevenson says it’s likely the firm will continue to focus on musculoskeletal-oriented companies, which currently make up half of MB Ventures’ portfolio.

PHAROS CAPITAL
With offices in Dallas and Nashville, Pharos Capital has been working to raise a new fund with a $300 million goal that could grow as large as $500 million, according to Kneeland Youngblood, managing partner of the firm. At the time of publication, Pharos had already closed on more than $200 million, according to Youngblood. The firm’s first institutional fund—at $155 million—is fully invested, he says, adding that Pharos’ current raise for its second institutional fund includes brand-name investors such as Verizon, Nokia and Disney. In January, the firm exited Nashville-based SmartDM, a database marketing company that was acquired by Acxiom Corp. Pharos’ Nashville presence is mostly through co-founders and managing partners Michael Devlin and Bob Crants.

RIVER ASSOCIATES
This Chattanooga-based private equity firm currently is investing its fourth fund and expects to begin raising its fifth this spring with a goal of $75 million - $100 million. River Associates made more investments in 2004 than in any year during its 15-year history with three new platform companies and acquisitions of two add-on companies for existing platform companies. Now Mark Jones at River Associates says he’s facing an extremely competitive market with more capital providers and more intermediaries, like investment bankers, but that the firm has remained very active in acquisitions and divestitures. During the last 18-24 months, Jones says there has been a return of aggressive lenders—senior debt and mezzanine debt providers have been much more aggressive. Also, he says, bank lenders who were very conservative in early 2000 have returned en masse, and the alternative lender market has become more pervasive.

SSM VENTURES
SSM, which focuses on health care and business services, is investing its third fund, of which about 30% is committed, according to Jim Witherington, managing partner. In about a year, SSM may begin raising a new fund, which likely won’t happen until its existing fund is more than 50% committed, Witherington says. SSM’s latest Tennessee deals included leading a new $5 million equity investment in Memphis-based Plan Express in Nov- ember 2004 and a follow-on investment in Nashville-based National Medical Solutions before that.

SALIX VENTURES
In 2004, Salix made five new investments, a record number for the firm. About 80% of the $120 million Salix Ventures II fund has been invested, and David Ward at Salix says the firm is looking to raise its third fund later this year. He expects it to be roughly $200 million with a similar focus in health care services. So far this year, Salix has closed on its part of a $7 million equity investment in U.S. Renal Care in March. (A second investment was imminent at the time this article was published.) During 2004, Salix exited its position in Psychiatric Solutions, in which the firm invested at its inception in the mid-’90s and again during a private offering in 2003. Ward calls Psychiatric Solutions the “biggest win last year” for Salix.

SOUTHERN APPALACHIAN FUND
East Tennessee’s venture capital outfit is exploring the prospects of establishing a second fund of about $30 million in equity and $1 million in operational assistance. The fund is led in Tennessee by Grady Vanderhoofven, an advocate of the area who says in his 15 years here, the last few years have provided the best climate he’s seen. The fund recently closed on an investment with Knoxville-based Eonstreams, a streaming media company, and the fund is negotiating two other deals, one in Tennessee and one in Mississippi. It included $12.5 million of equity and a $3 million pool to be used for operational assistance for its portfolio companies.

New Fund in Formation
East Tennessee soon may have a new fund in play. According to Southern Appalachian’s Vanderhoofven, “I am aware of another effort to raise a fund in this area.” While he declined to comment further on the fund, that’s not the case with many others in the East Tennessee financial community who say the $20 million+ fund should close on its fundraising by June.

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