An LP Becomes Owner of Silicon Valley VC Firm Northgate

Venture capital firms are usually owned by their founders and other firm executives who actively decide how to invest the money entrusted to them by wealthy individuals and institutions, such as pension funds. The suppliers of capital are called limited partners, and their usual role is to sit back while the VC firm chooses how to make their money grow.

But in an unusual move, Northgate Capital, a Danville, CA-based venture capital and private equity investment firm that manages $4.8 billion in assets, has struck a deal that gives one of its largest investors, a London-based asset management firm, a considerable voice in its investment strategies.

The Capital Partnership, one of Northgate’s largest sources of investment capital over the past 12 years, has agreed to buy 100 percent of Northgate—-that is, the Northgate management company or “general partner” organization that invests capital in various funds and portfolio companies on behalf of its limited partners. Financial terms were not disclosed.

Rather than a full takeover, the deal is a way for both companies to continue to work together to their mutual advantage, say top leaders from both sides. Northgate will serve as a bridge between The Capital Partnership and innovative Bay Area companies it wants to invest in, so it can apply their technology internationally, The Capital Partnership’s managing partner and co-founder Ali Ojjeh says. The London firm is most interested in four sectors: financial technology, media, digital health, and digital education, he says.

“Bay Area companies have a significant edge in those technologies,” Ojjeh says.

Northgate, founded in 2000, will continue to operate as a separate entity, with current CEO and managing partner Hosein Khajeh-Hosseiny remaining in those posts. But Ojjeh is expected to become chairman of Northgate, while staying on as a longtime member of Northgate’s Limited Partner Advisory Board. Plans also call for Ojjeh to join the the Northgate Investment Committee, along with Khajeh-Hosseiny and two of Northgate’s co-founders, Brent Jones and Thomas Vardell.

“The Capital Partnership will have governance involvement strongly across the management of the firm,” Khajeh-Hosseiny (pictured above) says.

That’s an advantage to both companies, Khajeh-Hosseiny says, because The Capital Partnership will have the confidence to invest greater amounts of money in Northgate funds if it has a say in the deployment of the capital under management. Northgate will become “a firm owned by an investor, for the investors,” The Capital Partnership said in a statement about the unusual transaction.

“It is unusual, but we believe this is the beginning of a trend where we will see a much greater degree of alignment between institutional investors and general partners,” Khajeh-Hosseiny says.

Both companies envision an expansion in the amount of capital flowing to private technology companies because they are major drivers of global wealth creation. Institutional investors will substantially increase the percentage of their assets invested in private equity and venture capital funds, Khajeh-Hosseiny predicts. They may fund the growth of companies for longer periods, rather than the relatively short time horizons now set by VC firms for their portfolio companies to pay off by going public or being acquired, he says.

“A company (worth) $50 billion to $100 billion could still remain private,” Khajeh-Hosseiny says.

To acquire the Northgate management company, The Capital Partnership is buying out the majority stake purchased in 2010 by India-based financial services group Religare, as well as a minority interest retained by three Northgate partners—-Khajeh-Hosseiny and two firm co-founders, Jones and Vardell. Other partners who held those stakes have retired in the last few years, Khajeh-Hosseiny says.

For its investment, The Capital Partnership will receive any profits from the management fees paid by all of Northgate’s limited partners. Northgate’s investment professionals will continue to receive compensation from a share of the gains on the investments made by Northgate’s funds. This is called the “carried interest.”

But under a new compensation scheme introduced by The Capital Partnership, the distribution of the carried interest among the 51 professionals will change. “A much larger pool of the firm’s professionals are key stakeholders, whether they are founders or not,” Khajeh-Hosseiny says. That gives them greater financial incentives to find and invest in companies that will grow, he says, and aligns their interests with The Capital Partnership and other limited partners, who will reap the bulk of those financial gains.

Bernadette Tansey is Xconomy's San Francisco Editor. You can reach her at btansey@xconomy.com. Follow @Tansey_Xconomy

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