NEW YORK-For telecommunications companies that believe the capital markets have become like Ebenezer Scrooge, Gerald W. Thames, a principal of the new Lehman Brothers Inc. Global Communications Fund, offers some Christmas cheer.
Thames, who said he spent 30 years on the other side of the fence starting new telecommunications ventures seeking investments, traded places last year to help launch the private equity fund. It begin seeking capital in late 1999 and closed in November with $800 million on hand, well above its initial objectives.
By early December, fund managers had reviewed close to 900 business plans, visited with 200 companies and awarded five investments, with three more expected by year-end.
Although the charter of the Lehman Brothers Global Communications Fund permits it to invest in network and device industry participants, its primary focus is on service providers. These include network operators, virtual private network operators, outsourced managed service providers, like those that provide data storage and back-up, streaming media companies, applications service providers, content delivery companies.
“For the venture world, this is a good time because the winners and losers are being sorted out. The values are dropping to more reasonable levels from the venture world’s perspective, although not from a CEO’s,” Thames said.
While the fund occasionally will look at incubating concept companies, it generally prefers those that have gone beyond seed stage and are in the fledgling start-up mode or one step beyond that, at the mezzanine level.
“The market is very critical today at the start-up to mezzanine levels because companies need significant cash to get them to free cash flow or EBITDA (Earnings Before Taxes, Depreciation and Amortization) positive,” he said.
“If they don’t have cash and stumble executing their plan, the fear is they won’t get more capital … We look for companies that have demonstrated the ability to sell their value proposition and can scale up in a growing market.”
Besides listening to business plans and projections offered by top executives of companies seeking investment, Thames said it is not uncommon for him or his colleagues to spend a day on the road making calls with the applicant firm’s salespeople.
By contrast, he said he could not recall one instance of venture capitalists conducting that type of down-in-the-trenches due diligence on companies for which he was seeking to raise capital.
Consolidation among telecommunications operators and its potential to diminish the market for the products and services offered by new companies do not concern him, he said. Since 1984, the United States has experienced eight telecommunications sector consolidations, including long-distance, long-distance resellers, wireless resellers and competitive local exchange carriers.
“On the wireless side, I am absolutely amazed at how poorly many areas are served with coverage and service,” Thames said.
“There are many tiered niche opportunities, geographically and from a services standpoint. With 2.5 and 3G, there will be many opportunities for bundling services and offering new service platforms.”
During the last eight years, the overall economy has experienced unprecedented growth, with a surplus of capital chasing a relative dearth of available investment opportunities, Thames said. The resulting investor willingness to take high risks resulted in exaggerated company valuations.
“Dumb money just puts money in and bets on a crap shoot. Smart money gets involved with (investee) companies at the board level to guide them,” Thames said.
“We already are viewed as the smart money, and other venture capital firms are looking to invest with us.”
