PhillyDeals: Are they rising from the wreck?

Don Caldwell, founder of Cross Atlantic Capital Partners Inc., says, "Private equity is a long-term proposition."
Don Caldwell, founder of Cross Atlantic Capital Partners Inc., says, "Private equity is a long-term proposition." (JOSEPH N. DISTEFANO / Staff)
Posted: June 26, 2011

The Pennsylvania State Employees' Retirement System (SERS) invested $20 million in Radnor-based Cross Atlantic Capital Partners Inc.'s first technology venture capital fund, back in 1999 during the boom, when then-Gov. Tom Ridge hoped it would help fund higher pensions.

Twelve years later, the taxpayer-supported system had gotten back just $19 million of its first investment, and no profit, according to its Dec. 31 report.

In 2001, SERS voted to put an additional $32.9 million with Cross Atlantic Technology Fund II. It's gotten back not quite $19 million.

Pennsylvania's Public School Employees' Retirement Fund (PSERS) invested more than $50 million in Cross Atlantic from 1999 to 2001, and it has yet to recoup its investment.

Cross Atlantic isn't unusual. Venture capital firms typically repay investors in a five- to 10-year cycle, or never. As returns dried up in the bust, the big money moved on, to buyout funds, real estate, and commodity speculation.

But SERS' politically appointed board is patient. On June 8, SERS trustees voted to invest another $20 million in Cross Atlantic Technology Fund III, even after the firm tied up SERS' millions for a decade, without profit, while still collecting management funds - $159,000 from SERS last year.

Why? Things are looking up, SERS spokesman Robert Gentzel told me. He says recent deals by Cross Atlantic have finally boosted the value of SERS' first investment past its original $20 million, "and we've now recovered all our initial investment, plus about $1.5 million."

That works out to a total return that averages less than 1 percent a year, if you don't count inflation, or the opportunity cost of what the state would have earned by sticking those millions in, say, U.S. Treasury bonds.

But SERS hopes for bigger profits to come. Gentzel says SERS' "alternative investment consultant," Cambridge Associates, "tells us [Cross Atlantic] ranks among the better-performing venture funds" still around from the days. PSERS, the teachers' fund, is undecided whether to invest with Cross Atlantic again.

I asked Don Caldwell, the gravel-voiced Cross Atlantic founder, how he won another chance with SERS. "Private equity is a long-term proposition," he told me.

Cross Atlantic lost millions in small European companies, but scored some early U.S. hits, including Ecount Inc., a Conshohocken debit card services company that turned Cross Atlantic's $4.2 million investment into $32 million when Citigroup Inc. bought it four years ago.

But it was Cross Atlantic's $3.5 million investment in GAIN Capital Holdings Inc., a Bedminster, N.J., foreign-exchange trader whose IPO finally put Cross Atlantic's Fund I into the black last year, boosting the value of Cross Atlantic's stake to $75 million. Other stock sales are in the works, Caldwell says.

Political play?

From 2000 to 2009, state records show Caldwell gave a total of more than $100,000 to the Pennsylvania Future Fund, chaired by Republican leader Bob Asher, and to politicians of both parties, including former Gov. Ed Rendell, former state TreasurerBarbara Hafer, who headed the PSERS board, and the state's current treasurer, Rob McCord, who sits on the SERS board and recused himself from the recent vote on hiring Cross Atlantic.

Did political cash help Cross Atlantic land state business? "The odds are higher that a personal introduction from someone you know will produce a better lead than something coming in over the transom," Caldwell acknowledged.

But managers won't get or stay hired if they don't produce profits, he added.

Caldwell and his partners haven't directly given money to Pennsylvania legislator, treasurer, or governor candidates since 2007. Why not?

"It became increasingly an issue" after investigations of New York pension contracts resulted in criminal bribery convictions for state pension officials there, Caldwell told me.

Is it really worth locking away millions for years this way? Wouldn't it be better to buy, say, Vanguard Group stock and bond index funds, which can be sold at will, and whose fees are way less?

SERS is betting Caldwell's skill at picking winners will beat the markets.

"The assumption that there is less risk in public securities, I don't think is a completely valid assumption," given the sad performance of stocks since 2000, Caldwell said.

Contact columnist Joseph N. DiStefano at 215-854-5194 or

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