Cross Atlantic rises from dot.com era wreck

The Pennsylvania State Employees' Retirement System invested $20 million in the Radnor-based Cross Atlantic Technology's first venture capital fund back in 1999, when then-Gov. Tom Ridge still believed dot.com profits would pay for higher pensions for himself and other public workers.

Venture capitalists typically project returns in five to 10 years. But after 12 years, the state pension system had gotten back just $19 million of its Cross Atlantic Fund I investment, and no profits, according to its most recent annual report dated Dec. 31.

SERS committed another $32.9 million to Cross Atlantic Technology Fund II, in 2002. It got back not quite $19 million of that money, over the first nine years.

Venture capital funding all but dried up since the dot.com bubble, as returns collapsed and big investors moved on to buyout funds, real estate and commodity speculation. But SERS's board, appointed by Gov. Corbett and the General Assembly, is patient. On June 8, SERS trustees voted to invest $20 million in Cross Atlantic Technology Fund III, the fund's new investment vehicle.

Why? The group tied up $50 million in SERS funds for almost a decade without any profit, while continuing to collect management funds, totalling $159,000 last year alone, according to SERS' annual report.

But things are looking up, says SERS spokesman Robert Gentzel. He says recent deals by Cross Atlantic have finally boosted the value of the 1999 investment above the original $20 million, "and we've now recovered all our initial investment, plus about $1.5 million," for a total return averaging 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 all those millions in, say, Treasury bonds.

SERS hopes for bigger Fund I profits as Cross Atlantic continues to sell off companies. It also "fully expects" Fund II will show a profit, eventually, Gentzel told me: SERS' paid "alternative investment consultant," Cambridge Associates, "tells us (Cross Atlantic) ranks among the better-performing venture funds" that are still around from the dot.com era.

I asked Don Caldwell, the onetime savings-and-loan boss (and Pennsylvania Academy of the Fine Arts patron) who runs Cross Atlantic, how he won another chance with the people's money.

"Private equity is a long-term proposition," Caldwell told me. He says he stuck with the companies he backed in the early 2000s, even when valuations crashed. And some of them, it turns out, were worth something after all, though it took a lot longer than promoters expected.

"It's late in maturing," but "Cross Atlantic has done very well," says Mike DiPiano, head of rival NewSpring Capital. Cross Atlatnic lost money in European investments, but its U.S. companies have hung on, he said. The next test will be how well the new fund does with its new fund, and its current team, he added. NewSpring partner Glenn Rieger was part of the initial team at Cross Atlantic.

Here's what some of Cross Atlantic's private-company picks have returned:

- eCount, a Conshohocken debit-card services company: Cross Atlantic invested $4.2 million, and got back $34 million when the firm was acquired by Citigroup in 2007.

- Metapack, London. Instead of writing it off after the British speculative-companies market tanked, Cross Atlantic held on and was able to get its money back, if nothing more, when the company was finally sold last month, just in time to help finance a new investment in San Ramon, Calif.-based Rootstock Software.

- Openet, an Irish company Cross Atlantic backed in 1999. The firm's focus has shifted from 3-G phone technology to "mediation software" matching different wireless systems to link their clients. "It took 10 years, but now we have a really serious business that we expect to take public this year," Caldwell says.

- Inspro Technologies, an Eddystone-based insurance software company spun off by an otherwise unprofitable investment in a former Radnor company, Health Benefits Direct, which Caldwell now hopes to sell at a profit.

- Gain Capital, Bedminster, NJ: Cross Atlantic invested $3.5 million and returned a net $75 million from its IPO in December, 2010 - the transaction that sent Fund I into the black.

- Rubicon Technology, Bensenville, IL Cross Atlantic invested $33 million and got back a net $52 million in its 2007 initial public offering. Cross Atlantic held onto part of its investment, which it valued at $135 million as of March 31.

-  Kanbay International, Chicago, IL: Cross Atlantic invested $14 million and collected a net $79 million when Cap Gemini purchased it in 2006.

-  Management Dynamics, East Rutherford, NJ: Planning an IPO in 2012.

Caldwell used to be a regular donor to Pennsylvania politiicans, including both Republican candidates 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.

Another Cross Atlantic manager, lawyer Frederick Tecce, is also a past political donor, and used to serve on the board of the Pennsylvania Public School Employees' Retirement System, the teachers' pension fund, which is also a Cross Atlantic investor. PSERS invested around $50 million with Cross Atlantic, in 1999-2001, and has gotten back just $41 million, so far. That system is undecided whether to invest in Fund III, says spokeswoman Evelyn Tatkovski.

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. And neither he nor Tecce have given Pennsylvania politicians money since 2007, records show. 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.

Mostly, Caldwell says, he's still in business because his team has kept backing promising companies even as the stock and bond markets have wavered.

Is it really worth locking away millions for years, for such modest, slow returns? "The assumption that there is less risk in public securities, I don't think is a completely valid assumption," given the stock market's flat performance in the 2000s, Caldwell said.

Cross Atlantic is still around because it invested in firms with real prospects, whose valuations may have been hurt by the dot.com bubble and the 2008 credit crisis, but whose businesses survived, he says: "It's a lot safer to build real businesses than it is to catch a wave. Right now, the wave is social media. God bless those that have caught it. But waves come and go, a real business is still there. I like to think we've been helpful."