The Golden LEAF Foundation's much-scrutinized investment in a Durham venture capital fund appears to be paying off.
So far, Hatteras Venture Partners has returned 98 percent of the foundation's roughly $25 million investment in Hatteras' second fund, thanks to the recent sale of two companies Hatteras had a stake in, said Clay Thorp, a general partner at the firm. Moreover, there is plenty of upside because 80 percent of the money invested by the second fund is still in play. The fund has investments in 13 companies that it hasn't cashed in yet.
Dan Gerlach, the foundation's president, said he is pleased with the returns to date, which are strong compared to venture capital funds of similar vintage.
Gerlach added, "We think there are some good investments that Hatteras has that remain to be harvested."
The mission of Golden Leaf, which is paid for from the state's share of a national legal settlement with cigarette manufacturers, is to promote economic development in tobacco-dependent and economically distressed regions of the state.
A break-even investment that took years to materialize normally isn't worth remarking, but venture capital funds are a different animal. They invest in young companies that are high on potential and short on cash; the funds don't reap any returns until those companies are sold or go public, a process that can take many years.
Consequently, although Golden LEAF's investment in Hatteras dates back to 2004, it's still early in the investment cycle of a venture capital fund.
Indeed, Hatteras' returns to date -- 98 cents on the dollar -- rank it among the top performers in its class. The average fund that got its start in 2004 and focuses on health-care companies had returned 10 cents on the dollar as of June 30, according to the investment consulting firm Cambridge Associates.
'Large returns early'
"We were fortunate to have large returns early in the fund cycle," Thorp said. "Once that happens, everything is gravy."
Golden LEAF's investment in Hatteras attracted criticism because there were no guarantees that the investments would be in North Carolina companies. Adding fuel to that fire was Hatteras' partnership with a Swiss firm, HBM BioCapital, for its second fund. HBM manages the fund, although Hatteras has input on the investment decisions.
So far at least, that criticism has held up. None of the investments to date have been in North Carolina companies.
But the story doesn't end there. Hatteras has a third fund -- not affiliated with HBM -- that has invested $10 million in four North Carolina companies to date and is looking to do more, Thorp said.
Hatteras executives say that without Golden LEAF's investment in its second fund, the third would never have materialized. It enabled Hatteras to beef up its investment staff and was a selling point when Hatteras raised money from investors for its newest fund.
Gerlach, who joined Golden LEAF last year, said the returns to date -- and the promise of more to come -- justify the investment in Hatteras.
The money Golden LEAF just received from Hatteras will be plowed back into the foundation's $580 million endowment, Gerlach said.
Ultimately, that will mean more money for economic development grants.
