The Private Equity Analyst

When two partners of Kleiner Perkins Caufield & Byers decided last spring to go out on their own, they found an unexpected suitor seeking their fund-raising business: Merrill Lynch & Co.’s Private Equity Group. Sure, the Merrill group is one of the biggest partnership placement agents around, but the New York firm generally has shunned venture capital funds as too small to be worth the effort.

Indeed, the two KPCB partners – Alexander E. Barkas and David Schnell, MD – were looking to raise just $75 million for their fund, Prospect Venture Partners, L.P.  That’s peanuts for Merrill, which is used to raising hundreds of millions, if not billions, of dollars for firms like Clayton, Dubilier & Rice, Inc., and E.M. Warburg Pincus & Co.

In the end, Messrs. Barkas and Schnell signed on with Merrill. And their firm, Prospect Management Co., LLC, Palo Alto, Calif. (Prospect Ventures), expects to close its fund next month at or above its target.

Merrill’s eagerness to represent the Prospect [Venture Partners] fund is a reflection of how Merrill perceives institutional appetites for alternative investments are changing. It also is an indication of how the Merrill private equity placement group is broadening its product mix to meet those appetites.

In the past year or so, Merrill has stepped up its offerings of real estate, emerging market and hedge funds, as well as its marketing of direct private equity investments. In the past, Merrill — like most other fund placement firms — marketed buyout and similar kinds of corporate finance funds almost exclusively.

Merrill courted Messrs. Barkas and Schnell, for example, because it wanted to offer a technology-oriented venture capital partnership to institutional investors that worry the buyout business might be too heavily funded. The Kleiner Perkins pedigree made managing the Prospect offering all the more desirable. Those benefits made Merrill willing to overlook the fund’s small size. And Merrill executives make no secret of the fact that they hope Prospect Venture Partners will tap Merrill to raise subsequent – and larger – funds.