Rediscovered, Redefined Corporate Private Equity.

• Author: Sammut, Stephen M.

Corporate private equity investment is resurging. And why not? It can help you grow your company better, cheaper and faster.

Since the mid-1990s, Intel Corporation has invested more than $2 billion in over 200 companies, usually in the early stages of development. Its investments are relatively small, on the order of $1 million to $2 million in each company. Private venture capital funds with as much money to deploy as Intel probably wouldn't consider investments of that size. But Intel's strategy is to invest not only for financial return, but perhaps more importantly for strategic reasons.

Intel's private equity investment program is head- ed by Leslie Vadasz, an Intel senior vice president, director of corporate business development and member of Intel's board of directors. He was the third employee at Intel, back in the late 1960s, and has been a major contributor to the company's extraordinary growth. Vadasz's mission is clear, given Intel's position as a dominant supplier of semiconductors: Feed the demand for increasingly powerful microprocessors.

To accomplish this objective, Intel can't just produce faster chips; it also must ensure development of applications that will continue to demand more powerful microprocessors. As a result, Intel has invested in everything from content developers to bandwidth expanders to facilitators of e-commerce. Any company that will help to feed its core mission is a potential investment target.

Powerful Wave

Like Intel, many corporations over the past 25 years have created wholly owned or affiliated venture capital funds. Typically these funds are organized for strategic purposes, but are expected to deliver financial returns at least commensurate with average historic returns on shareholder equity. Since they often have the latitude to invest in a range of transactions, the term "venture capital" is giving way to the broader notion of private equity.

This concept is now central to many companies' growth strategies. Why? There are several factors: the phenomenal growth and financial success of the private venture capital industry, corporate outsourcing and spin-offs; the rationalization of R&D portfolios; changes in relationships with suppliers; and most significantly, the upsurge in entrepreneurial culture. And corporations have helped venture capital activity to surge by making substantial investments in venture capital funds, increasing the level of direct investment in private equity transactions and, in some cases, forming their own strategic venture capital subsidiaries.

Today's boom is the latest resurgence in a recurring cycle of rise and decline in this type of investment, roughly in synch with the stock market. Prof. Josh Lerner of Harvard Business School divided these cycles into three distinct waves. The first began in the late 1960s and early 1970s, when more than a quarter of the Fortune 500 initiated CPE programs to capitalize on opportunities similar to those identified by some of the early venture capital funds. One such fund was ARD, which acquired 77 percent of Digital Equipment Corporation (DEC) in 1957 for just under $70,000. ARD realized an...