Reaping the rewards of Irish success stories

Mr Niall Carroll, managing partner of ACT Venture Capital, readily admits that the company was lucky to have begun when it did.

Ten years ago, he left AIB Group to set up ACT as a stand-alone venture capital operator. The economy looked very different from what it is today. The Government had devalued the punt less than two years previously and unemployment was hovering close to 20 per cent, a level it actually passed in 1995.

However, within three years the Republic had changed in a dramatic fashion, partly driven by the high-tech boom.

"We didn't know it would happen at the time," Mr Carroll says, "but I don't think anybody else did either."

Ten years on, there's no questioning the fact that ACT benefited from that boom and continues to do well. Since 1994, it has raised a total of €350 million for investment in mainly Irish companies. Currently, ACT is in the process of investing its third fund, a total of €171 million that its clients placed with it between 2001 and 2002.

It was the biggest venture capital fund raised in Europe, a fact acknowledged by an award from investment journal Financial News, which sits in the company's boardroom. The fund's ultimate investors include all the leading Irish financial institutions and pension funds such as Eircom, ESB and RTÉ.

Its European backers include Access Capital Partners (a fund of funds), the European Investment Fund, Partners Group and the large German player BCM. JP Morgan Fleming and Merrill Lynch joined them from the US.

Not surprisingly, Mr Carroll says ACT is "pretty happy" with the calibre of investors it has attracted. "We've succeeded in getting, a strong international spread amongst our investors," he says.

In terms of the return ACT generates for its investors, Mr Carroll says that the first fund, which was €63 million, has generated a better return than the stock market on the investments it has exited. A portion of that fund is still in a number of what he describes as good investments.

In order to remain profitable, ACT has to deliver a better return than the stock market, bonds and other investment vehicles that its clients use. "Otherwise, they would just manage it themselves," he says.

The returns also have to reach that level before ACT gets part of its payment. The company charges its clients a fee, but also gets a carried interest, a payment that is only made once clients have redeemed their money and a sufficient return.

Mr Carroll argues that, not only does his business add to his clients' wealth, it has also helped many of the entrepreneurs behind the companies that it has funded. "We must have produced 20-plus millionaires, that is our objective, because if they make money, we make money as well," he says.

Over the past year, it has exited eight investments, realising €50 million for its clients in the process. These were largely trade sales. The most recent successful disposals included Belfast-based digital processing company Amphion, which was sold to US operator Conexant. ACT got a 2.5 times return on its original €2.3 million investment, which it made in May of last year.

In September, Broadcom paid $120 million (€89.6 million) to another ACT investment, Alphamosaic in the UK, which produced mobile phone components. The Irish venture capitalist more than trebled its €8.5 million investment as a result of the deal.

Other companies in which it invested included BCO Technologies, which floated in 1997 and was eventually bought by Analog Devices. That generated a nine-times return. It has also invested in Fitzpatrick Hotels, Massana, Belfast Airport and Cablelink.

It has not always been plain sailing, however. Over the past decade it has written off a total of €15 million as five or six investments, including high-profile technology company ETOS, which failed outright, leaving it without a red cent at the end.

It has also written down €15 million from some of its existing investments. However, Mr Carroll is quick to point out that, as those companies are still in business, there is always a chance of that value being recovered.

ACT runs the rule over a large number of potential new investments every year, but only chooses four or five as a general rule.

It has invested €42 million of the €171 million it raised in its last round in 10 companies. Those investments include €4 million in E-Net, which will operate the Government-funded fibre networks. ACT has 25 per cent of the company.

It has also invested in AGI Therapeutics, a spin-off of Elan, whose own fortunes have been revived recently after a controversial two years. AGI is developing products for the treatment of gastro-intestinal diseases. ACT has also backed Nova Science, a medical devices specialist.

Technology and science loom large in ACT's portfolio. That is partly a result of the fact that they are the fields boasting the highest level of entrepreneurship. But Mr Carroll explains that technology is very much central to the company's strategy.

"Our focus would be on early stage high-tech companies with deep technology," he says. "That means that they have some unique new approach, and that is something that can be exploited and driven internationally.

"We try to help them build up management teams and give them the money to exploit their potential."

On the question of that potential, he proves he's a bit of a Renaissance man by quoting Michelangelo: "The greater danger for most of us lies not in setting our aim too high and falling short; but in setting our aim too low and achieving our mark".

He believes that many Irish start-ups cannot see the potential of their products and ideas, or are sometimes daunted by exploiting them to their limit. Mr Carroll says that ACT has advised companies against sales on the basis that they were premature.

Mr Carroll says that it takes five rounds of fundraising and six or more years to bring the companies, and ACT's investment in them, to fruition. Part of the cash in its current fund will be used to cover subsequent fundraising rounds for companies in which it has made an initial investment.

In some respects, Mr Carroll believes that not seeing out the venture capital stage to its natural end contributed to the collapse of values that we now call the "technology bubble".

"I think that some of the VCs [ venture capitalists] were stuck for money and that caused a rush for exit, they tried to get the stock market to fund the next stage, and they went public too early," he argues.

ACT provides its companies with each subsequent round, and the sums rise each time. This gives them the means to develop the expertise they need to float or become part of a bigger company through a trade sale.

"What we are looking for at the end of the day is to create good, strong, international Irish success stories," he says.

Going on his firm's record, it has a good record in spotting those success stories early on. Perhaps its own success story is down to more than a luckily timed launch.