The accompanying notes are an integral part of these financial statements .
The accompanying notes are an integral part of these financial statements .
The accompanying notes are an integral part of these financial statements .
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The Private Investment Funds' management fees range from 2.00% to 2.50% on committed capital during the initial investment period and typically decrease over time as the Private Investment Funds seek to exit investments. The Private Investment Funds' incentive fees range from 20% to 25% of profits generated by the Private Investment Funds.
The accompanying notes are an integral part of these financial statements.
Excelsior Venture Partners III, LLC
NOTES TO FINANCIAL STATEMENTS
October 31, 2011
Note 1 — Organization
Excelsior Venture Partners III, LLC (the "Company") is a non-diversified, closed-end management investment company which commenced operations on April 5, 2001. The Company was organized as a Delaware limited liability Company on February 18, 2000. The Company registered its initial offering of units under the Securities Act of 1933, as amended (the "Securities Act"). The duration of the Company is ten years (subject to two 2-year extensions) from the final subscription closing which occurred on May 11, 2001, at which time the affairs of the Company will be wound up and its assets distributed pro rata to members ("Members") as soon as is practicable. On March 17, 2011 the Company’s Board of Managers (the “Board” or “Board of Managers”) authorized an extension of the duration of the Company until May 11, 2013.
Pursuant to a Registration Statement on Form N-2 (File 333-30986), which was originally declared effective on September 7, 2000, the Company was authorized to offer an unlimited number of units of membership interest with no par value. The Company sold 295,210 units via a public offering, which closed on May 11, 2001, for gross proceeds totaling $147,605,000. At the time, units of the Company were made available through Charles Schwab & Co., Inc., the Company’s principal distributor.
The Company incurred offering costs associated with the public offering totaling $1,468,218. Net proceeds to the Company from the public offering, after offering costs, totaled $146,136,782.
Until January 29, 2010, the Company was treated as a business development company or "BDC" under the Investment Company Act of 1940, as amended (the "Investment Company Act"). BDCs are a special type of investment companies, as defined and regulated by the Investment Company Act, which focus primarily on investing in the privately issued securities of eligible portfolio companies, as defined by the Investment Company Act. A BDC must also make available significant managerial assistance to such companies.
At a special meeting held on December 10, 2009, Members of the Company approved a proposal to withdraw the Company's election to be treated as a BDC and continue its operations as a registered closed-end management investment company. The registration of the Company under the Investment Company Act became effective on January 29, 2010.
The Company’s investment objective is to achieve long-term capital appreciation primarily by investing in domestic venture capital and other private companies ("Private Companies") and, to a lesser extent, domestic and international private funds ("Private Investment Funds"), negotiated private investments in public companies and international direct investments that Bank of America Capital Advisors LLC ("BACA" or the "Investment Adviser") believes offer significant long-term capital appreciation. Private Companies are companies in which the equity is closely held by company founders, management and/or a limited number of institutional investors. The Company does not have the right to demand that such equity securities be registered.
BACA, a Delaware limited liability company and a registered investment adviser under the Investment Advisers Act of 1940, as amended, serves as investment adviser for the Company. Its principal offices are located at 100 Federal Street, Boston, MA 02110. The Investment Adviser is an indirect wholly-owned subsidiary of, and is controlled by, Bank of America Corporation ("Bank of America"), a financial holding company which has its principal executive offices at 101 North Tryon Street, Charlotte, NC 28255. BACA is responsible for identifying, evaluating, structuring, monitoring and disposing of the Company’s investments and for performing the management and administrative services necessary for the operation of the Company. All officers of the Company are employees and/or officers of the Investment Adviser. The Investment Adviser is compensated as described in Note 3.
Prior to May 29, 2008, the Company’s investment adviser was UST Advisers, Inc. (the "former investment adviser"). On May 29, 2008, BACA assumed the responsibilities of the investment adviser to the Company as a result of a transfer (the "Transfer") of the former investment adviser’s rights and obligations under the Advisory Agreement (as defined below) between the Company and the former investment adviser dated July 1, 2007. The Transfer was approved by the Company’s Board of Managers on March 11, 2008. This change was a product of corporate mergers resulting from the
acquisition by Bank of America of U.S. Trust Corporation (“U.S. Trust Corp.”) in July 2007. The Transfer of the Advisory Agreement from the former investment adviser to BACA did not change (i) the way the Company was managed, including the level of services provided, (ii) the team of investment professionals providing services to the Company, or (iii) the management and incentive fees paid by the Company. Until July 1, 2007, United States Trust Company, National Association ("U.S. Trust"), acting through its registered investment advisory division, U.S. Trust-New York Asset Management Division, had served as the investment sub-adviser to the Company (the "Investment Sub-Adviser").
The former investment adviser, a Delaware corporation and registered investment adviser, had been an indirect wholly-owned subsidiary of, and controlled by, Bank of America, since July 1, 2007. Prior to that, the former investment adviser was an indirect subsidiary of U.S. Trust Corp., a registered financial holding company, which, in turn, was a wholly-owned subsidiary of The Charles Schwab Corporation ("Schwab"). The former investment adviser assumed the duties of the investment adviser from the previous investment adviser to the Company, U.S. Trust Company, N.A. ("UST-NA"), which was acting through its registered investment advisory division, U.S. Trust Asset Management Division, on December 16, 2005. UST-NA has served as the investment adviser to the Company pursuant to an investment advisory agreement.
On July 1, 2007, U.S. Trust Corp. and its subsidiaries, including the former investment adviser and the Investment Sub-Adviser, were acquired by Bank of America (the "Sale"). The former investment adviser continued to serve as the Investment Adviser to the Company after the Sale (until May 29, 2008, as indicated above) pursuant to a new investment advisory agreement with the Company (the "Advisory Agreement") that was approved at a special meeting of Members of the Company held on March 15, 2007 and was identical in all material respects except for the term and the date of effectiveness to the previous investment advisory agreement. The Investment Sub-Adviser ceased to serve as the investment sub-adviser to the Company after the Sale.
Note 2 — Significant Accounting Policies
A. Basis of Accounting:
The Company’s policy is to prepare its financial statements on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Consequently, income and the related assets are recognized when earned, and expenses and the related liabilities are recognized when incurred. The following is a summary of significant accounting policies followed by the Company in the preparation of its financial statements.
B. Recent Accounting Pronouncements:
In May 2011, FASB issued Codification Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS ("ASU 2011-04"). ASU 2011-04 requires disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for those transfers. In addition, ASU 2011-04 expands the qualitative and quantitative fair value disclosure requirements for fair value measurements categorized in Level 3 of the fair value hierarchy and requires a description of the valuation process in place and a description of the sensitivity of the fair value to changes in unobservable inputs and interrelationships between those inputs if a change in those inputs would result in a significantly different fair value measurement. ASU 2011-04 is effective for fiscal years beginning after December 15, 2011 and for interim periods within those fiscal years. The adoption of ASU 2011-04 is currently being assessed but is not expected to have a material impact of the Company's financial statements.
C. Valuation of Investments:
The Company computes its net asset value as of the last business day of each fiscal quarter and at such other times as deemed appropriate by the Investment Adviser in accordance with valuation principles set forth below, or may be determined from time to time, pursuant to the valuation procedures (the “Procedures”) established by the Board.
The Board has approved the Procedures pursuant to which the Company values its interests in the Private
Investment Funds and other investments. The Board has delegated to the Investment Adviser general responsibility for determining the value of the assets held by the Company. The value of the Company’s interests is based on information reasonably available at the time the valuation is made and the Investment Advisor believes to be reliable. Generally, the value of each Private Investment Fund is determined to be that value reported to the Company by the Private Investment Fund as of each quarter-end, determined by the Private Investment Fund in accordance with its own valuation policies. The Company follows the authoritative guidance under U.S. GAAP for estimating the fair value of investments in investment companies that have calculated net asset value in accordance with the specialized accounting guidance for investment companies. The adoption of this guidance does not have a material effect on the financial statements.
While the Investment Adviser may rely on a Private Investment Fund’s valuation mechanics, the Investment Adviser must maintain an effective monitoring process and internal controls to comply with the Procedures and the Company’s stated accounting policies. In reviewing valuations from the Private Investment Funds, the Investment Adviser takes into consideration all reasonably available information from the Private Investment Funds related to valuation. If the Investment Adviser determines that a Private Investment Fund’s value as reported by that Private Investment Fund does not represent current value, or in the event a Private Investment Fund does not report a quarter-end value to the Company on a timely basis, then the Private Investment Fund is valued at its fair value in accordance with the Procedures. In determining fair value of a Private Investment Fund, the Investment Adviser shall recommend a value for such Private Investment Fund for approval by the valuation committee of the Board (the “Valuation Committee”) that it reasonably believes represents the amount the Company could reasonably expect to receive from the Private Investment Fund if the Company were able to sell its interests in the Private Investment Fund at that time. In making such a recommendation and approving a valuation, the Investment Adviser and the Valuation Committee, respectively, take into consideration all reasonably available information and other factors deemed pertinent.
The value for securities for which no public market exists is difficult to determine. Generally, such investments will be valued on a "fair value" basis and in conformity with U.S. GAAP. Accordingly, the fair value measurement is determined based on the estimated price a seller would receive in an orderly transaction at the measurement date. For venture capital companies there are a range of values that are reasonable for such investments at any particular time. Initially, Private Companies are valued based upon their original cost except that original cost valuation will be adjusted, upon approval by the Valuation Committee on the advice of the Investment Adviser, based on either a market or appraisal method of valuation. The private market method shall only be used with respect to reliable third party transactions by sophisticated, independent investors. The appraisal method shall be based upon such inputs affecting the company such as earnings, net worth, reliable private sale prices of the company’s securities, the market prices for similar securities of comparable companies, an assessment of the company’s future prospects or, if appropriate, liquidation value. The values for the investments referred to in this paragraph will be estimated regularly by the Investment Adviser or the Valuation Committee under the supervision of the Board of Managers and, in any event, not less frequently than quarterly. However, there can be no assurance that such value will represent the return that might ultimately be realized by the Company from the investments.
At October 31, 2011, market quotations were not readily available for the investments on the Company’s Schedule Investments which are valued at $32,331,825 or 88.45% of net assets. Such securities were valued by the Investment Adviser, under the supervision of the Board of Managers. Because of the inherent uncertainty of valuation, the estimated values may differ significantly from the values that would have been used had a ready market for the securities existed, and the differences could be material.
FASB ASC 820-10 "Fair Value Measurements and Disclosure" establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). FASB ASC 820-10-35-39 to 55 provides three levels of the fair value hierarchy as follows:
| Level 1 | Inputs that reflect unadjusted quoted prices in active markets for |
| | identical assets or liabilities that the Company has the ability to |
| | access at the measurement date; |
| Level 2 | Inputs other than quoted prices that are observable for the asset or |
| | liability either directly or indirectly, including inputs in markets |
| | that are not considered to be active; |
| | |
| Level 3 | Inputs that are unobservable. |
Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. The Company generally uses the capital balance reported by the Private Investment Funds as the primary input in its valuation; however, adjustments to the reported capital balance may be made based on various factors, including, but not limited to, the attributes of the interest held, including the rights and obligations, any restrictions or illiquidity on such interests, any potential clawbacks by the Private Investment Funds and the fair value of the Private Investment Funds' investment portfolio or other assets and liabilities.
An individual Private Investment Fund’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes ‘‘observable’’ requires significant judgment by the Company, Board and Valuation Committee. The Company, Board and Valuation Committee considers observable data to be that market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, provided by multiple, independent sources that are actively involved in the relevant market. The categorization of the Private Investment Fund within the hierarchy is based upon the pricing transparency of that Private Investment Fund and does not necessarily correspond to the Company’s perceived risk of that Private Investment Fund.
All of the Company’s investments in the Private Companies and Private Investment Funds have been classified within Level 3, and the Company generally does not hold any investments that could be classified as Level 1 or Level 2, as observable prices are typically not available. The Private Investment Funds generally do not provide redemption options for investors and, subsequent to final closing, do not permit subscriptions by new or existing investors. Accordingly, the Company generally holds interests in such Private Investment Funds for which there is no active market. The Company's interests in Private Companies and Private Investment Funds, in the absence of a recent and relevant secondary market transaction, are generally classified as Level 3. Assumptions used by the Company, Board or Valuation Committee due to the lack of observable inputs may significantly impact the resulting fair value and, therefore, the Company’s results of operations.
The following table presents the investments carried on the Statement of Assets, Liabilities and Net Assets by level within the valuation hierarchy as of October 31, 2011.
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Investments in Private Companies | | | | | | | | | | | | |
| Common Stocks | | $ | – | | | $ | – | | | $ | – | | | $ | – | |
| Preferred Stocks | | | – | | | | – | | | | 18,711,585 | | | | 18,711,585 | |
| Investments in Private Investment Funds | | | | | | | | | | | | | | | | |
| Early-Stage Information Technology | | | – | | | | – | | | | 4,683,444 | | | | 4,683,444 | |
| Early-Stage Life Sciences and | | | | | | | | | | | | | | | | |
| Technology | | | – | | | | – | | | | 5,650,791 | | | | 5,650,791 | |
| Multi-Stage Life Sciences, | | | | | | | | | | | | | | | | |
| Communications and Health Care | | | – | | | | – | | | | 3,286,005 | | | | 3,286,005 | |
| Totals: | | $ | – | | | $ | – | | | $ | 32,331,825 | | | $ | 32,331,825 | |
The following table includes a rollforward of the amounts for the year ended October 31, 2011 for investments classified within Level 3. The classification of an investment within Level 3 is based upon the significance of the unobservable inputs to the overall fair value measurement.
| | | Private | | | Private | |
| Fair Value Measurements using Level 3 inputs | | Companies | | | Investment Funds | |
| Balance as of November 1, 2010 | | $ | 18,920,770 | | | $ | 13,914,164 | |
| Net change in unrealized appreciation/(depreciation) | | | | | | | | |
on investments | | | (209,185 | ) | | | 2,342,070 | |
| Contributions | | | - | | | | 503,817 | |
| Distributions | | | - | | | | (3,120,664 | ) |
| Net realized gain/(loss) on investments | | | - | | | | (19,147 | ) |
| Balance as of October 31, 2011 | | $ | 18,711,585 | | | $ | 13,620,240 | |
The net change in unrealized appreciation/(depreciation) relating to Level 3 investments still held at the reporting date for Private Companies and Private Investment Funds is $(209,185) and $2,342,070, respectively.
The Company recognizes transfers into and out of the levels indicated above at the end of the reporting period. There were no transfers into or out Level 3 at the end of the reporting period.
All net realized and unrealized gain (losses) in the table above are reflected in the accompanying Statement of Operations.
Additional information on the investments can be found in the Schedule of Investments.
The estimated remaining life of the Company’s Private Investment Funds as of October 31, 2011 is one to three years with the possibility of extensions in each of the Private Investment Funds.
Investments in Private Companies and Private Investment Funds are closed investment vehicles, which provide for no liquidity or redemption option, and are not readily marketable.
Cash and cash equivalents on the Statement of Assets, Liabilities and Net Assets can include overnight deposits in commercial paper, which are classified as a Level 1 asset.
D. Cash and Cash Equivalents:
Cash and cash equivalents consist primarily of cash and short term investments which are readily convertible into cash and have an original maturity of three months or less. At October 31, 2011, the Company did not hold any cash equivalents.
E. Use of Estimates:
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates and the differences could be material.
F. Security Transactions and Investment Gains and Losses:
Private and Public Companies
Security transactions are recorded on a trade date basis or in the case of private investments or securities transactions are recorded when the Company has a legal and enforceable right to demand payment. Realized gains and losses on investments sold are recorded on the basis of specific cost. Interest income, adjusted for amortization of premiums and discounts, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date.
Private Investment Funds
Distributions of cash or in-kind securities from a Private Investment Fund are recorded as a return of capital to reduce the cost basis of the Private Investment Fund. In-kind securities received from a Private Investment Fund are recorded at fair value. Distributions are recorded when they are received from the Private Investment Funds as there are no redemption rights with respect to the Private Investment Funds. The Company may also recognize realized losses based upon information received from the Private Investment Fund managers for write-offs taken in the underlying portfolio. Unrealized appreciation/(depreciation) on investments, within the Statement of Operations, includes the Company's share of interest and dividends, realized (but undistributed) and unrealized gains and losses on security transactions and expenses of each Private Investment Fund.
G. Income Taxes:
The Company is a limited liability company that is treated as a partnership for tax reporting. Tax basis income and losses are passed through to the individual Members and, accordingly, there is no provision for income taxes reflected in these statements.
Differences arise in the computation of Members' capital for financial reporting in accordance with U.S. GAAP and Members' capital for federal and state income tax reporting. These differences are primarily due to the fact that unrealized gains and losses are allocated for financial reporting purposes and are not allocated for federal and state income tax reporting purposes.
The cost of the Private Investment Funds for federal income tax purposes is based on amounts reported to the Company on Schedule K-1 from the Private Investment Funds. As of October 31, 2011, the Company has not received information to determine the tax cost of the Private Investment Funds. Based on the amounts reported to the Fund on Schedule K-1 as of December 31, 2010, and after adjustment for purchases and sales between January 1, 2011 and October 31, 2011, the estimated cost of the Private Companies at October 31, 2011 for federal income tax purposes is $21,505,378. The resulting estimated net unrealized depreciation for federal income tax purposes on the Private Companies at October 31, 2011 is $2,793,793, which consists of unrealized appreciation and depreciation of $7,735,981 and $10,529,774, respectively. The estimated cost of the Private Investment Funds at October 31, 2011 for federal income tax purposes is $11,042,066. The resulting estimated net unrealized appreciation for federal income tax purposes on the Private Investment Funds at October 31, 2011 is $2,578,174, which consists of unrealized appreciation and depreciation of $3,713,616 and $1,135,442, respectively.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state, local and foreign jurisdictions, where applicable. As of December 31, 2010, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations is from the year 2008 forward (with limited exceptions). The Investment Advisor reviewed the Company’s tax positions for the open tax years and has concluded that no provision for taxes is required in the Company’s financial statements. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations. During the year ended October 31, 2011, the Company did not incur any interest or penalties.
H. Distribution Policy:
Distributions of available cash will be made by the Company at such times and in such amounts as determined by the Board in its sole discretion. Distributions are recorded on the ex-dividend date to members of record on the record date.
I. Contribution Policy:
Units are issued when contributions are paid. For the year ended October 31, 2011, no additional units were issued.
J. Restrictions on Transfers:
Limited liability company interests of the Company (“Interests”) are generally not transferable. No Member may assign, sell, transfer, pledge, hypothecate or otherwise dispose of any Interests without the prior written consent of the Company, which may be granted or withheld in its sole discretion, and in compliance with applicable securities and tax laws.
K. Fees of the Private Investment Funds:
Each Private Investment Fund will charge its investors (including the Company) expenses, including asset-based management fees and performance-based referred to as an allocation of profits. In addition to Company level expenses shown on the Company’s Statement of Operations, Members of the Company will indirectly bear the fees and expenses charged by the Private Investment Funds. These fees are reflected in the valuations of the Private Investment Funds and are not reflected in the ratios to average net assets in the Financial Highlights. However, the Company has disclosed in the Financial Highlights a range of the expense ratios and fees charged by the Private Investment Funds.
L. Expenses:
The Company records expenses on an accrual basis. Such accruals require management to make estimates and assumptions that affect the reported amounts, which is consistent with U.S. GAAP.
Note 3 — Investment Advisory Fee, Administration Fee and Related Party Transactions
Under the Company's registration statement for the services provided, the Investment Adviser was entitled to receive a management fee at an annual rate equal to 2.00% of the Company’s end of the quarter net assets through the fifth anniversary of the first closing date of April 5, 2001, and 1.00% of net assets thereafter. Effective November 1, 2010, the Company’s management fees will be calculated based on average quarterly net assets. This change is being made in accordance with the Company’s Advisory Agreement. In prior years, management fees were calculated based on end of quarter net asset value.
As of October 31, 2011, $94,461 was payable to BACA for management fees.
On July 31, 2008, the Company received $268,999 from BACA as a reimbursement for fees associated with the sale of Genoptix, Inc. The Company, through its own internal controls, identified a potential violation of the Investment Company Act involving the sale of Genoptix, Inc. through an affiliate of the former investment adviser. BACA and its affiliate believe that the sale of Genoptix, Inc. in the initial public offering and secondary offering was at arms-length. However, to ensure the Company and its investors are made whole and in its fiduciary capacity as the Investment Adviser, BACA decided to reimburse the Company for the fees paid to its affiliate.
Until December 31, 2009 in addition to the management fee, the Investment Adviser was entitled to allocations and distributions equal to the incentive carried interest. The incentive carried interest was an amount equal to 20% of the excess, if any, of the Company’s cumulative realized capital gains on Private Companies, over the sum of (i) cumulative realized capital losses on investments of any type (ii) cumulative gross unrealized capital depreciation on investments of any type and (iii) cumulative net expenses. As of December 31, 2009, the incentive carried interest was eliminated and could no longer be allocated to the Investment Adviser.
Pursuant to an Administration, Accounting and Investor Services Agreement, the Company retains BNY Mellon Investment Servicing (U.S.) Inc. as administrator, accounting and investor services agent. In consideration for its services, the Company (i) pays BNY Mellon Investment Servicing (U.S.) Inc. a variable fee between 0.07% and 0.105%, based on average quarterly net assets, payable monthly, subject to a minimum quarterly fee of approximately $28,750, (ii) pay annual fees of approximately $37,159 for taxation services and (iii) reimburses BNY Mellon Investment Servicing (U.S.) Inc. for out-of-pocket expenses. In addition, BNY Mellon Investment Servicing Trust Company serves as the Company's custodian.
Each member of the Board of Managers receives $10,000 as an annual retainer and the Chairman of the Board receives an additional $1,000 annual retainer. Also, each member of the Board receives $2,000 per quarterly meeting
attended. In addition, each Board member receives $500 per quarterly telephonic meeting and $500 for any other telephonic special meeting. For each audit committee meeting attended, Board members receive $1,500, while the Chairman of the Audit Committee receives an additional $1,000 retainer. Each member of the Board is reimbursed for expenses incurred for attending meetings. No person who is an officer, manager or employee of Bank of America, or its subsidiaries, who serves as an officer, manager or employee of the Company, receives any compensation from the Company.
Affiliates of the Investment Adviser may have banking, underwriting, lending, brokerage, or other business relationships with the Private Investment Funds or the Private Companies in which the Company invests and with companies in which the Private Investment Funds invest.
Note 4 — Purchases and Sales of Securities
Excluding short-term investments, the Company's purchases and proceeds received from the sale of investments and distributions received from Private Investment Funds and Private Companies for the year ended October 31, 2011 were as follows:
| Purchases | Proceeds |
| $503,817 | $4,143,086 |
Note 5 — Capital Commitments of Company Members to the Company
As of October 31, 2011, each Member has contributed 100% of its share of the total $147,605,000 in capital commitments to the Company.
Note 6 — Capital Commitments
As of October 31, 2011, the Company had unfunded investment commitments to the Private Investment Funds totaling $894,291 as listed.
| | | Unfunded | |
| Private Investment Funds: | | Commitments | |
| Advance Technology Ventures VII, L.P. | | $ | 121,500 | |
| Burrill Life Sciences Capital Fund, L.P. | | | 56,167 | |
| CHL Medical Partners II, L.P. | | | - | |
| CMEA Ventures VI, L.P. | | | 330,000 | |
| Morgenthaler Partners VII, L.P. | | | - | |
| Prospect Venture Partners II, L.P. | | | 285,000 | |
| Sevin Rosen Fund IX, L.P. | | | - | |
| Tallwood II, L.P. | | | - | |
| Valhalla Partners, L.P. | | | 101,624 | |
| Total | | $ | 894,291 | |
Note 7 — Transactions with Affiliated Companies
An affiliated company is a company in which the Company has ownership of more than 5% of the voting securities. The Company did not receive dividends from affiliated companies during the years ended October 31, 2011. Transactions with companies, which are or were affiliates, were as follows:
| | | | | | | | | For the year ended October 31, 2011 | | |
| Non-Controlled Affiliates | | Shares/ Principal Amount Held at October 31, 2010 | | | October 31, 2010 Fair Value | | | Purchases/ Conversion Acquisition | | | Sales Proceeds/ Conversion | | | Realized Gain/ (Loss) | | | Shares/ Principal Amount Held at October 31, 2011 | | | October 31, 2011 Fair Value | |
| Ethertronics, Inc., Series B | | | 4,433,333 | | | $ | 11,496,926 | | | $ | - | | | $ | - | | | | - | | | | 4,433,333 | | | $ | 11,439,247 | |
| Ethertronics, Inc., Series C | | | 1,969,205 | | | | 5,106,724 | | | | - | | | | - | | | | - | | | | 1,969,205 | | | | 5,081,104 | |
| Ethertronics, Inc., Series D | | | 758,542 | | | | 1,967,120 | | | | - | | | | - | | | | - | | | | 758,542 | | | | 1,957,251 | |
| Total | | | | | | $ | 18,570,770 | | | $ | - | | | $ | - | | | $ | - | | | | | | | $ | 18,477,602 | |
Note 8 — Description of the Private Investment Funds
Burrill Life Sciences Capital Fund, L.P. represents 5.29% of the Company’s net assets at October 31, 2011. The investment objective of Burrill Life Sciences Capital Fund, L.P. is to invest primarily in innovative, early-stage life science venture opportunities in order to achieve capital appreciation. Burrill Life Sciences Capital Fund, L.P. does not provide liquidity to its partners in the form of redemptions and explicitly states that no partner can withdraw its capital or profits. Liquidity is provided at the general partner’s discretion in the form of distributions in cash or securities. Additionally, the general partner of Burrill Life Sciences Capital Fund, L.P. may approve transfers at its sole discretion.
CMEA Ventures VI, L.P. represents 6.33% of the Company’s net assets at October 31, 2011. The investment objective of CMEA Ventures VI, L.P. is to invest in and assist new and emerging growth-oriented business that are involved in the areas of life science technology, human healthcare and high technology companies in order to achieve net rates of return on invested capital in the top quartile of venture capital funds of the same vintage year. CMEA Ventures VI, L.P. does not provide liquidity to its partners in the form of redemptions and explicitly states that no partner can withdraw its capital or profits. Liquidity is provided at the general partner’s discretion in the form of distributions in cash or securities. Additionally, the general partner of CMEA Ventures VI, L.P. may approve transfers at its sole discretion.
Sevin Rosen Fund IX, L.P. represents 5.78% of the Company’s net assets at October 31, 2011. The investment objective of Sevin Rosen Fund IX, L.P. is to develop, negotiate and acquire equity positions primarily in early stage startup and emerging companies in the technology area in order to achieve net rates of return on invested capital. Sevin Rosen Fund IX, L.P. does not provide liquidity to its partners in the form of redemptions and explicitly states that no partner can withdraw its capital or profits. Liquidity is provided at the general partner’s discretion in the form of distributions in cash or securities. Additionally, the general partner of Sevin Rosen Fund IX, L.P. may approve transfers at its sole discretion.
Note 9 — Indemnifications
In the normal course of business, the Company enters into contracts that provide general indemnifications. The Company’s maximum exposure under these agreements is dependent on future claims that may be made against the Company, and therefore cannot be established; however, based on the Investment Adviser's experience, the risk of loss from such claims is considered remote.
Many of the Private Investment Funds' partnership agreements contain provisions that allow them to recycle or recall distributions made to the Company. Accordingly, the unfunded commitments disclosed under Note 6 reflect both amounts undrawn to satisfy commitments and distributions that are recallable, as applicable.
Note 10 — Concentrations of Market, Credit and Industry Risk
The Company invests in Private Investment Funds and Private Companies. This portfolio strategy presents a high degree of business and financial risk due to the nature of the Private Companies and the underlying companies in which Private Investment Funds invest, which may include entities with little operating history, minimal capitalization, or operations in new or developing industries.
The Company may invest in certain financial instruments which may contain varying degrees of off balance sheet credit, interest and market risks. However, due to the nature of the Company’s investments in the Private Investment Funds and Private Companies, such risks are limited to the Company’s investment in each Private Investment Fund and Private Company, which is the current value as included in the Schedule of Investments.
Note 11 — Liquidity Risk
The Company focuses its investments in the securities of privately-held venture capital companies, and to a lesser extent in venture capital, buyout and other private equity funds managed by third parties. The Company invests its available cash in short-term investments or marketable securities pending follow-on investments in portfolio companies and distribution to investors.
The Company believes that its liquidity and capital resources are adequate to satisfy its operational needs as well as the continuation of its investment program.
Note 12 — Subsequent Events
The Company has evaluated all events subsequent to the balance sheet date of October 31, 2011, through the date these financial statements were available to be issued and has determined that there were no subsequent events that require disclosure.
Supplemental Information
Advisory Agreement Approval (Unaudited)
The Advisory Agreement between the Company and the Investment Adviser provides that it may be continued in effect year-to-year subject to approval by: (i) the Board or (ii) vote of a majority of the outstanding voting securities, as defined by the Investment Company Act, of the Company; provided that, in either event, the continuance must also be approved by the Managers who are not “interested persons,” as defined by the Investment Company Act, of the Company (the “Independent Managers”), by vote cast in person at a meeting called for the purpose of voting on such approval. The continuance of the Advisory Agreement for an additional annual period was approved by the Board, and by the Independent Managers, at a meeting held in person on March 17, 2011. The Independent Managers were assisted in their review of this matter by independent legal counsel and met in an executive session with such counsel separate from representatives of the Investment Adviser.
In determining whether to approve the continuance of the Advisory Agreement, the Board considered all information it deemed reasonably necessary to evaluate the terms of the Advisory Agreement. The Independent Managers reviewed materials furnished by the Investment Adviser, including information regarding the Investment Adviser, its affiliates, personnel, operations and financial condition. Independent legal counsel reviewed with the Board its duties and responsibilities under state and common law and under the Investment Company Act, with respect to the approval of the Advisory Agreement. Independent legal counsel also discussed in detail the U.S. Supreme Court decision in Jones et al. v. Harris Associates, L.P.
The Board also reviewed and considered the Investment Adviser’s profitability derived from its relationship with the Company and financial statements of the Investment Adviser and its affiliates. Specifically, the Board reviewed and considered a profit contribution analysis of the Investment Adviser showing its fees, other revenue, and expenses in connection with the Company and the methodology used in the analysis. The Board determined that the Investment Adviser is solvent and sufficiently well capitalized to perform the ongoing responsibilities to the Company and to satisfy its obligations under the Investment Company Act and the Advisory Agreement.
The Board reviewed and considered any economies of scale realized by the Company and how the current Advisory Fee for the Company reflects the economies of scale for the benefit of the members of the Company, noting that as the Company is a closed-end fund at the end of its investment period, economies of scale was not a significant factor for the Company.
The Board reviewed and considered the fees or other payments received by the Investment Adviser. Specifically, the Board reviewed and considered comparison of fees charged by investment advisers to fund peers of the Company, and fees charged by the Investment Adviser or its affiliates with respect to other private equity funds of funds programs.
The Board also reviewed and considered the qualifications of the portfolio managers to manage the portfolio of the Company, including their experience managing private equity investments and the background and expertise of the key personnel. The Board concluded that, in light of the particular requirements of the Company and the relatively late stage of the Company’s investment programs, that it was satisfied with the professional qualifications and overall commitment to the Company of the portfolio management team.
The Board discussed the nature, extent and quality of services rendered to the Company by the Investment Adviser and the investment performance of the Company based on the data provided, including the portfolio reviews considered at each quarterly meeting. The Board determined that in light of the data taken as a whole and the nature and stages of the Company’s investment program and its inception date, the investment performance was acceptable. The Board discussed the Investment Adviser’s profitability, and it was noted that the profitability percentage was within a range the Board considered to be reasonable, given the services rendered and the Company’s performance. The Board concluded that the Company’s fees paid to the Investment Adviser were reasonable in light of all the factors considered.
Based on the information provided to the Board, and the considerations and conclusions described above, the Board, including each of the Independent Managers, determined that it is in the best interest of the Company and its members to continue in effect the Advisory Agreement for an additional annual period.
Proxy Voting and Form N-Q (Unaudited)
A description of the Company’s policies and procedures used to determine how to vote proxies relating to the Company’s portfolio securities, as well as information regarding proxy votes cast by the Company (if any) during the most recent 12 month period ended October 31, is available without charge, upon request, by calling the Company collect at 866-921-7951 or on the website of the Securities and Exchange Commission (the “SEC”) at http://www.sec.gov. The Company did not receive any proxy solicitations during the year ended October 31, 2011.
The Company files a complete schedule of portfolio holdings with the SEC within 60 days after the end of the first and third fiscal quarters of each year on Form N-Q. The Company’s Forms N-Q (i) are available at http://www.sec.gov, and (ii) may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. (the information operation of the public Reference Room may be obtained by calling 1-800-SEC-0330), and (iii) may be obtained at no charge by calling the Company collect at 866-921-7951.
Excelsior Venture Partners III, LLC
Company Management (Unaudited)
Information pertaining to the Board of Managers of the Company is set forth below.
| Name, Address and Age | Position(s) Held with the Company | Term of Office and Length of Time Served | Principal Occupation During Past Five Years and Other Directorships Held | Number of Portfolios in Fund Complex Overseen by Manager |
| Disinterested Managers |
| |
| John C. Hover II | Manager | Term Indefinite; | Former Executive Vice President of U.S. Trust Company (retired since | 9 |
| c/o Excelsior Venture Partners III, | | Length- since | 2000). Mr. Hover serves as a manager of Excelsior Multi-Strategy Hedge | |
| LLC | | Company | Fund of Funds (TI), LLC, Excelsior Multi-Strategy Hedge Fund of Funds | |
| 225 High Ridge Road | | Inception | (TE), LLC, Excelsior Multi-Strategy Hedge Fund of Funds (TI 2), LLC, | |
| Stamford, CT 06905 | | | Excelsior Multi-Strategy Hedge Fund of Funds (TE 2), LLC, Excelsior | |
| (Born 1943) | | | Private Markets Fund II (Master), LLC, Excelsior Private Markets Fund II | |
| | | | (TI), LLC and Excelsior Private Markets Fund II (TE), LLC, and a | |
| | | | director of Tweedy, Browne Fund, Inc. | |
| | | | | |
| Victor F. Imbimbo, Jr. | Manager | Term Indefinite; | President and CEO of Caring Today, LLC, the publisher of Caring Today | 9 |
| c/o Excelsior Venture Partners III, | | Length- since | Magazine, the leading information resource within the family caregivers | |
| LLC | | Company | market; Former Executive Vice President of TBWA\New York and | |
| 225 High Ridge Road | | Inception | Former President for North America with TBWA\WorldHealth, a division | |
| Stamford, CT 06905 | | | of TBWA Worldwide, where he directed consumer marketing program | |
| (Born 1952) | | | development for healthcare companies primarily within the | |
| | | | pharmaceutical industry. Mr. Imbimbo serves as a manager of Excelsior | |
| | | | Multi-Strategy Hedge Fund of Funds (TI), LLC, Excelsior Multi-Strategy | |
| | | | Hedge Fund of Funds (TE), LLC, Excelsior Multi-Strategy Hedge Fund | |
| | | | of Funds (TI 2), LLC, Excelsior Multi-Strategy Hedge Fund of Funds (TE | |
| | | | 2), LLC, Excelsior Private Markets Fund II (Master), LLC, Excelsior | |
| | | | Private Markets Fund II (TI), LLC and Excelsior Private Markets Fund II | |
| | | | (TE), LLC, and a director of Vertical Branding, Inc. | |
| | | | | |
| Stephen V. Murphy | Manager | Term Indefinite; | President of S.V. Murphy & Co, Inc., an investment banking firm. Mr. | 9 |
| c/o Excelsior Venture Partners III, | | Length- since | Murphy serves as a manager of Excelsior Multi-Strategy Hedge Fund of | |
| LLC | | October 2000 | Funds (TI), LLC, Excelsior Multi-Strategy Hedge Fund of Funds (TE), | |
| 225 High Ridge Road | | | LLC, Excelsior Multi-Strategy Hedge Fund of Funds (TI 2), LLC, | |
| Stamford, CT 06905 | | | Excelsior Multi-Strategy Hedge Fund of Funds (TE 2), LLC, Excelsior | |
| (Born 1945) | | | Private Markets Fund II (Master), LLC, Excelsior Private Markets Fund | |
| | | | II (TI), LLC and Excelsior Private Markets Fund II (TE), LLC, and a | |
| | | | director of The First of Long Island Corporation, The First National | |
| | | | Bank of Long Island and former director of Bowne & Co., Inc. (1/06 to | |
| | | | 11/10). | |
* The “Company Complex” consists of Excelsior Venture Partners III, LLC, Excelsior Multi-Strategy Hedge Fund of Funds Master Fund, LLC, Excelsior Directional Hedge Fund of Funds (TI), LLC, Excelsior Directional Hedge Fund of Funds (TE), LLC, Excelsior Multi-Strategy Hedge Fund of Funds (TI 2), LLC, Excelsior Multi-Strategy Hedge Fund of Funds (TE 2), LLC, Excelsior Private Markets Fund II (Master), LLC, Excelsior Private Markets Fund II (TI), LLC and Excelsior Private Markets Fund II (TE), LLC.
Excelsior Venture Partners III, LLC
Company Management (Unaudited)
Information pertaining to the Officers of the Company is set forth below.
| Name, Address and Age | | Position(s) Held with the Company | | Term of Office and Length of Time Served | | Principal Occupation During Past Five Years |
| James D. Bowden | | Chief Executive Officer | | Since July, 2008 | | Managing Director and Senior Vice President, Bank of America Capital |
| Bank of America Capital Advisors, LLC | | and President | | | | Advisors LLC (since 1998). |
| 100 Federal Street | | | | | | |
| Boston, MA 02110 | | | | | | |
| (Born 1953) | | | | | | |
| | | | | | | |
| Steve L. Suss | | Chief Financial Officer | | Since April 2007 | | Managing Director, Alternative Investments, Bank of America (7/07 to |
| Bank of America Capital Advisors, LLC | | and Treasurer | | | | present); Director (4/07 to 5/08), Senior Vice President (7/07 to 5/08), |
| 225 High Ridge Road | | | | | | and President (4/07 to 6/07) of UST Advisers, Inc.; Senior Vice |
| Stamford, CT 06905 | | | | | | President of U.S. Trust’s Alternative Investment Division (4/07 to 6/07); |
| (Born 1960) | | | | | | Chief Financial Officer and Chief Compliance Officer, Heirloom |
| | | | | | | Capital Management, L.P. (5/02 to 9/06). |
| | | | | | | |
| Mathew J. Ahern | | Senior Vice President | | Since June 2008 | | Senior Vice President and Director, Alternative Investments, Bank of |
| Bank of America Capital Advisors, LLC | | | | | | America (12/02 to present). |
| 100 Federal Street | | | | | | |
| Boston, MA 02110 | | | | | | |
| (Born 1967) | | | | | | |
| | | | | | | |
| Marina Belaya | | Secretary | | Since April 2007 | | Assistant General Counsel, Bank of America (7/07 to present); Vice |
| Bank of America Capital Advisors, LLC | | | | | | President and Senior Attorney of U.S. Trust Company(2/06 to 6/07); |
| 114 W. 47th Street | | | | | | Vice President, Corporate Counsel, Prudential Financial (4/05 to 01/06); |
| New York, NY 10036 | | | | | | Associate, Schulte Roth & Zabel LLP (09/02 to 03/05). |
| (Born 1967) | | | | | | |
| | | | | | | |
| Fred Wofford | | Chief Compliance | | Term Indefinite | | Compliance Risk Executive, GWIM Alternative Investments, Bank of |
| Bank of America Capital Advisors, LLC | | Officer | | Length – since | | America (6/08 to present); Compliance Risk Executive, Columbia |
| 100 Federal Street | | | | April 2011* | | Management Advisors and the Columbia Funds, Bank of America (6/05 |
| Boston, MA 02110 | | | | | | to 6/08); Head of Operations, Liberty Asset Management, Inc. (now, |
| (Born 1955) | | | | | | Banc of America Investment Advisors, Inc.) and the Liberty All-Star |
| | | | | | | Funds, Bank of America/Fleet (3/03 to 5/05). |
| | | | | | | |
| *Robert M. Zakem, the previous CCO of the Company, resigned his position with the Company on April 6, 2011. |
| | | | | | | |
All officers of the Company are employees and/or officers of the Investment Adviser.
Officers of the Company are elected by the Managers and hold office until they resign, are removed or are otherwise disqualified to serve.
Alternative investments are sold to qualified investors only by a Confidential Offering Memorandum. An investment in an alternative investment fund is speculative and should not constitute a complete investment program. The information presented in the annual letter is current as of the date noted, is for information purposes only and does not constitute an offer to sell or a solicitation of an offer to buy interests in any fund. This is not, and under no circumstances is to be construed as, an offer to sell or a solicitation to buy any of the securities or investments referenced, nor does this information constitute investment advice or recommendations with respect to any of the securities or investments used. Past performance is no guarantee of future results. Additional information is available upon request.
A description of the policies and procedures that the Company uses to determine how to vote proxies relating to portfolio securities, and information regarding proxy votes cast by the Company (if any), is available without charge, upon request, by calling the Company at 866-921-7951 or on the website of the Securities and Exchange Commission (the “SEC”) at http://www.sec.gov.
Beginning with the Company’s fiscal quarter ended July 31, 2004, the Company files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Company’s Forms N-Q are available on the SEC’s web site at http://www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 866-921-7951.
