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*Groups Form $100M Equity Fund Targeting DM, E-Commerce Firms

An investment fund and an investment banker joined forces to create a $100 million equity fund to invest specifically in direct marketing and e-commerce companies, they announced today.

Behind the venture are Madison Dearborn Partners, Chicago, and Gruppo, Levey & Co., New York. The fund, Direct Equity Partners LP, New York, just completed its first transaction – an $18.5 million investment in art reproduction cataloger Atelier America Inc., Toronto. It shares a majority interest in Atelier with The Blackburn Group, another private investor.

Patricia Campbell, who was named president and managing director at the fund, said she will look for investment opportunities in both consumer and business-to-business companies.

“We’re looking at four or five different companies right now. For every 50 you look at, one might be the right one,” said Campbell, who was previously with barnesandnoble.com.

The goal is to invest roughly $10 million to $20 million in each transaction. Madison Dearborn provided $99 million of the initial $100 million fund, but there is no a cap on its investment commitment.

“The $100 million initial commitment is just that,” said Claire Gruppo, founder and managing director at Gruppo. “If we find deals that are more sizable, Madison Dearborn will be comfortable in the up-to-$500-million range investment total.”

One industry observer cited the potential for conflicts within the Gruppo organization under the arrangement, since the investment banking side of the company will continue to advise clients. One temptation would be to recommend its inhouse fund take a financial interest in the client’s company when that might not be the ideal strategic solution, the executive said. “How do you let Gruppo, Levey represent you to sell your company if they’re also a potential buyer?”

Campbell predicted Direct Equity will announce another investment in the next three months. Its investments won’t necessarily reside in any one area of direct marketing or e-commerce.

“People are really waking up to the fact that the Internet is all about direct marketing,” she said. “You really have the ability to use all of the direct marketing disciplines we’ve seen in the real world to build a business. Direct marketing companies have a lot of assets that have been built over lots of years, and the infrastructure’s already in place.”

The key element sought in potential investments will be the prospective company’s ability to leverage offline direct marketing assets and the flexibility to survive in a fast-changing online environment.

“We hope to find the right direct marketing companies whose management appreciates the opportunities presented by Internet technologies and wants to migrate their business in that direction,” said Benjamin Chereskin, managing director at Madison Dearborn.

The investment in Atelier will enable chairman/founder Harvey Kalef to sell his products through new distribution channels in both the consumer and BTB arenas and introduce new products and a Web site this year. Until now, Atelier derived revenues solely through catalog sales to consumers and some OEM (original equipment manufacturer) supplier arrangements with art publishing companies specializing in reprints.

“He’s using the hardest distribution channel of all right now for artwork and he’s already being successful,” Campbell said. “Here’s a company that has a wonderful product but hasn’t really taken advantage of all the right distribution channels.”

Plans are set to introduce new products, including a high-end gift card line and framed miniature reproductions that will be marketed through the retail channel starting in April. BTB plans also are under way already through alliances with third parties – such as interior decorators and furniture suppliers and retailers – to sell and lease reproductions.

“There are ways of selling that are already established that we might not have known about in the direct marketing world,” Campbell said. “We’ll [sell Atelier products] through third parties for the first year and not start with our own sales force.”

Building a Web site to showcase the company’s inventory to the BTB and the consumer market is a high priority, but more as a source of product information than an e-commerce vehicle.

Atelier, which has been in business for five years, generates an average order of $900. It spent most of its first two years in business doing research and development and applying for patents for its Brushstrokes painting technology, which reproduces the brushstrokes of fine oil painting. The company specializes in the Classics and the Impressionists, including Monet and van Gogh, but has begun building a library of contemporary art that will be introduced in a new catalog that mails in April.

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