We were particularly enthused to announce our investment in PeakColo earlier this week.   Peak is a leading provider of cloud computing services, focused on the infrastructure as a service (IaaS) layer of the cloud computing value-chain. Peak serves large enterprise customers, which it recruits through a white-labeled channel strategy leveraging the existing enterprise account relationships of value-added-resellers and other enterprise IT channels. The Company maintains computing centers in Denver, CO, Seattle, WA and the United Kingdom. As a side-bar, Peak’s Seattle, WA presence is hosted in our data center portfolio company, Digital Fortress’ Seattle area data center.

PeakColo fits nicely into our Fund III Growth Equity profile as evidenced by the Company’s substantial growth over the past couple of years which was accomplished while the Company maintained a breakeven EBITDA position. As indicated in the Company’s press release announcing the investment the funds will enable Peak to meet growing customer demand in the Company’s current geographic markets and also enable the Company to expand into additional markets.

Since the formation of our Fund III, we’ve had a stated objective to add a cloud-computing investment to the portfolio. Our investment in PeakColo is the result of proactive efforts to make that happen. Over two years ago, our colleague Tom Simonson identified PeakColo as a prospective investment in the sector. He and Derek Pilling cold-called on CEO, Luke Norris, to learn more about PeakColo’s business.  At the time, Luke Norris, the Company’s CEO was narrowing the Company’s execution focus but had not yet built the business to the minimum revenue scale required to meet our investment criteria. Adding to the positive tone of the initial discussions, we learned that Mark Hughes (previously an executive at InFlow, the Chairman of Digital Fortress and a Fund III entrepreneur’s fund investor) was on the Board of Directors of PeakColo.

Over the next two years, Derek and Luke had breakfast nearly every other month; Luke running business challenges by Derek; Derek providing counsel and helping Luke to refine Peak’s execution focus. During this time, several other investment firms, including much larger private equity firms took a run at making an investment in or acquiring PeakColo. We waited patiently for the Company to prove its model and for the other prospective investors to disqualify themselves. This summer, when PeakColo delivered a 100% year-over-year revenue growth trajectory and reached the scale to qualify as a Meritage’s Growth Equity criteria, Derek brought Luke in to present to the Meritage investment committee and we delivered a term sheet shortly thereafter. The completion of our investment in PeakColo affirms that our model of establishing and maintaining relationships with successful entrepreneurs coupled with a clearly defined set of investment criteria works exceeding well.

Core to our thesis about the PeakColo investment is the fact that the information storage and computing requirements of most all enterprise customers are growing rapidly. Further enterprise customers are increasingly adopting cloud computing solutions which meet their needs for scalability, redundancy and security. Finally, we believe Peak’s white-labeled go-to-market strategy is unique and brings the potential for massive scale is the Company’s channel partners activate demand in the market.

Luke and the Company have established mutually beneficial relationships with critical infrastructure, software and equipment vendors who frequently invite Luke to share the PeakColo story at industry events. For example Luke recently presented alongside Dave Hitz, one of the Founders of NetApp, to over 5,000 CIO and IT executives at VMWorld 2012 in San Francisco.  As part of our checkings I met with Dave Hitz and he shared his support and enthusiasm for PeakColo.  He also shared his belief that PeakColo’s offering was in great demand by medium sized enterprises allowing CIO’s and CFO’s to rent storage and compute capabilities based on their current needs rather than making large capital investments in storage and compute infrastructure potentially years in advance of full utilization.

We were pleased to lead the structuring and syndication of the PeakColo investment. Once Meritage and PeakColo were aligned on a mutually acceptable investment structure we shared the opportunity with Sweetwater Capital, led by Bill Marraccini. Bill and his firm are equally enthusiastic about the prospects of the Company.  As you may recall, Sweetwater Capital is currently a co-investor in Digital Fortress, and previously co-invested with us in the successfully exited Fund III Company, NewPath Networks. Jack Tankersley will join me on PeakColo’s Board and will serve as its Chairman.   Both Jack and I look forward to working with Luke, and alongside Bill Marraccini to make PeakColo a wildly successful business.

My Partners and I announced our investment in Datavail this past week. We’re excited about the company and its prospects and at a very superficial level I am pleased to finally join the Board of a company headquartered within a 35 minute drive from my home. While we don’t select our investments based on location, Datavail board meetings will be significantly more convenient, and easier on my body, than flying to wonderful cities like London, Tokyo or Seattle!

Our Growth Equity portfolio is focused on companies where the risk is isolated to execution; the cut and thrust of driving a proven product with a clear value proposition into a meaningful market opportunity. Datavail fits squarely into this definition. Success in this stage of company comes from having world class executives develop and execute on a clear growth plan (organic and/or inorganic), while maintaining margins and operating leverage.

I first met Mark Perlstein in January around the annual VCIR conference. What struck me most about Mark was his business agility and clear headedness about his business. Like a quarterback who knows his playbook cold, and who likes to drive his team to perform within a defined game plan, Mark outlined his vision for Datavail to me with a clear headed determination to win. This is not the first rodeo for Mark. Prior to being asked to take the reins at Datavail he served as the President of Ciber’s IT Outsourcing division where he was instrumental in tripling revenues to levels in excess of $100 million.

Since joining Datavail two years ago, Mark has added world class executives around him and refined the sales execution plan and regional market launch strategy. In August, Datavail was included on the Inc. 5000 list of the fastest growing private companies in America (ranked number 1,842) and 35^th among the 89 metro Denver companies that made this year’s list. In July 2012, Datavail announced its acquisition of Seattle-based Blue Gecko and the Company is executing plans to launch a market presence in New York. It was easy for me to buy into Mark as a leader who could deliver results.

During our discussions over the months that followed we developed a shared understanding of where the Company could invest to drive further growth, while improving operating efficiencies. Through that process I grew confident that the Datavail team, under Mark’s leadership, had a clearly defined execution plan where effort would be channeled to business activities that would impact the outcome. That sealed the deal for me and my partners backed the investment into Datavail.  The existing investors, including Boulder Ventures and Montis Capital, stepped up in support of the company.

Looking forward, we expect the company to drive into the Seattle market off the Blue Gecko acquisition, launch NY by year end, and launch several additional markets in 2013, and continue to evaluate additional opportunities like Blue Gecko as they come into focus.

We’re excited to announce we’ve formed a new company, Digital Fortress, Inc., which will serve as a platform for consolidating the data center colocation market in the Pacific Northwest and for the development and refurbishment of select new data center sites. The Company is headquartered in Seattle, WA and will be led by Mark Hughes, former CFO of our portfolio company Inflow Communications and a Meritage Entrepreneurs Fund investor.

We’ve been pursuing investment opportunities in the data center space since the sale of Inflow in 2005. Most recently, since the formation of Fund III, we’ve been proactively searching for an entry point into the segment. Valuations in the space have exceeded our sensibilities keeping us on the sidelines. Through the formation of Digital Fortress we’ve created a unique and compelling entry-point into the segment.

Our evaluation of the Seattle market dates back to October 2010, culminating with Meritage signing letters of intent to acquire digital.forest, Inc. and the assets of Fortress Colocation Services during June 2011. We launch Digital Fortress with the simultaneous completion of these two acquisitions and the announcement of plans to refurbish an existing enterprise data center space in downtown Seattle. The operations of the two initial acquisition targets are located in the same building on Sabey Corporation’s Intergate.West data center campus located ten miles south of Seattle, WA. Both targets serve large and mid-sized enterprise customers with traditional colocation services, and differentiate their offerings by delivering high-density power capabilities. Under Mark Hughes leadership, the operations of these facilities are being combined under the umbrella of a single operating model, preserving and enhancing the value proposition in the process.

The Company will simultaneously expand its operating footprint through the refurbishment of an existing enterprise data center in downtown Seattle. The new facility will offer 18,000 square feet of data center colocation space. In total, the Company will operate in excess of 40,000 usable square feet of data center.

The colocation market remains a regional business. Seattle and the Pacific Northwest are considered by industry experts like Tier1 Research to be amongst the most attractive markets for data center operators in North America. Seattle, in particular, is blessed. Data center supply in metropolitan Seattle is already constrained. And because the future rate of demand growth is expected to exceed the rate of supply growth, available capacity will continue to be in short supply. In addition, Seattle has some natural advantages over other metropolitan markets, including a cool climate and access to low-cost power. More than 90% of the power used by Digital Fortress’ facilities is generated from renewable sources, principally hydroelectric generation.

Meritage led the structuring and equity syndication of this investment, resulting in equity commitments from Halyard Capital and Sweetwater Capital, both of whom we’ve invested with previously. Halyard Capital was a co-investor in Inflow Communications and Sweetwater Capital, led by Bill Marraccini, was a co-investor in our already successfully liquidated Fund III portfolio company NewPath Networks.

We’re excited to have led this transaction and about Digital Fortress’ prospects. David Solomon and Derek Pilling will represent Meritage on the Company’s Board of Directors. We look forward to working with Mark Hughes, the management team, and our co-investors to make Digital Fortress a success.

Congratulations to Meritage portfolio company Crisp Media, the leading mobile technology and services provider of premium rich media advertising, for being selected as a winner of the Interactive Advertising Bureau’s (IAB) inaugural Mobile Rising Stars competition. Specifically, Crisp was selected for its Adhesion and Capsize ad units. Only Crisp and Microsoft were standalone winners of the Mobile Rising Stars competition. We are excited to see this portfolio company continuing to innovate and get this kind of recognition for its work.

Meritage portfolio company and media services provider Access Media 3 (”AM3″) received $30 million in funding from ORIX Venture Finance and Petra Capital Partners. This financing supports AM3’s organic and acquisition-based growth initiatives, including the company’s recent expansion into the Mid-Atlantic region.

The company addressed both sides of its growth goals in 2011, expanding into the Florida telecom market with the acquisition of Peoples Choice Cable in Boca Raton while also setting company records for organic sales. AM3’s dramatic growth landed it on the 2011 Inc. 500 list of the fastest growing companies in the U.S.

AM3 supplies triple-play (TV/internet/voice) services to multi-dwelling unit properties in Florida, Georgia, Illinois, Minnesota, Tennessee, Virginia, and Washington D.C. The Company serves more than 50,000 subscribers in more than 500 properties.

We’re thrilled to announce that Intel Capital has joined the investment syndicate at our portfolio company, IP Commerce. The Company and Intel announced the financing earlier today.

We’ve worked with Intel in a number of other investments, including our co-investment at Crisp Media, and introduced them to IPC several months ago. They, like us, were immediately intrigued by IP Commerce’s platform as a service (“PAAS”) approach to electronic payments. Ultimately, Intel concluded that the Company is the clear leader in its space and that the Company’s approach to integrating value added services into the payment process stream is unique and incredibly valuable to payment application developers.

I’m personally excited to be working with Intel here as we’ve developed a valuable repeat relationship with them. In particular, I’m pleased to once again be working with Bavanipratap Rana, my colleague from Intel at Crisp Media, and Vibhor Rastogi, who together will represent Intel on this investment. Rana and Vibhor have a keen understanding of the Company’s opportunity and will work hard to bring the full resources of Intel along to support the Company’s efforts. Welcome to the team and congratulations to IP Commerce on completing this important financing.

Meritage Funds is pleased to announce that David L. Solomon has been appointed as a Managing Director of the firm. Mr. Solomon was a co-founder of Meritage and has served as an Operating Partner of the firm since its inception. Mr. Solomon has 16 years of operating and entrepreneurial experience and 13 years of public accounting experience.

“David’s proven entrepreneurial, management and investment judgment will be key to the Firm’s ongoing success.” stated Jack Tankersley, Founder and Managing Director of Meritage Funds. “With David’s decision to assume a leadership role, the Firm’s long-term future is bright.”

Mr. Solomon currently serves as Chairman of the Board of Meritage portfolio company IP Commerce and served as director of Meritage portfolio company Diveo Broadband Networks until its sale in December 2010. Mr. Solomon served as CEO and later Executive Chairman of Meritage portfolio company NuVox Communications from November 1999 until its $643 million acquisition by Windstream Corporation in November 2009. Under Mr. Solomon’s leadership, NuVox grew its annual revenues from less than $200,000 to over $530 million. Prior to NuVox, Mr. Solomon served as CFO of Brooks Fiber Properties (acquired by WorldCom for $3.4 billion) and as a Partner with KPMG.

Congratulations to the Masergy Communications team on signing a definitive purchase agreement with ABRY Partners! Masergy is the last remaining investment in Meritage Fund I’s portfolio and we are delighted that the proceeds from this sale will put this Fund in the top quartile of communication-oriented funds of its vintage year.

For more information about this transaction, read Masergy’s press release here.

We’re pleased to let you know that our portfolio company, Crisp Media, has completed a $6 million growth equity financing led by EDB Investments (“EDBI”). You can read Crisp’s full release here and TechCrunch’s reporting on the financing is here. Based in Singapore, EDBI is a leading strategic investor focused on assisting operating companies in their efforts to expand into the Asian Pacific (”APAC”) region.

Over the past year, Crisp has established itself as the leading mobile rich media vendor in North America. The Company has struck strategic relationships with nearly every major online publisher in North America, including Yahoo!, CNN, The Weather Channel, ESPN, The Wall Street Journal, MSN (Microsoft). In addition, the Company has established a strong reputation within the agency and advertiser communities for its ability to deliver large mobile rich media buys, that are served from a single technology platform reaching smartphones, tablets and other connected devices. The Company’s outstanding campaign execution has resulted in repeat advertising buys from some of the largest brands in the world including Toyota, Ford, Sprint and others.

Many of Crisp’s customers (both publishers and agencies) market globally. To date, Crisp has executed a number of global campaigns, serving these campaigns from the Company’s North American operations. With increasing global demand for Crisp’s platform, particularly in APAC, the Company embarked on a plan to establish operations in the APAC region, culminating in EDBI’s strategic investment. EDBI’s investment will not only provide Crisp with the capital to facilitate this expansion, but will also offer the Company critical contacts in the APAC region, accelerating the Company’s market entry.

We welcome EDBI in joining Meritage and Intel Capital in Crisp’s investment syndicate and look forward to working with both EDBI and management to establish Crisp as the leading global mobile rich media platform.

Separately, the Internet Advertising Bureau (”IAB”) mobile working group has decided that its work to standardize how rich media advertising is integrated into mobile application environments will be based on ORMMA.  ORMMA (open rich media mobile advertising) is an open standards initiative of which Crisp Media is a founding member.  Xavier Facon, Crisp’s CTO, has been instrumental in launching ORMMA and establishing this vendor-agnostic approach to delivering in-app rich media ads as an industry standard in very short order.  This emerging standard will serve all participants in the mobile ecosystem well, including publishers, advertisers, and rich media vendors like Crisp.  Kudos to the ORMMA members for doing something that is good for everyone in the industry.

Meritage is a private equity firm having raised just over $600 million in committed capital since formation. We typically make two to four new investments per year. At the start of 2010, we had a total of eleven portfolio companies. During the year, we sold three of our companies - Diveo, NuVox and NewPath - to strategic buyers. We were delighted with each of these transactions.

In the case of Diveo and NuVox, our exit was frankly overdue as our Fund I made its initial investments in these companies in 1999. In an ideal world, these companies would have been sold as early as 2007 and certainly by 2008, as both were strongly EBITDA positive with excellent growth. As we all know well, strategic buyers had limited appetite for acquisitions in the 2008-09 timeframe, and the timing of our 2010 exits was due in large part to the return of strategic buyers with pent-up demand to the marketplace.

Both NuVox and Diveo were formed in frothy markets where debt and equity funding was readily available for capital-intensive projects, and both companies had large, unwieldy investment syndicates. As these companies started to mature, they encountered perhaps the most difficult markets (both financial and operational) in the history of the communications industry. While many larger and better-known enterprises failed in this market, NuVox and Diveo survived by virtue of significant restructurings and excellent leadership. In the case of NuVox, Meritage partner David Solomon was the Chief Executive Officer and led the company not only through a significant restructuring, but also through two major acquisitions. Under David’s stewardship, NuVox grew from a few hundred thousand dollars in revenue in 1999 to well over $500 million in revenue at the time of its sale. Interestingly, there were investors in NuVox who chose not to participate in the restructuring, and therefore did not benefit from David’s work. In the case of Diveo, Bob Goad stepped in and provided the operational and strategic leadership necessary to build the company into a strongly EBITDA-positive entity following its restructuring.

NuVox was purchased by Windstream Communications in February for approximately $650 million, and Diveo was purchased by Universo Online in December for approximately $475 million. We at Meritage take great pleasure in having been part of building these two significant enterprises. Both companies were started in the best of times, and both weathering the worst of times. NuVox and Diveo are now in the hands of significantly larger enterprises where they will be important earnings contributors going forward.

The third company we sold in 2010 was NewPath Networks, a Fund III portfolio company. NewPath was an altogether different story, as the sale of this company occurred only 16 months from the date of our original investment. We invested in NewPath alongside Charterhouse Group in April of 2009, believing that the company’s distributed antenna system (“DAS”) networks represented the next generation in communications tower infrastructure for high-density markets. We also believed that NewPath’s management team, led by Mike Kavanagh, was the best management team in the sector. NewPath was the smallest of the three “pure play” DAS operators by size but had achieved strong market positioning as a result of its strategy of building systems with high lease-up potential.

When we participated in the company’s $30 million institutional financing, we believed NewPath had adequate capital to build a significant footprint and make needed operational gains. Shortly after the closing, however, the industry landscape changed dramatically. First, our largest competitor was purchased by a large private equity firm, which made available significant additional capital (rumored to be $150 million) to this competitor. Our second largest competitor responded by raising $128 million in a significant equity financing. All of a sudden, NewPath’s $30 million looked quite modest! We quickly initiated a financing effort to raise at least $75 million, despite our concerns about dilution. Soon after hiring an investment banker, NewPath was contacted by both of its pure-play DAS competitors as well as several major tower operators, all seeking to purchase NewPath rather than have us raise additional capital. The company’s pure-play DAS competitors had the most to gain from an acquisition but proved to be “flat footed” in the process, thus setting the stage for the ultimate acquirer, Crown Castle, to become the dominant force in the sector.

Crown Castle purchased NewPath in September 2010 in a transaction that valued the company at approximately $115 million. By combining its communications towers and capital with NewPath’s DAS capabilities and know-how, Crown is now extremely well positioned. Although we would have liked to have grown NewPath into a much larger company, we realized that given the limited resources of the NewPath investors and the enormous dilution that was in store if we proceeded to raise more capital, we were ultimately on a precarious path. Therefore, from a portfolio management perspective, this was an excellent transaction.

Our success in 2010 demonstrates that the strategic buyer is alive and well for services companies. Buyers are seeking scale and/or seeking to fill specific strategic needs. This means that there continues to be an enormous role for private equity investors to grow their portfolio companies both organically and inorganically to take advantage of the current appetite of strategic buyers. Of course, the downside of an improving market is the impact on pricing of new investments. As we have learned on more than one occasion during the past ten years, private equity investors must be disciplined from a valuation perspective in order to generate attractive returns.

In a recent conversation with one of our limited partners, we learned that their 2010 distributions exceeded their internal forecast by 2.5 times, illustrating that our strong 2010 liquidations was an industry-wide occurrence. While the volume of activity will likely not match the 2010 level, we at Meritage believe that 2011 will continue to offer a robust environment to sell strong, profitable and growing companies.