News @ peHUB

Dog Days Edition: The New York Post, The Blackstone Group, infrastructure analysis, and lazy(?) Wall Streeters, and bored reporters, and a slow, slow exit market.

Reuters: Don’t expect the exit market to break and turn attractive anytime soon, Candover’s chairman said.

New York Observer: Laid off Wall Streeters are enjoying their time off. That’s cute. (Via Dealbook).

Dealbook and Dealscape: Thanks to both of you, now, I don’t feel so bad for (A) scrambling to find stories in the slowest week of the year and (B) Dealscape blog post is interesting—its not every day the Times and Journal go with the exact same story taking totally different angles.
Wall Street Folly: Speaking of slow news days, Another take on the Blackstone-Smurf news that’s slightly amused me. (Dan’s take here.) Never in my professional career did I think I’d be putting those two words in the same published sentence, much less hyphenated. Just, wow.

CNN: Both personal and commercial bankruptcies are up. So where’s all the distressed deals? I know you have money….

NY Post:  I’ve already addressed the AMI story, but wanted to comment on the fact that the Post http://www.nypost.com/sev…save_ami_126347.htm?dbk\”>just couldn’t resist throwing in a completely unnecessary sex scandal reference (after throwing the man’s unfortunate name in the headline, no less).

No one’s selling today unless they have to, and in traditional media, some of them just have to, a buyout pro told me. There isn’t a lot of happy news for print media companies this summer.

Cox Communications is trying to sell some of its newspapers, which PE firms are interested in, one source says, but not at the 10X to 11X multiple investment bank Citigroup is hoping for. Meanwhile, American Media Inc. — backed by THL Partners and Evercore Partners — today saw its CEO make a last-ditch offer to save his company from bankruptcy.

The Newark Star-Ledger is threatening to sell, too, but after watching the ugly investments of both Avista Capital Partners (Star-Tribune) and Willis Stein (Ziff Davis) in print media space, who would be so brave as to leverage a company with a declining business model?

A very smart media guy at Warburg Pincus once told us his theory on the future of print media outlets: they’ll be propped up and sustained by independent private trusts, because they no longer have a viable, money-making business model.

There’s one area of traditional media that’s looking hopeful, and that’s radio. Buyers, seeing opportunity with Clear Channel’s year-long buyout distraction (and subsequent divestiture requirements), have seen the space as a strong place to invest. Assets up for sale in the space (probalby including Clear Channel’s 500 or so divestitures) are being valued in the 9-11X EBITDA range, which makes me nostalgic for those high-multiple, pre-credit crunch days of yore.

Just when you thought this Blackstone extortion case couldn’t get any stranger, we learn that the Smurfs are involved. Yeah, those Smurfs (as if there are other ones).

For the uninitiated, a man named Stuart Ross last week was arrested for trying to extort $11 million from David Blitzer, a senior managing director with Blackstone Group who is married to Ross’ estranged daughter. He was released on $2,500 bail Saturday morning, and apparently believes the entire thing is a Blackstone-conceived plot to “crush” him. As he put it outside the courtroom: “This was a preconceived operation by Blackstone to show its strength.”

Ummm… Ok. A firm worth billions of dollars – which could buy and sell most of us – feels the need to flex its muscles at the expense of an elderly non-practicing attorney. If that were the case, Schwarzman could have just asked him to play piñata at next year’s birthday bash.

Anyway, back to the Smurfs. Seems Ross hasn’t always been hard up for money. Back in the day, he made a fortune off licensing rights to the little blue guys (and one special lady), but has since squandered it. Too bad the Smurfs aren’t still popular (I blame The Snorks) – with a little makeup and hair dye, Ross could work as a double for Gargamel:

The Active Network, a San Diego-based online community and application technology provider for the active lifestyle/sports market, has quietly raised $80 million in Series F funding. This brings the company’s total VC capitalization to over $275 million since 1999, which is amazing considering that most of its 11 acquisitions are for relatively short money.

Active did file for a small IPO back in 2004, but later pulled the offering due to “unfavorable market conditions.” Maybe it’s gearing back up, and using this deal as a mezzanine stand-in.

The new round was done entirely with existing investors, including ESPN, Canaan Partners, North Bridge Venture Partners and Performance Equity Partners. Notably absent are past backers like Austin Ventures and Charles River Ventures, although they remain shareholders in the company. Other firms in that position include IAC, Liberty Mutual, Enterprise Partners, Outlook Ventures, Kettle Partners, Rocket Ventures, Interactive Minds and Tao Ventures.
Active Network has now raised a VC round each of the past four years. That includes a $67 million Series E deal last summer and a $35 million Series D deal in 2006 at a pre-money valuation of approximately $200 million (led by $20 million from ESPN).

Pete Lattman has a piece in today’s WSJ about how individuals at Insight Venture Partners made a fortune off last year’s $300 million sale of Photobucket to News Corp., while the firm’s limited partners made nothing. I love a good VC scandal, but there is much less here than meets the eye.

The facts are undisputed: Certain IVP employees and acquaintances invested $3 million for 20% of PhotoBucket in 2005, while partner Jeff Lieberman took a seat on the company’s board of directors. They did not include the deal as part of its $675 million fifth fund (it has since raised a $1.25b sixth fund), which means that IVP’s limited partners never paid in nor got paid out on what turned out to be a blockbuster investment.

Someone apparently believes this is a case of IVP partners cherry-picking a sweet deal for themselves, at least judging by the number of media outlets he/she tipped off before WSJ ran with it. Maybe a bitter LP, rival VC, passed-over entrepreneur or jilted girlfriend. I don’t know or care, because it’s a bogus accusation.

IVP says it didn’t put Photobucket into its fund because the company was far too small and early for an investment mandate that focuses on growth-stage, revenue-generating companies. This seems to square with a data search I ran on recent IVP deals, in that I couldn’t find an initial check written for single-millions of dollars. The firm did once have an early-stage practice, but most of those folks left to form OpenView Venture Partners.
The “tipster” also accused IVP of not telling Photobucket executives that the deal was not being done via the fund – a charge that Jeff Lieberman denied during a phone conversation earlier this morning (that part isn’t in the WSJ story, but PaidContent had it).

Imagine if it had invested in Photobucket and the company had cratered? Then LPs would have a legitimate gripe. As it stands, everyone seems to have acted appropriately. No harm, no foul. Guess we’ll have to wait ‘till next time…

* Jenny Anderson on the inevitable privatization of U.S. infrastructure. Lex, on the other hand, expects a “great unwinding of infrastructure funds,” particularly when it comes to granddaddy Macquarie.

* The latest public pension to create a private equity allocation? The Tennessee Consolidated Retirement System.

* Arianna says VC-backed Huffington Post is not for sale.

* WSJ on how individual partners at Insight Venture Partners made a fortune off the sale of Photobucket to News Corp., while the firm’s investors made nothing. I like nothing more than a good scandal, but this just doesn’t seem to be one. If a growth/later-stage firm like IVP had been making lots of seed-stage investments, on the other hand, that might have been worthy of outrage.

* Lehman asks three PE firms to stay in the bidding for its asset management arm. They are: KKR, Bain and Hellman & Friedman.

* China is creating its own version of CFIUS, but Heidi says it will rarely be used.

* Winning Cubs brings more value to Sam Zell.
* Wallstrip on microlending:

Beijing-based Zero2IPO, a research and publishing company that tracks the Chinese venture capital market, has raised nearly $60 million from 46 investors for a second fund, according to a regulatory filing with the Securities and Exchange Commission.The only limited partner listed on the regulatory filing is British Virgin Island-based Inter Private Equity. The managers listed on Zero2IPO China Fund II include Danny Chung Wai Chi and Ni Zhengdong. Zhengdong, who is also known as Gavin Ni, is the CEO of Zero2IPO. Chung Wai Chi is the publishing company’s COO.

The new fund is almost four times larger than the firm’s first fund.

Zero2IPO collected $1.5 million from Menlo Park, Calif.-based Startup Capital Ventures in April 2006 along with American Pacific Ventures, Z2 Investment Ltd. and Authosis Capital. It went on to raise $6.2 million in August 2006 for an angel fund from IDG Technology Venture Investment III, the venture arm of publishing firm International Data Group, as a beneficial owner of the fund.

It added the Trustees of the Leland Stanford Junior University in 2007 to top off its first fund at $16.5 million.

VCs have invested $2.25 billion in 174 companies so far this year, according to data from Thomson Reuters. If the rate of investing continues through the end of the year, Chinese startups will likely see 20% more investment from VCs than in 2007.

These days, the word “big” is a relative term for PE professionals. In a semi-regular column, I’ll explore how the some of the biggest (or at least most interesting) deals are getting done.Today’s Big Deal (Kind Of) goes to Sentinel Capital Partners, for its purchase of Mobile Dental Services. My pick is a bit of a cop-out, since Sentinel won’t say how big the deal actually was, and we’re talking no info whatsoever here. No revenues, no EBITDA, no stake size, no purchase price, no purchase price multiple. All we know is that when it comes to perfect fit, this add-on acquisition is it.

Sentinel Capital Partners, fresh off a wildly successful round of fundraising (seriously, they wanted $600 million and got $765 million), considers itself a bit of an expert in the dental services industry. It had three such deals under its belt, but last November’s purchase of ReachOut Healthcare America was different. ReachOut provides dental care not to paying clients with insurance, but to Medicaid-qualifying children. The company provides much-needed access to the government-supported care by administering in schools. ReachOut is one of two such companies to offer this service. The other one, of course, is Mobile Dentists.

ReachOut and Mobile Dentists were founded separately around 10 years ago, and when ReachOut sold a controlling interest to Sentinel, the founders of Mobile Dentists took notice. Sentinel took notice of Mobile Dentists, too. According to Sentinel’s Paul Murphy, Mobile Dentists was first on the list of potential add-on acquisitions.

Earlier this year, the timing was perfect to start talking to bolt-on targets, but before Sentinel could approach Mobile Dentists, Mobile Dentists approached Sentinel. “They told us they wanted a financial partner,” Murphy says. “Everyone saw that one plus one equals three, especially since there was no (geographic) overlap of the businesses.”

So it’s a very shiny happy deal with no visible, ahem, cavities, so to speak. Even the financing looks squeaky clean. Golub Capital provided senior debt and Audax provided mezzanine finance. A number of lenders expressed interest in the transaction, Murphy explains, because dental care is not cyclical, and a service like the one provided by ReachOut Healthcare depends on money from state governments, so (though unlikely) any change in Medicaid would not deliver a full-on blow to the business.

Management from both companies will stay involved, holding a minority stake. The investment came from Sentinel’s third fund, mostly because ReachOut was also in the third fund. It hasn’t started to deploy its fourth fund yet.

It’s the numbers edition: One bankruptcy, $3 billion in assets for sale, $900 million in fresh capital, two troubled mattress companies, many a unitranche loan, and one train stopped dead in its tracks.

Oops: Cadence Innovations is bankrupt. Again. Yucaipa was the lone wolf PE backer among the handful of hedge funds that brought the company, once known as Venture Holdings, out of Chapter 11 three years ago.

On The Left: From Churchill Capital’s weekly newsletter, further commentary on Unitranche. You may remember the instrument from a story I wrote on high yield (called “Sponsors Warm to Virtues of Simple Loans”), or from GE and Allied’s co-managed fund. Here is Churchill’s take on unitranche:

Blender Lenders: Issuers are increasingly considering unitranche as a mezz alternative. The one-document, blended senior/sub debt rate structure does eliminate inter-creditor issues, but the greater risk doesn’t suit all investors. Even a 10% yield won’t offset 4-5x total leverage.

mergermarket: In the wake of its Alltel merger, Verizon is selling between $3 billion and $4 billion worth of assets. Morgan Stanley is running the auction.

Debtwire: The news service reports that DE Shaw is hoping its troubled portfolio company, Foamex, can merge with another troubled bedding maker, Sleep Innovations. Easier said than done, it seems.

Venture Nashville via Dealscape: Buyout firms in fundraising, meet the Tennessee Consolidated Retirement System. They’ve got $900 million in fresh capital, just itching to be put to work in your alternative investment fund.

Naked Shorts: Fortress just gives up.

Today I’m looking at two white papers, one from Pepper Hamilton on distressed debt investing and one from Pricewaterhouse Coopers on growth through M&A.

Both papers open with some (seemingly) obvious statements: For growing businesses, PwC argues, the middle market is still in an OK, or even strong, position. Yep, we know. Likewise, Pepper Hamilton offers the no-brainer advice to distressed debt investors: Conduct due diligence.

All that seems pretty obvious, but upon reading I discovered some very relevant, worthwhile points, which I’ve nicely summarized below.

PwC On Growing Via M&A

The firm points out even though mid-market deals are still happening, there subtle changes to the deal-making process have developed, and buyers and sellers should be prepared for them. A few examples below.

-Banks are cautious because of the spiking default rate, not because of subprime write-offs, which they’ve already taken the hit on and moved past.
-To help cautious lenders decide whether or not to lend, they’re aggressively “stress testing” whether earnings will hold up in a downturn.
-A stress test, aka “kicking the tires,” takes more time, which means it could take months to find a lender.
-Meanwhile, buyers themselves are doing phased diligence lasting a month or more.
-Adding to the slower pace, PE is taking a more active role in syndication, as opposed to the self-syndication of the last cycle.
-And since those deals are taking longer and the market is so volatile, buyers are demanding “real time” numbers from targets up until the deal’s closing.

Pepper Hamilton On Distressed Debt Investing

With handfuls of private equity firms deciding to throw on a “distressed debt buyer” hat, it Pepper Hamilton’s advice is on the money. I’m not criticizing anyone of style drift—take opportunities when they’re available, I say—but on the flip side, when wading into unfamiliar territory, I also say take advice when it’s offered. See below for two choice highlights and a link to the full text.

-Tax treatment on returns that are subject to US tax law is mostly unattractive to foreign investors.
-Changes to Regulation M, which propose to delete all reliance on ratings organizations, could benefit investors “with resale strategies that liberalize restructions on their ability to trade on-investment grade securities.”
-Click here for more how-to advice on due diligence, insider trading rules, tax issues, and bankruptcies.