PE Week Wire: Mon., April 16, 2007

Rain is falling, MIT won the VCIC and I’ve got to find a non-canceled flight to NYC for Buyouts Symposium East. In other words, it’s time for some Monday Mouth-Off.

Most of the email last week regarded my allegation of intellectual dishonesty at LBO firms that tie capped fund size to increased carried interest. As you might recall, I tried clarifying my argument on Tuesday, so what follows came from that point on:

Melvin: “This issue is about abusing LPs, pure and simple. But it will keep happening until LPs are able to regain the type of leverage that they had over VCs in 2001-2003… But that probably won’t happen until enough ‘new money’ leaves the alternatives space – which itself won’t happen until credit significantly tightens, the public exit environment disappears and/or a major LBO scandal or two emerges.”

Kelly: “I still think you have it wrong. If a middle-market GP raises a much larger fund, both management fees and transaction fees become a major source of profitability — whether he makes a nickel for his LPs. That level of profitability is baked in no matter what happens with the fund, and if he takes his eye off the ball because he’s fat and happy, he wins though the LP loses. For a GP that trades fund size – and a much larger pool of management and transaction fees – for increased carry, he only gets that carry if he performs. Having a smaller fund size doesn’t generate returns, hard and smart work does. A smaller fund size may minimize strategy drift and allow a GP to play to his strengths, but of itself it doesn’t generate returns. And in this case, if the GP wins the LP wins as well. If the GP doesn’t perform and doesn’t generate capital gains, his return is zero.

Jeff: “Thank you for clarifying you point about raising carried interest. Your second attempt was definitely a better description of your position.The banker is right, you might be a socialist. In any event, you seem to suggest that LPs should behave as a cartel or that LPs should unionize to fight back against the private equity sponsors who are delivering high returns. And your obsession with fees, we’ll leave that for another email session.”

George: “The people dissenting… are missing the core point of your argument as I saw it, and that is the ’99-like hubris behind this trend. Having lived through the VC frenzy, I say that LBO pros need to take a close look at the parallels and employ the longer view of their business. Just like they used to want the companies they bought to take the longer-term view –before they were able to flip a ‘core holding’ in less than a year. [Yes, I’m talking about you CD&R].”

*** A couple of notes about Curt Schilling’s videogame startup, which is trying to raise $48 million. Andy asks: “Why are VCs so willing to invest in videogame publishers, but not emerging film companies? Aren’t they almost the exact same type of hits-driven consumer businesses?” Carl adds: “You note the downside to Schilling’s ‘intense involvement’ with 38 Studios as being the fact that he’s a first-time entrepreneur. Heh, my concern is about whether it will take his “eye off the ball” of his day job, being the best pitcher he can be for the Red Sox. Startups come and go, but let’s hope Curt keeps his focus on what matters to us most.” Amen…

*** Jason: “Do you plan on writing up a summary of what happened while you were in Chapel Hill at the VCIC Finals?” Yes – hopefully later today.

*** Michael: “I know you’re moderating Buyouts Symposium sessions both Tuesday and Wednesday. Will you be there Monday night for the cocktail hour?” I’m willing, if US Air is able…

Top Three

Sallie Mae (NYSE: SLM), the nation’s largest provider of college loans, has agreed to be acquired for $25 billion. The buyers are J.C. Flowers & Co., Friedman Fleischer & Lowe, J.P. Morgan Chase and Bank of America. The private equity firms will own a combined 50.2% stake, while the banks will each invest $2.2 billion for a combined 49.8% stake.

Google (Nasdaq: GOOG) has agreed to acquire online marketing company DoubleClick Inc. from Hellman & Friedman and JMI Equity for $3.1 billion in cash. H&F led a $1.1 billion buyout of DoubleClick in 2005, with JMI Equity participating as a minority investor., a Los Angeles-based social networking company targeting the 25+ demographic, has raised $25 million in VC funding from Oak Investment Partners. The company previously has raised $1.4 million in angel funding since its 2002 inception.

VC Deals

DiObex Inc., a San Francisco-based drug company focused on metabolic disorders like Type II diabetes, has raised $24 million in Series B funding. Inventages Venture Capital led the deal, and was joined by Mitsui & Co., Pac-Link BioVentures and return backers Domain Associates, Pequot Ventures and Sofinnova Ventures.

Sepaton Inc., a Marlborough, Mass.–based provider of data protection solutions, has raised $22 million in Series E funding. HarbourVest Partners led the deal, and was joined by return backers JVP, Menlo Ventures and Valhalla Partners. The company has raised around $90 million in total VC funding since its 1999 inception as SANGate Systems.

Intent MediaWorks Inc., an Atlanta-based developer of a digital content distribution platform, has raised $10 million in Series B funding. Participants included Allen & Co., Greycroft Ventures, SoftBank Capital and Bertelsmann Digital Media Investments.

Premise Corp., a Farmington, Conn.-based provider of software solutions to optimize patient flow, has raised $6.3 million in its first round of institutional funding. Milestone Venture Partners and Inflection Point Ventures co-led the deal, and were joined by Aetna Ventures.

MESoft Inc., a Burbank, Calif.-based developer of digital media supply chain technology, has raised $6 million in first-round funding co-led by Peninsula Equity Partners and Sid R. Bass Associates.

PINC Solutions Inc., a Berkeley, Calif.-based provider of passive RFID technology, has raised around $4.5 million in Series C funding. Horizon Ventures led the deal, and was joined by return backer Sutter Hill Ventures. The company had raised around $3.7 million in Series B funding early last year.

BitShelter Inc., a New York-based online consumer services startup, has raised around $4.17 million in Series A funding led by General Catalyst Partners, according to a regulatory filing. The company’s initial product is PhotoShelter, an asset management and sales marketplace for professional photographers.

Collaborative Software Initiative, a Portland, Ore.-based open-source software startup, has launched with an undisclosed amount of seed funding from OVP Venture Partners. The company is run by Stuart Cohen, former CEO of Open Source Development Labs.

Buyout Deals

Tinicum Capital Partners has acquired Western Pneumatic Tube Co., a Kirkland, Wash.-based custom, welded tube mill. No financial terms were disclosed. The seller was Superior Group Inc., which was advised on the sale by Brown Gibbons Lang & Company.

Erinaceous Group PLC (LSE: ERG), a UK-based property services group, confirmed that it has received preliminary buyout approaches. Various news reports suggest that 3i Group is among the suitors, with a management buyout approach that would value Erinaceous at around £375 million.

Siemens may reconsider plans to float up to half of its automotive engineering unit, after receiving buyout interest from both strategic and financial bidders. German cart parts maker Continental reiterated its interest, while The Financial Times reports that possible LBO suitors could include KKR, Bain Capital and Permira.

Home Depot may reconsider its decision to sell HD Supply, according to The Deal. The report says that the retailer has received multiple bids for the unit – including from TH Lee Partners, Bain Capital, Carlyle, Group, CD&R and Leonard Green.

PE-Backed IPOs

TomoTherapy Inc., a Madison, Wis.-based developer of cancer treatment systems that use on-board CT imaging and conformal radiation therapy, has set its proposed IPO terms to around 10.94 million common shares being offered at between $15 and $17 per share. It plans to trade on the Nasdaq under ticker symbol TTPY, with Merrill Lynch serving as lead underwriter. The company has raised around $79 million in VC funding since 1999, from firms like The Endeavors Group, Open Prairie Ventures, State of Wisconsin Investment Board, Advantage Capital Wisconsin Partners and Ascension Health Ventures.

Gerresheimer, a German packaging company owned by The Blackstone Group, is targeting proceeds of more than €500 million for its IPO this summer, according The Financial Times Deutschland. Blackstone acquired Gerresheimer from Investcorp and JPMorgan Partners in 2004.

PE Exits

Welsh, Carson, Anderson & Stowe has agreed to sell diagnostics testing company Ameripath to Quest Diagnostics (NYSE: DGX). The deal is valued at approximately $2 billion, including $770 million in debt. The deal is expected to close later this quarter. WCAS acquired Ameripath in 2003 for approximately $840 million.

Bespak PLC (LSE: BPK) has agreed to acquire Emergent Respiratory Products Inc., an Irvine, Calif.-based maker of breathing equipment and related single-use circuits and masks as an early treatment for patients experiencing breathing difficulty. The deal is broken out into two tranches: Bespak will initially invest $3 million for a 51% equity stake. The remaining 49% will be acquired between 2009 and 2011 at a pre-determined multiple of profits, with an estimated cost ranging from $15-$18 million – subject to a maximum deferred consideration of $35m. Emergent has raised around $10 million in VC funding from firms like Grayhawk Venture Partners, Posco BioVentures and Shepherd Ventures.

Firms & Funds

Darwin Ventures is looking to raise $60 million for its second venture capital fund-of-funds. The San Francisco-based firm closed its initial VC fund-of-funds in 2004 with $42 million, and committed to funds from firms like Accel Partners, Lightspeed Venture Partners, NEA, Sierra Ventures and U.S. Venture Partners.

Citi has agreed to acquire hedge and private equity fund manager Old Lane, which will operate as part of Citi Alternative Investments (CAI). No financial terms were disclosed. In related news, Old Lane’s Vikram Pandit will become CEO of CAI, while Old Lane’s John Havens will serve as president of CAI.

Piper Jaffray Cos. has agreed to acquire Fiduciary Asset Management LLC (FAMCO), a St. Louis-based investment management firm with approximately 50 employees and $9 billion in assets under management. The deal is valued at approximately $66 million in cash, plus future cash considerations based on financial performance.

The Los Angeles County Employees Retirement Association (LACERA) has selected four finalists to be its non-discretionary private equity advisor. They are: Altius Associates, Cambridge Associates, Credit Suisse Customized Fund Investment Group and Franklin Park Advisors.

Human Resources

James Binch has joined Lincolnshire Management as a senior operating partner and managing director. He previously was president and CEO of medical component manufacturer Memry Corp. (AMEX: MRY).

Saad Khan has joined CMEA Ventures as a partner focused on opportunities in the software space. He previously was a venture partner with Garage Technology Ventures, where he worked on such deals as TripleHop (acquired by Oracle), Savage Beat (Pandora), cFares and CaseStack.

Sohail Khan has joined SiGe Semiconductor Inc. as president and CEO. He previously was an entrepreneur-in-residence and operating partner with Bessemer Venture Partners. SiGe is an Ottawa-based supplier of RF front-end solutions for wireless systems, which has raised around $112 million in VC funding from firms like TD Capital, Prism VentureWorks, VenGrowth Private Equity Partners, 3i Technology Partners, Hunt Ventures, RWI Group, GrowthWorks and Vista Ventures.

Milton McColl has joined New Leaf Venture Partners as a Menlo Park-based venture partner. He most recently was president of Boston Scientific’s neurovascular division.