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PE Week Wire: Mon., July 9, 2007

Following a month of chatter, Congress this week finally begins debating the tax treatment of carried interest. On Wednesday, the Senate Finance Committee is holding a hearing. These hearings typically precede the adoption or rejection of legislation. Quick recap: Lawmakers have suggested taxing carried interest as ordinary income (a 35% rate) rather than as long-term capital gains (a 15% rate).

The panel expects to hear from five well-positioned authorities, including Eric Solomon of the Department of Treasury, whose boss, ex-Goldman chief Hank Paulson, has gone on the record opposing the change. The Congressional Budget Office also has a witness on the card, most likely to say how much more money the government could collect if the tax change were implemented. The SEC is chiming in, too.

The private equity industry will have one representative, Kate Mitchell, a managing director at Scale Venture Partners and a member of the board of directors of the National Venture Capital Association. I wasn’t able to track down Mitchell before sending out the Wire, but presumably her testimony will be in keeping with what is surely an NVCA unified front against the proposed change.

The last speaker is Mark Gergen, a University of Texas Law School professor. Gergen, who spoke to me on Friday, said he considers the current treatment of carried interest an “anomaly” in the tax code that should be straightened out. Gergen has been making this point for more than 20 years. “It’s an old issue,” he said, noting that he wrote a paper in 2003 predicting Congress would make the change within a few years.

He plans to urge the panel to adopt a “simple fix” to 702(b)—the relevant part of the tax code—that would encompass not just buyout firms and venture capitalists, but also real estate partnerships and oil and gas partnerships. The upshot of his proposal would have PE pros pay the ordinary-income rate on carry.

Formal hearings aside, the political calculus for the proposed tax change is difficult to decipher. Democrats control the Senate by a razor-thin 51-49 majority, but several big Senate Dems (including Hillary Clinton, Chuck Schumer and Chris Dodd, all of whom count hedge-fund and private equity pros as highly valued constituents) have yet to weigh in on the issue. John Edwards, Democratic presidential candidate and former employee of Fortress Investment Group, came out over the weekend with a three-point plan for increasing taxes on hedge funds and private equity firms. Conventional wisdom says the GOP—Chuck Grassley notwithstanding—will turn its nose at anything that carries even the faintest whiff of a tax hike, especially since some in the party already suspect the carried interest debate is the opening salvo in a larger war to raise the capital gains rate for everybody.

But looming over the 110th Congress (as it did for the 109th, 108th, 107th and so on) is the alternative-minimum tax, the automatic income tax originally designed for rich families that now increasingly snares the middle class. Congress has blunted the full effect of the AMT by approving several small patches, but a comprehensive repeal has so far proven impossible, probably because it would deplete the treasury by as much as $1.5 trillion over 10 years.

According to one school of thought, raising taxes on exorbitantly wealthy private equity pros and hedge-fund managers would be a small price to pay for bailing out the middle class. It will be interesting to see if, on Wednesday, the CBO predicts how much revenue a tax shift on carried interest could bring to government. That number, though certainly far, far short of $1.5 trillion, could turn out to be a uniter, not a divider.

***Friday’s blog talked about the effects of interest rate hikes on European Leveraged Buyouts and today a few statistics have come out and the debt situation is not looking good.

Moody’s, the credit rating agency, criticized the private equity industry in a report issued today which frowns on the industry’s increasing use of debt to buy companies and questions its claims that listed companies are better off in private hands. The criticism comes at a sensitive time for both the private equity industry and credit rating agencies. The former is facing deterioration in debt markets, while rating agencies face investor criticism for their slowness to spot credit markets problems such as the US sub-prime lending crisis. www.moodys.com

The European leveraged finance market is an “unsustainable bubble”, according to 60% of respondents to a survey conducted by law firm White & Case and almost 80% expected the bubble to burst in 6-12 months’ time. However, the vast majority of banks, private equity firms and turnround specialists surveyed expected the growth in LBOs, lending and in debt multiples to continue over the next six months. www.whitecase.com

***And defaults may be closer than they appear

BC Partners and Electra, two London-based private equity companies and Baxi, a UK boiler maker, have approached lenders to ease debt obligations after a warning in a company trading statement that it risked defaulting. Baxi is currently valued at £700 million and it has £515 million in debt. Buyout firms Candover and Electra bought Baxi in 2000 for an undisclosed sum. Candover exited the company with around a 2x return in early 2004, when BC Partners acquired its undisclosed stake as part of a £662.5 billion refinancing. Electra also increased its 28% holding through a £15 million reinvestment. http://www.electraequity.com/

*** Today’s installment of PE Week Wire is brought to you by Jeremy Harrell, associate editor of Buyouts Magazine in New York. He can be reached at jeremy.harrell@thomson.com or 646-822-3039.

The Wire’s is still being produced from the London office, so please contact EVCJ editor, Amanda Palmer on Amanda.palmer@thomson.com with press releases.

Top Three

Carlyle Group has placed a hard cap of $17 billion on Carlyle V, a US buyouts dedicated fund, according to an SEC filing. The firm raised $7.97 billion, more than the total size of its last US fund, on its first closing in May, three months after it officially began marketing the fund. www.carlyle.com

Kohlberg Kravis Roberts & Co., joining with management and a bevy of passive investors, has succeeded with its tender-offer strategy for Laureate Education (Nasdaq: LAUR.) The investor group announced Monday that 59% of Laureate’s shareholders tendered their stock by the July 6 deadline. KKR and the investors offered to pay $62 per share, or $3.82 billion. www.kkr.com

Trion World Network has attracted $30 million in a Series B round of funding from venture capitalists and major media companies. The round was led by Rustic Canyon Partners, which was joined by Time Warner Investments; Peacock Equity Fund, managed by two of General Electric Co.’s units – GE Commercial Finance and NBC Universal; and Bertelsmann Digital Media Investments, a unit of global media company Bertelsmann AG, one of Europe’s leading entertainment groups. Trion is aiming to set up a video game cable channel with series that evolve in a similar fashion as television sitcoms or dramas such as Lost. www.trionworld.com

VC Deals

Nomura’s New Energy & Clean Technology Ventures has led the $14 million Series C round of SpectraSensors, a Rancho Cucamonga, California-based supplier of gas analyzer products. Existing investors American River Ventures, Blueprint Ventures and Nth Power also participated alongside new investor CTTV Investments, the venture capital arm of Chevron Technology Ventures. http://www.spectrasensors.com

Intalio, a provider of business process management software, has secured a $2.3 million Series A recapitalization round from inside investors. All of the company’s existing investors – Cargill Ventures, 3i Group, Sippl MacDonald Ventures, Woodside Fund and XML Fund – participated in the round, with the exception of SAP Ventures, which still holds a stake in the company after the recap. The round had no lead investor as all investors participated pro rata.

BioVex held a $22 million first close on a Series E that will enable the company to move a treatment for advanced melanoma into pivotal U.S. trials. New investor Triathlon Medical Ventures is leading the round and so far has been joined by one other new backer, New Science Ventures. Return investors include ABN Amro, Avalon Ventures, Credit Agricole Private Equity, GeneChem Management, Innoven Partners and Scottish Equity Partners.

Reata Pharmaceuticals raised a $25 million Series E funding to advance a pipeline of products through clinical trials. Existing investors Cardinal Investment and Novo A/S led the round. It is thought that Reata has now raised a total of US$66 million.

POINT Biomedical raised $4.3 million toward a Series G round of up to $25.7 million, according to a regulatory filing. POINT Biomedical disclosed the fund-raising in a Form D filed with the Securities and Exchange Commission last month. www.pointbio.com

SkyFuel Inc. a developer of utility-scale solar thermal projects raised $1.6 million in a seed round of funding, according to a filing with the Securities and Exchange Commission. The filing indicated that the financing was raised from angel investors.

NanoBioDesign raised £500,000 ($1 million) for manufacturing. The funding raised from two investors the £50 million London regional venture capital fund, The Capital Fund, and the publicly traded technology investment company Imperial Innovations Group.

Enerpulse raised $5.5 million in second round funding to get its second product into stores by summer’s end. SAIL Venture Partners, a new investor, joined backer Altira Group. Altira led the company’s February 2004 Series A round of $2.2 million.

Draper Fisher Jurvetson and Trinity Ventures invested $10 million in Series B financing for Ripple Networks Inc. Trinity Ventures, which led Ripple’s $5 million Series A last year, deferred to DFJ for the lead this time around. As part of the new funding, John Fisher, co- founder and managing director of DFJ, has joined Ripple’s board.

Buyout Deals

CVC Capital Partners, a London-based private equity firm, is on the verge of making its first big play in the US with the $2.2bn buyout of chemicals distributor Univar. CVC has, through its Ulysses Luxembourg subsidiary, offered €53.50 per Univar share, a premium of approximately 36% on its trading on Euronext last week. Shares closed trading at €38.97 on Friday. Univar, a Rotterdam, Netherlands-based company, derives 85% of revenues from the US and Canada. CVC is expected to relocate the firm’s headquarters to the US. HAL Investments, Univar’s largest shareholder, has committed to tendering its 26.6% stake to CVC. In March 2007, Univar had raised its takeover offer for US-based peer Chemcentral Corp to $650m. www.thomsonmergernews.com.

A consortium led by New York private equity firm Centerbridge Capital Partners has had its $750 million investment into auto supplier Dana approved by trade unionists. Dana is based in Ohio, and about half of its 8,000 strong workforce have union representation. Centerbridge’s investment will allow Dana to set-up special pension trusts, voluntary employees’ beneficiary associations, managed by the unions. http://www.centerbridge.com

New York’s world famous department store Macy’s has once again been the subject of takeover talk, causing shares to rise by 8.2%. Last month the company was linked with a private bid of $52 per share by KKR, Goldman Sachs and Providence. www.macys.com

Carlyle Group has been given the greenlight to buy PQ Corp, a specialty chemicals and glass maker, by the Federal Trade Commission. The US buyouts house agreed a price of $1.5 billion in June with PQ’s owners J.P. Morgan Partners. www.pqcorp.com

TPG Capital’s Aleris International, a maker of aluminum sheets, it to acquire Wabash Alloys of Indiana, a recycler of scrap metal into aluminum alloys, for $194 million. http://www.wabashalloys.com

Dollar General, a Tennessee-based discount retail chain, has been acquired for $7.3 billion by a KKR-led consortium. Fellow investors included Goldman Sachs and Citigroup, which together paid $22 a share. www.dollargeneral.com

Nautic Partners, a Rhode Island-based private equity firm, has bought Canada Cartage Diversified Income Fund for US$133.5 million. Canada Cartage, based in Ontario, is a provider of trucking services. Nautic is paying $11.30 for the privilege. www.canadacartage.com

Asurion Corp, a Nashville-based wireless telephone insurance company, has been acquired by a consortium of unnamed private equity firms, earning previous owner DST Systems $980 million in pre-tax profits. www.dstsystems.com

Prada has stuck a €3 billion to €3.5 billion (US$4.1 billion to US$4.8 billion) price tag on the business amid speculation that billionaire Richard Caring and two private equity houses are considering a bid for the Italian luxury fashion chain. A Prada spokesman has denied suggestions of a sale. Last summer, Banca Intesa took a 5% stake in the group which had previously been 100% owned by chief executive Patrizio Bertelli and his wife Miuccia Prada. Analysts believe that Banca Intesa is keen to exit from Prada, which announced last year that it was again considering a flotation after trying to list the business three times in seven years.

Baring Private Equity Asia, the Asian private equity group with US$1 billion under management has purchased 100% of Barclay Vouchers – Japan’s leading luncheon voucher and meal coupon provider serving 6,000 offices. This is Barings first buyout in Japan. Including this investment, Baring Asia has closed seven deals in Asia in the past calendar year worth US$217 million. www.baringpe.com

Apollo Management has raised its bid for chemical company Huntsman to $28 a share. The move comes before its rival, Dutch chemical group Basell, responded to Apollo’s earlier offer of $27.25 a share. On June 26 Basell submitted an initial $25.25 a share offer, valuing Huntsman’s equity at $5.6bn. Then last week Apollo trumped Basell’s offer. On Friday, July 6, Apollo’s bid vehicle Hexion Specialty Chemicals claimed Huntsman now preferred its offer. And to seal the deal, last night Hexion increased its offer by US$0.75 to US$28 a share. Huntsman has so far denied that it has changed its view on the competing offers. Basell has until the end of tomorrow, July 10, to increase its offer for the company.

Inflexion Private Equity, the London-based mid-market private equity investor, has taken a minority stake in Jack Wills, the British preppy premium clothing retailer. Terms were not released.

Consensus Business Group the investment vehicle of property entrepreneur Vincent Tchenguiz is a potential bidder for the UK roadside restaurant chain Little Chef, which is up for sale for £20m to £25m by its owner R Capital. Little Chef was bought by Lawrence Wosskow and Simon Heath from Permira in October 2005. www.consensusbusiness.com

The Carlyle Group is close to sealing a deal for a stake in a hotel management company in China. The plan by Carlyle to invest nearly $100 million in Kaiyuan Group, a private hotel management company, follows its $65 million purchase of 26% of a Chongqing-based glass fibre manufacturer and an $80 million deal for a 49% stake in a steel pipe maker. www.carlyle.com

Statistics from CMBOR, a provider of analysis on the UK buy-out market founded by Barclays Private Equity and Deloitte, reveal that the private equity market has picked up significantly after a slow start to 2007. Excluding the Alliance Boots mega-deal the first half total was £13.9 billion, up 31% on the first half of 2006. Including Alliance Boots, the first half total is already over £25 billion, close to the record 2006 full year number of £26.5 billion. www.cmbor.org

PE-backed IPOs

Constant Contact, a Massachusetts-based developer of direct marketing email software, is to raise up to $86.25 million in an IPO. The company is backed by Commonwealth Capital Ventures, Greylock Partners, Hudson Venture Partners, Longworth Venture Partners, Saturn Capital, VeriSign. http://www.constantcontact.com

London stock markets experienced a second quarter surge in the number of IPOs with a 129% increase on the same period last year according to the latest PricewaterhouseCoopers LLP quarterly IPO Watch Europe survey. London was the largest market in terms of offering value and volume in the quarter, with 102 IPOs raising EUR14,808 million compared with 108 IPOs raising EUR6,454 million in 2006. www.pwc.com

Ulta Salon, Cosmetics & Fragrance, an Illinois-based women’s beauty shop operator, has filed for a $115 million IPO. The business counts among its backers: Annapolis Ventures BCI Partners, Bessemer Venture Partners, Carrefour, Chanel, Chicago Growth Partners, DLJ Merchant Banking Partners, Doublemousse, Eloise Investments, GRP Partners, INVESCO Private Capital, Oak Investment Partners, Phillips-Smith Specialty Retail Group, Scale Venture Partners, Security Pacific Capital Corp, Sprout Group, Trico Capital. www.ulta.com

Firms & Funds

Clearwater Capital Partners, the New York-based, Asian focused private equity firm has reached final close on Clearwater Capital Partners Fund III with US$900 million of committed capital. The fund was significantly oversubscribed, according to the group. Clearwater’s investment strategy is focused on special situation investments and distressed or otherwise undervalued assets and securities located in Asia excluding Japan. www.clearwatercapitalpartners.com

H.I.G. Capital, a private equity firm that provides capital to small and medium-sized companies, has closed H.I.G. European Partners, a dedicated European investment fund,at its hard cap of €600 Million. With this fund, the firm plans to significantly expand its investment activities in Europe, and has established affiliate offices in London, Paris and Hamburg. www.highcapital.com

Battery Ventures today announced the close of its eighth multi-stage venture fund at US$750 million, substantially larger than its $450 million predecessor. Battery expects to start investing from the new fund in the third quarter of 2007. www.battery.com

DAG Ventures is launching a new $500 million tranche to finance mid-stage companies.

The Palo Alto-based house closed on $477 million at the end of June and expects to collect the balance from a current limited partner. This new funding is required for the group less than a year after closing a $325 million venture fund. www.dagventures.com

Ventizz Capital Partners, a German private equity firm, is seeking €350 million for its fourth fund. It will invest in small and medium-sized companies based in Germany and other German speaking countries. www.ventizz.de

Canadian private equity fund of funds manager Kensington Capital Partners has revealed three fund investments: TriWest Capital Partners III LP, Novacap Industries III LP and Novacap Technology III LP. http://kcpl.ca/home

Massachusetts-based venture-capital firm Highland Capital Partners and Thomas Stemberg, founder of the office supply monolith Staples is planning to bankroll a new generation of specialty retail chains with a US$300 million venture-capital fund called Highland Consumer Fund I. www.hcp.com

Bertram Capital closed its Bertram Growth Capital I LP fund on $250 million in August 2006. Now the firm wants to boost the assets under management in its debut growth equity fund by $100 million in a special fund-raising effort. Nearly all of the initial limited partners pledged additional investment. www.bertramcapital.com

Arbor Private Investment, an investment firm focused on the food and beverage sector, has raised $170 million for its second buyout fund, Arbor Investments II, significantly exceeding the size of it preceding fund, which raised $42 million. http://www.arborpic.com

China Environment Fund, the Chinese clean technology-focused venture capital firm, is back in the market raising $150 million in its third fund. www.cefund.com

Human Resources

Investment bank Lehman Brothers has made a double promotion in the shape of Richard Atterbury and Philippe Dufournier as co-heads of global finance, Europe. Atterbury, who will keep his current role as co-head of financial sponsors investment banking, has been with the group since 2005 following a six year stint at Morgan StanleyDufournier joined in 2001 after 12 years at Bankers Trust, and was made head of its fixed income solutions division in 2003.

Edward Patorini, the faux private equity prankster that has made well over US$100bn in fake bids for companies such as Playboy Enterprises, Sony Corporation and Goldfields of South Africa is close to being collared by the SEC. A filing from the SEC in the Southern District of New York says that between January 2003 and April 2007, Pastorini aka Roxford/Niren/Vakil made a series of bogus offers to acquire publicly-traded companies and then publicised these through internet message boards, press releases and at least one filing with the SEC itself in order to increase the stock prices when he had no intention of buying the companies or the financial means to do so.

Hogan & Hartson will be joined in its Paris office by James Vaudoyer a new partner in the firm’s tax practice group. Vaudoyer joins Hogan & Hartson from the Paris office of Freshfields Bruckhaus Deringer, where he was a member of the tax and real estate practice areas, and served as the managing partner of the Paris office of Freshfields from 1997 to 2000.

Corrections

Maria Cirino, a partner with .406 Ventures, was a co-founder of Guardent, not Verisign (which ultimately acquired Guardent). Also, Fortify Software has raised over $19 million in total VC funding.