PE Week Wire — Monday, February 13

AIG vs. Cartesian: Postmortem

Ten days ago, I wrote that there would be no winners in the AIG vs. Cartesian Group lawsuit, save for the lawyers (which generated lots of indignant email from lawyers). From a legal perspective, I was entirely correct. After all, the whole point of a confidential out-of-court settlement is that both sides can claim victory and go home. But a more pragmatic examination is a bit trickier.

For the uninitiated, a backgrounder on the case can be found here. For the initiated, some additional information you should know. Cartesian filed its response to AIG’s complaint last Tuesday. Most of it addressed the alleged computer fraud, and argued that the post-termination emails were obtained because AIG forgot to disable an auto-forwarding rule that send AIG emails to the personal Mindspring account of senior advisor – and defendant – Tom Armstrong. Rather than Cartesian hacking into AIG’s network, AIG’s network was sending information directly to Cartesian. Also, a expected, Cartesian provided amended versions of Peter Yu and Bill Jarosz’ 12-month non-compete agreement, which seemed to distinguish between resigning/being terminated with cause from being terminated without cause – specifically because the amended language only referenced the former and not the latter.

Later that day, AIG filed reams of additional paperwork alleging that Yu — following his termination — had downloaded thousands of AIG documents from his laptop computer onto an external disk drive. AIG also released alleged emails that showed Yu was concerned that he and Jarosz might be terminated, and that they needed to address the non-compete issue. It is important to note that while Cartesian responded to the initial allegations, it settled before responding to the subsequent allegations. Twenty-four hours later, the two sides settled out-of-court.

OK, on to the settlement. The short analysis is that Cartesian caved. Yu and Jarosz gave up all claims to vested interest in the AIG private equity funds (GEM I) on which they worked, agreed to suspend fund-raising until after the original 12-month non-compete period ends in late April and agreed to amend Cartesian fund offering documents so as to remove a substantial amount of track record and performance information.

The reality of the situation, however, is that Cartesian didn’t have much choice. This wasn’t quite David vs. Goliath, but was at least David and a buddy against Goliath. Cartesian could not afford to pursue this case, even were it to ultimately have been vindicated by verdict. First, AIG simply had much deeper pockets (particularly since Yu and Jarosz never got severance). Second, and more importantly, Cartesian would have been forced to suspend fund-raising anyway, since no LP worth his or her Lexus would invest in the midst of this type of ongoing litigation. In fact, the settlement’s temporary fund-raising suspension is far shorter than the informal fund-raising suspension would have been, were this case to have gone to trial.

So doesn’t all of this mean that AIG won, Cartesian lost and I was wrong (in reverse order of importance)? In the short-term, yes. In the long-term, however, I’m still right (whew, thank goodness I’ll be able to save this one).

Cartesian is going to raise its fund by year-end, although my guess is that they get closer to their original $500 million target than their $750 million cap. It already had hundreds of millions worth of verbal commitments prior to the AIG complaint, and should be able to re-secure most, if not all, of them. Sure the first close won’t come at the end of February, as planned, but fund allocations already have been made and June now looks like a more reasonable target. Cartesian will, of course, have to provide amended PPMs, but asking LPs to ignore already-provided track record info is a bit like asking them to un-ring a bell. Moreover, GEM I received a bunch of public pension fund commitments, which means that much of its performance data is already online. Since Peter Yu ran GEM I, he shouldn’t have too much trouble with establishing a performance track record based, in part, off of that info. In fact, he might become the first private equity fund manager to be significantly benefited by public disclosure.

Perhaps Cartesian’s largest stumbling block will be AIG itself. The company was not shy in letting potential Cartesian LPs know about the initial complaint, and very well could do the same with the subsequent laptop downloading info. More importantly, Cartesian cannot respond to such allegation – per the settlement’s confidentiality – which could make for some very one-sided and uncomfortable conversations. But, as I’ve written earlier, LPs love these guys, particularly former GEM LPs.

As for AIG, I’m not quite sure what to make of its decision to settle. If the point was to cripple Cartesian, it will only work for a couple of months. If the point was to avoid paying out Yu and Jarosz’s vested interest, it succeeded, although that hardly seems worth the effort for such a rich company (not to mention the obvious concern it engenders among remaining and prospective staffers). If the point was public vindication in its original decision to terminate Yu and Jarosz – a decision eviscerated in this space – it failed, because the settlement precluded a verdict. If the point was to prevent competition for emerging markets deals, it was a foolish point, given the reams of money other firms are raising for Asia, Middle East and Eastern European funds.

So, to wrap up, everyone lost. Cartesian is in a holding pattern for the next couple of months, during which time it must figure out a way to re-attract limited partners. Its principals also lost a bunch of money in both legal bills and given-up carry. AIG will still have to face Cartesian in the emerging markets by this time next year, still has an emaciated GEM II fund without many outside commitments and simply gave smart PE pros another reason to avoid corporate jobs. And, in a shocking twist, the case settled so fast that not even the lawyers fared too well…


    Top Three

MySQLAB, a Sweden-based developer of an open-source database, has raised $18.5 million in Series C funding. Institutional Venture Partners led the deal, and was joined by Intel Capital, SAP Ventures and Presidio STX. Existing shareholders Benchmark Capital and Index Ventures also participated.

Wind Point Partners has agreed to acquire Knape & Vogt Manufacturing Co. (Nasdaq: KNAP), a Grand Rapids, Mich.-based maker of drawer slides, shelving, storage and ergonomic office products. The deal is valued at $19 per share.

Andrew Rolfe has joined TowerBrook Capital Partners as a senior venture partner and advisory board member. He most recently served as president of Gap Inc.’s international division, most recently helping to launch Banana Republic in Japan. Before joining Gap in January 2004, he was chairman and CEO of food retailer Pret A Manger.

    VC Deals

Sport100 International Holdings Ltd., a Shanghai-based sporting goods retail chain, has raised $10 million in venture funding from Orchid Asia Group Management.

Asempra Technologies Inc., a Sunnyvale, Calif.-based provider of real-time recovery management solutions, has raised nearly $20 million in Series B funding, according to a regulatory filing. Menlo Ventures led the deal, and was joined by return backers Polaris Venture Partners and U.S. Venture Partners.

Digital Orchid Inc., a San Diego-based provider of wireless application and mobile content platforms, has raised $6 million in Series B funding. Shepherd Ventures led the deal, and was joined by NeoCarta Ventures.

Demandware Inc., a Woburn, Mass.-based provider of ecommerce enabling software, has raised $12.3 million in Series B funding from return backers General Catalyst Partners and North Bridge Venture Partners.

La La Media Inc., a Palo Alto, Calif.-based website development startup, has raised around $9.05 million in Series A funding, according to a regulatory filing. Backers include Ignition Partners and Bain Capital Ventures.

Reactivity Inc., a Belmont, Calif.-based XML networking provider, has secured around $8.55 million of a $9.74 million Series B round, according to a regulatory filing. Return backers include Accel Partners, Diomandhead Ventures and JK&B Capital.

RappidMapper Inc., a Salt Lake City-based developer of “intelligent pixel” technology, has raised $1.65 million in convertible note funding led by vSpring Capital, according to a regulatory filing.

Kodime Ltd., a London-based provider of mobile media software and services to property marketers, has raised an undisclosed amount of venture funding from The Capital Fund.

Nallatech, a Glasgow, Scotland-based provider of FPGA computing solutions, has secured a $5 million funding facility from ETV Capital SA and Bridge Bank NA.


    Buyout Deals


Arcapita has acquired Norway-based energy services company RoxarAS from Lime Rock Partners for approximately $200 million. Royal Bank of Scotland and Barclays Bank provided $91 million in senior and mezzanine financing, plus a $25 million working capital facility. Roxar senior management will retain a 1.2% shareholding in the company.

ProSiebenSat.1 Media AG is no longer for sale, according to The Wall Street Journal. The German television broadcaster has received substantial interest since German regulators last year blocked its $3.1 billion sale to Axel Springer AG, but has opted to stay off the auction block. The company is owned by Haim Saban (Saban Capital Group), Bain Capital, Hellman & Friedman, Providence Equity Partners, Quadrangle Group and Thomas H. Lee Partners.

Bru Venture Capital and Connemara Capital Co. have acquired Cadec Corp., a Londonderry, N.H.–based provider of mobile information systems for the transportation industry. No financial terms were disclosed.

Charterhouse Capital is in talks to buy the car parks business of France-based construction company Effage, according to The Evening Standard.

Montagu Private Equity has received European Commission approval for its proposed buyout of BSN Medical from Smith & Nephew and Beiersdorf AG.

Integrity Interactive Corp., a Waltham, Mass.–based provider of corporate ethics and compliance communications solutions, has raised an undisclosed amount of private equity funding from Castanea Partners and Weston Presidio.

Eureka Growth Capital has acquired Martin StuartLtd. (a.k.a. New York Laundry), a New York-based women’s active-wear designer, seller and distributor. No financial terms were disclosed.

Phoenix Capital Partners has agreed to acquire Nationwide Autocentres, a UK-based independent car servicing business, from NBGI Private Equity. No financial terms were disclosed. NBGI PE sponsored a management buyout of Nationwide Autocentres in January 2001.

    PE-Backed IPOs

RAM Holdings Ltd., a Bermuda-based reinsurance company, has filed to raise $250 million via an IPO of common stock. It plans to trade on the NYSE, with Banc of America Securities and Merrill Lynch serving as lead underwriters. Shareholders include Greenwich Street Capital Partners, CIVC and Canaan Partners.

Novacea Inc., a South San Francisco-based drug company focused on oncology, has filed to raise $75 million via an IPO of common stock. It plans to trade on the Nasdaq under ticker symbol NOVC, with Bear Stearns and Credit Suisse serving as lead underwriters. The company has raised nearly $110 million in VC funding since its 2001 inception, from firms like Apax Partners, Domain Associates, New Enterprise Associates, ProQuest Inv*stments, Sofinnova Ventures and Versant Ventures.

Windsor Energy Resources Inc., an Oklahoma City-based oil and gas company, has filed to raise $175 million via an IPO of common stock. It plans to trade on the Nasdaq under ticker symbol WERI, with Johnson Rice & Co. serving as lead underwriter. Windor Energy was formed by Wexford Capital in July 2003.

Luna Innovations Inc., a Roanoke, Va.-based provider of optical component test and measurement systems, has filed to raise $57.5 million via an IPO of common stock. It plans to trade on the Nasdaq under ticker symbol LUNA, with ThinkEquity Partners serving as lead underwriter. The company raised around $21 million in VC funding from firms like Columbia Capital, Novak Biddle Venture Partners and Envest Ventures, but those firms sold most of their holdings during a September 2005 acquisition.

    PE-Related M&A

Bear Stearns Merchant Banking and WFD Ventures have sold Hand Innovations Inc. to J&J subsidiary DePuy Orthopaedics for an undisclosed amount. Hand Innovations is a Miami, Fla.–based maker of fracture fixation products for the upper extremities, and received funding in June 2004.

MACH, a Luxembourg-based provider of inter-operator solutions to the telecom and data industries, has acquired End2End, an Aalborg, Denmark-based provider of outsourced mobile data solutions. No financial terms were disclosed. Mach was acquired last year by Warburg Pincus, while End2End has raised over $170 million in VC funding since its 2000 inception, from firms like DB Capital, Hewlett-Packard, DFJ ePlanet Ventures and Amadeus Capital Partners.

CTC Communications, a Waltham, Mass.-based CLEC, and Choice One Communications, a Rochester, N.Y.-based CLEC, have agreed to merge. No financial terms were disclosed. The combined company is expected to generate over $550 million in annual revenue, with current CTC and Choice One shareholders each owning 50% of the combined company. CTC was acquired in late 2003 by Columbia Ventures Corp.

Deutsche Post AG, a Bonn, Germany-based postal company and owner of DHL, has agreed to acquire a 75% stake in UK-based corporate information solutions provider Williams Lea Group Ltd. for 370 million euros. Among the sellers with be 3i Group, which holds a 38% stake in Williams Lea.

    Firm & Fund News

ABS Ventures of Waltham, Mass. is in the midst of raising its latest fund with a $270 million target, according to a regulatory filing. It already has secured $112.7 million in commitments from Adams Street Partners, Calvert Capital, HarbourVest Partners and Pomona Capital.

Black Diamond Capital Management is looking to raise $750 million for its BDCM Opportunities Fund, according to a regulatory filing. C.P. Eaton & Associates is serving as placement agent, and the fund already has secured around $103 million in capital commitments.

    Human Resources

Jeffrey Goettman has left Thayer Capital Partners to launch a new buyout firm called CameronBlue Capital, according to The Washington Post. Goettman had been a managing partner with Thayer, which he joined in 1998.

Jeffrey Williams has resigned as president of China-based Shenzen Development Bank Co. No reason has been given. Williams became bank president in December 2004, when TPG affiliate Newbridge Capital became its largest shareholder with a 17.89% stake.

Thatcher Bell has joined DFJ Gotham Ventures as an associate. He has served as manager of business development with OpenPages, as a senior analyst with North Hill Ventures and as a summer associate with Silicon Alley Venture Partners.

Alexander Fotakidis has joined CVC Capital Partners as an inv*stment director in its London office. He previously worked in the European leveraged finance group of CIBC World Markets.

Douglas Hamilton is stepping down as COO and CFO of Javelin Pharmaceuticals Inc. (OTC BB: JVPH), in order to join the venture capital community. He will remain in place until a successor is found.