PE Week Wire — October 10-21

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Friday Feedback

The air is chilled, the phrase Web 2.0 already has become tiresome and yet another “worst hurricane ever” is threatening. In other words, it’s time for Friday Feedback.

Most email this week concerned Refco, which yesterday received a $790 million counteroffer for its futures brokerage business from Interactive Brokers Group LLC. It also could have its bankruptcy challenged by Russian hedge fund – and major Refco creditor – VR Group. Jim writes: “A major reason that private equity firms perform so well is because they have the time flexibility to conduct exhaustive due diligence. If a firm like Thomas H. Lee can then turn around to its LPs and say ‘We got suckered,’ what is the value of investing in a private equity fund in the first place? VC firms are designed to write off certain portfolio companies, but big-time private equity firms are not.” Linda adds: “I agree with you that Tom Lee will easily raise its next fund, but that says more about the reputation envy of institutional investors than it does about the track record of Tom Lee.”

Robert, however, thinks that this is a mountain out of a well-publicized molehill: “Refco is obviously a major embarrassment for Thomas H. Lee Partners, but it’s got to be placed in context of the overall fund portfolio (which seems to be pretty good). You can’t say that they do slip-shod due diligence, because that would have also shown up in most of their others deals – and it didn’t.”

*** Regular respondent James chimes in on the CalPERS review: “The recommendation that CalPERS outsource more of its small and medium-sized GP relationships reflects how out-of-balance the private equity market has become, in terms of VC firms getting smaller and LBO firms getting bigger… Is it even worth CalPERS’ time to look at VC funds or small-market buyout funds anymore?”

Interesting question, and one that many LPs seem to be wrestling with, but from the opposite direction. One major issue is that most portfolio managers get paid to beat the market, not to meet the median (particularly when it comes to bonuses). At the same time, the rising size of LBO mega-funds dictates that more and more LP portfolios are being dominated by the same funds: Blackstone, Carlyle, Warburg, KKR (coming next year), etc. The result is that too many portfolios are near-carbon copies of each other, thus making it virtually impossible to beat the market, because there is too much cluster around the middle. If you fill your portfolio with VC funds, small funds and mid-market funds (complimented by just a few top-tier mega-funds), however, you’ve got a better shot at differentiation and, thus, a hefty bonus.

*** Speaking of bonuses, last week’s news of a new Harvard Management Co. chief elicited a predictable response from Harvard alum Roger: “How can you not condemn Harvard for spending so much more money on its endowment managers than on its faculty, staff or students?” Well Roger, I’m not sure your math is correct on a collective basis, but much of the money spent on faculty, staff and students is generated by the endowment’s inspired returns (basic “better managers generate better returns” argument). Would you prefer a trade-off that ultimately would provide less cash for faculty, staff and students? But I will grant you this: It is odd that HMC felt the need to go out-of-house to replace Jack Meyer. After all, aren’t its internal managers supposed to be best in class? How could not one of these gems be deserving of a promotion?

This reminds me a bit of City Year, the urban peace corps for which I worked several years back. It turned out that the organization was paying alumni less to become “team leaders,” than it was paying outsiders – a self-defeating protocol that since has been halted. I only bring this up because tomorrow is the annual City Year Serve-A-Thon in Boston. Despite the aforementioned gaffe, this is a phenomenal organization (model for Americorps), and Serve-A-Thon is the one fund-raiser where participants serve as much more than just… well, fund-raisers. Go here for more info, or let me know if you’d like to join the team I’m serving on (or even if you want to sponsor me)…


    Top Three

SanDisk Corp. (Nasdaq: SNDK) has agreed to acquire Matrix Semiconductor Inc., a Santa Clara, Calif.-based maker of 3-D integrated circuit one-time programmable technology for storage applications. The deal is valued at approximately $250 million, including $238 million of newly-issued SanDisk shares/equity incentives and around $12 million in cash. It is expected to close by year-end. Matrix has raised approximately $175 million in VC funding since its 1998 inception, from firms like Benchmark Capital, Integral Capital Partners, Nintendo, Eastman Kodak, Microsoft, Seagate, Sony, Thomson SA, Skymoon Ventures, Telesoft Partners and Western Technology Investments.

Permira has sold UK restaurant chain Little Chef to Out of Town restaurant chain heads Lawrence Wosskow and Simon Health for Gbp52 million. Permira originally acquired Little Chef as part of its Gbp712 million acquisition of Travelodge in 2003, and reportedly began the divestiture process with a Gbp50 million asking price.

Joseph Gatto has joined Lehman Brothers as vice chairman of the company, and chairman of its M&A practice. He previously served as chairman of the Global Consumer Products Group at Goldman Sachs.

    VC Deals

PowerMetal Technologies Inc., a Carlsbad, Calif.-based nanotech applications company, has raised $10 million in Series A funding led by Mosaic Venture Capital.

Pacific Star Communications, a Portland, Ore.-based broadband services provider, has held a $4.5 million first close on a VC funding round designed to raise $6 million. Fluke Ventures led the deal, and was joined by Invest America and Benaroya Capital.

    Buyout Deals

ABN AMRO Capital has sponsored a management buyout of Bianchi Vending, a Bergamo, Italy-based maker of vending machines. No financial terms were disclosed.

GTCR Golder-Rauner has agreed to sell insurance brokerage Alliant Resources Group Inc. to Lindsay Goldberg & Bessemer, according to The Deal. No pricing information was reported. Stamford, Conn.-based Alliant was formed by GTCR in 2000.

CVC Capital Partners has sold Belgium-based Drakkar Holdings, the parent company of animal nutrition concern Adisseo Group, to China National Chemical Corp. (ChemChina). No financial terms were disclosed for the deal, which is expected to close by year end. Adisseo had 2004 revenue of approximately 500 million euros.

France Telecom has agreed to pay $628 million for the 36.2% stake of mobile phone operator Orange Slovakia that it doesn’t already own. The selling parties are private equity funds affiliated with AIG.

Spectrum Equity Investors has agreed to acquire QTC Management Inc., a Diamond Bar, Calif.-based provider of medical examinations and disability evaluations. A Moody’s report puts the debt piece at $170 million, while The Deal reports that Spectrum also will contribute approximately $100 million in equity.

    PE-Backed IPOs

Saifun Semiconductors Ltd., an Israel-based, has filed to raise around $129.38 million via an IPO of ordinary shares. It plans to sell five million shares at between $20.50 and $22.50 per share, and trade on the Nasdaq under ticker symbol SFUN. Lehman Brothers and Deutsche Banc Securities are serving as lead underwriters. Significant shareholders include Gemini Israel Funds, Concord Ventures and Argos Capital.

SkinMedia Inc., a Carlsbad, Calif.-based drug company focused on dermatological conditions, has withdrawn its proposed $86.25 million IPO, citing “market conditions.” It had planned to to trade on the Nasdaq, with SG Cowen & Co. serving as lead book manager. SkinMedia has raised around $92 million in total VC funding since its 1999 inception, including a $15 million Series E round in March. Backers have included EuclidSR Partners, Apax Partners, Domain Associates, HealthCare Ventures, Montreux Equity Partners, Perseus-Soros BioPharmaceutical Fund and Split Rock Partners.

Passave Inc., a Santa Clara, Calif.-based fabless semiconductor company focused on system-on-a-chip solutions for fiber-to-home applications, has set its proposed IPO terms to 4.7 million common shares being offered at between $17 and $19 per share. It plans to trade on the Nasdsaq under ticker symbol PSVE, with Merrill Lynch and JPMorgan serving as lead underwriters. Shareholders include Walden Israel Ventures, Blue Orange Ventures, Eurofund 2000, BRM Capital and Intel Atlantic Inc.

    PE-Backed M&A

Hunter Defense Technologies Inc., a Cleveland–based manufacturer of military and homeland defense products, has acquired PowerSystems International Inc., a Natural Bridge Station, Va.-based developer of power generation systems, power distribution and control equipment and environmental control units for military applications. The deal is valued at approximately $40 million. Hunter Defense is a portfolio company of Behrman Capital.

Altra Industrial Motion Inc., a Quincy, Mass.–based maker of mechanical power transmission products, has agreed to acquire Hay Hall Group, a Birmingham, England-based manufacturer of couplings, industrial clutches, brakes and various power transmission components. No financial terms were disclosed. Altra Industrial Motion is a portfolio company of San Francisco-based Genstar Capital.

    Firm & Fund News

NGN Capital has closed its first healthcare venture capital fund with $250 million in capital commitments. The fund will focus on later-stage opportunities, and received a cornerstone commitment from ERP-EIF Dachfonds.

Brown Brothers Harriman is raising its third private equity fund-of-funds, according to a regulatory filing. The vehicle is being capped at $100 million, and already has secured over $46 million in capital commitments.

Arcturus Capital held a $32 million final close on its inaugural fund back in June. The Los Angeles-based firm already has made nine commitments to early-stage technology companies in Southern California.

    Human Resources

GE Commercial Finance Corporate Lending has named Todd Lynady as vice president of originations. He will be responsible for originating lending opportunities among small and middle-market companies throughout New York, New Jersey and Northeast and Central Pennsylvania. He most recently served as the Northeast and Mid-Atlantic regional manager for Atradius Trade Credit Insurance Inc.

Kevin Kresnicka has joined the private equity group of Northern Trust Global Investments, where he will be responsible for marketing strategy, product development and client communications/reporting. He previously served as a vice president in the private equity funds management group at Bank of America.


The Once King

The Carlyle Group has lost its silly money throne, despite having raised $10.05 billion in buyout fund capital just seven months ago (yeah, it was for two separate funds, but that’s only because Carlyle opted not to go the singularly “global” route). The new king is Blackstone Group, which last Friday held a $10.28 billion first close for its fifth buyout fund (Blackstone, unlike Carlyle, likes it global). A second close is slated for November 30, while a final close is expected to occur in early 2006. That ultimate figure is targeted at $12.5 billion, although I was told yesterday that it could end up closer to $13 billion.

Of course, $10.05 billion can buy a lot of wickets, which is why Carlyle founder David Rubenstein didn’t seem the bit depressed during a speech he gave this morning here in Boston. In fact, Rubenstein didn’t spend much time at all on fund sizes, deal sizes, multiple sizes or how certain lenders are beginning to freak out all three. Instead, he focused on the globalization of private equity. The speech ended less than an hour ago, but here are a few quick notes I jotted down:

  • Most interesting line was the idea that private equity capital has become the United States’ greatest export. Not airplanes or soybeans, but money. He acknowledged during Q&A that certain U.S.-based private equity funds get a bunch of capital from overseas, but insisted that the trade-winds are far stronger from U.S. institutions to European and Asian private equity funds. As he correctly pointed out, how many major European or Asian LBOs take place without at least one U.S. sponsor? How many European or Asian private equity firms are truly global, as compared to the number of global firms in the original 50?
  • He expects overall private equity returns to decrease in the coming years, but expects a similar decline in public market fortunes. As such, the differential will remain the same, thus keeping private equity as an attractive asset class.
  • U.S.-focused private equity funds have better median returns than do top-quartile firms focused on emerging markets (read: Asia). He expects that to change dramatically.
  • Carlyle is about to close two deals in China. The first is for a contract equipment manufacturer, and Rubenstein believes it will be the first leveraged buyout ever in mainland China. The second is for China’s third largest life insurance company.
  • Carlyle closed its Russia office because of: (A) Unmanageable corruption issues; (B) Vladimir Putin was not as receptive to foreign private equity as Carlyle had expected and; (C) Russians simply understand their market better than do Americans.
  • The buyout market should have a trade/lobbying group. A questioner joked that it would be tough for any lobbyist to have better governmental access than does Carlyle, but Rubenstein correctly pointed out that this is too big an industry to not have a dedicated voice on Capital Hill.
  • He didn’t comment on his firm’s attempted buyout of Dunkin’ Donuts, despite its obvious importance to the Boston audience. Specifically, I was looking for a promise that, if successful, Carlyle would ensure that iced French vanilla coffee be fresh in both the summer and winter. Thankfully, I might have a chance to ask during the Buyouts Symposium West  in San Francisco next month, where he also will be speaking.

Unrelated: Certain Yahoo Mail users have not received the PE Week Wire since last Friday, or at least have received it late/sporadicaly. Yahoo’s mail servers are accepting the emails very slowly, and we are doing everything we can on our end. In the meantime, affected readers may want to switch their subscriptions over to another email service until the problem is resolved.


    Top Three

The Blackstone Group
has held a $10.28 billion first close for its latest buyout fund, from over 200 limited partners. The firm plans to hold a second close on November 30, with a final close slated for early next year. Blackstone hopes to raise a total of$12.5 billion, but its first close already makes this the largest buyout fund in history. Reuters first reported the first close news yesterday, and PE Week has since confirmed it with sources close to the firm.

Lilliputian Systems Inc., a Woburn, Mass.-based provider of fuel cells for wireless electronic devices, has raised $30.2 million in Series C funding. Return backers include Kleiner Perkins Caufield & Byers, Atlas Venture and Rockport Capital Partners. The company has raised $39.8 million in total VC funding, including a $2.6 million Series A deal in April 2002, and a $7 million Series B deal in April 2004.

Marinus Pharmaceuticals Inc., a Bradford, Conn.-based drug company focused on neurological and psychiatric disorders, has raised $28.14 million in Series A funding, according to a regulatory filing. Backers include Domain Associates and Sofinnova Venture Partners. The company has a Phase III clinical candidate to treat infantile spasms, and has in-licensed from Yale University a preclinical compound to treat bipolar disorder.

    VC Deals

ForeScout Technologies Inc., a Cupertino, Calif.-based provider of clientless network policy enforcement and intrusion prevention solutions, has raised $10 million in fourth-round funding. Amadeus Capital Partners led the deal, and was joined by return backers Accel Partners, Meritech Capital, Pitango Venture Capital and Itouchu Corp. The company has raised $34 million in total VC funding, including a $10 million Series C infusion in 2002 at a post-money valuation of approximately $39 million.

Surf Communication Solutions, an Israel-based providcer of multimedia processing software and boards for telecom infrastructure, has raised an undisclosed amount of fourth-round VC funding. Texas Instruments and Giza Venture Capital led the deal, and were joined by return backer Pitango Venture Capital.

Cdigix Inc., an Englewood, Colo.-based provider of digital media services to colleges, has raised an undisclosed amount of VC funding. The round was co-led by Meritage Private Equity Funds and Novak Biddle Venture Partners, with return backer Iron Gate Capital also participating. In other Cdigix news, the company named former RealNetworks president Larry Jacobson as its new CEO.

StarVox Communications Inc., a San Jose, Calif.-based infrastructure and applications service provider, has raised $9 million in Series A recap funding from Novus Ventures, Trinad Capital Master Fund and Deutsche Suisse Asset Management.

Hainan Tianya Online Internet Science & Technology Co. Ltd., a Chinese online community and B2B site operator, is about to raise $5 million in VC funding from undisclosed backers, according to SinoCast.

Setanta Sports Group, an international sports broadcaster, has raised an undisclosed amount of venture funding from Benchmark Capital Europe. The deal follows an earlier Benchmark Europe investment into NASN, a European broadcaster of U.S. sports, which now is owned equally by Benchmark and Setanta.

    Buyout Deals

Change Capital Partners has acquired a majority position in UK-based clothing retailer Republic for Gbp105 million. Sellers included 3i Group and retired CFO Ron Scott. 

Drax Power Ltd., a UK-based coal-fired power producer, has received a third takeover bid. The newest entrant is a Gbp2 billion joint bid from International Power PLC and Mitsui & Co. This comes after the company already rejected a Gbp1.9 billion bid from Constellation Energy and Perry Capital, and received aGbp2.075 billion offer from Apollo Management, Texas Pacific Group and TowerBrook Capital Partners.

    PE-Backed IPOs

Smart Modular Technologies (WWH) Inc., a Fremont, Calif.-based provider of memory modules, memory cards and communications products, has filed to raise $230 million via an IPO of ordinary shares. It plans to trade on the Nasdaq under ticker symbol SMOD, with Citigroup, JPMorgan and Lehman Brothers serving as lead underwriters. Significant shareholders include Texas Pacific Group, Francisco Partners and Shah Capital Partners.

    PE-Backed M&A

Mont Blanc, a France-based maker of dairy products, has acquired the Gloria concentrated milk brand from Nestle SA. Activa Capital bought Mont Blanc from Nestle two years ago. No financial terms were disclosed.

Talk America (Nasdaq: TALK) has agreed to acquire Network Telephone Corp., a facilities-based communications provider serving businesses in the BellSouth region. The deal is valued at $20 million in cash. Pensacola, Fla.-based NTC says it has raised $320 million over five rounds of private equity funding, from firms like Spectrum Equity Investors, Mellon Ventures, Wind Point Partners, Onset Ventures, Brown Brothers Harriman, Desai Capital Management and Morgan Keegan Ventures.


Expansion Capital Partners has acquired an additional 20,000 common shares of Biorem Inc. (TSX: BRM), an Ontario, Canada-based provider of air pollution control filters. The new shares represent 2% of Biorem’s outstanding common stock, meaning that Expansion now holds an 11.7% position overall. The new shares were sold via a private agreement with an existing shareholder.

    Firm & Fund News

Crosslink Capital of San Francisco has closed its fifth venture fund with $250 million in capital commitments.

Lehman Brothers has closed its latest private equity fund-of-funds with $650 million in committed capital. Approximately 60% of the capital will be used for buyout funds, with the remainder going to venture capital funds. Named Lehman Brothers Crossroads XVII, the vehicle is already 60% committed to funds from firms like Blackstone Group, Carlyle group, Warburg Pincus, American Securities Capital, New Mountain Capital, Code Hennessey & Simmons, 3i Group, Sun Capital Partners, Apollo Management and Oaktree Capital Management.

    Human Resources

Chris Davis has joined Forstmann Little & Co., where she will work with senior partner Ted Forstmann to manage the firm’s final three portfolio companies: IMG Worldwide, Citadel Broadcasting and 24 Hour Fitness Worldwide Inc. Forstmann had previously announced that his firm would not raise any new funds. Davis most recently served as president and CEO of McLeodUSA, and before that held executive positions with ONI Systems, Gulfstream and General Electric. In other Forstmann Little news, general partner Thomas Lister has resigned to pursue unspecified opportunities in the private equity market.

Cardinal Venture Capital has promoted Christian Borcher to the position of general partner. He has been with the firm since its 2000 founding, and focuses on digital media, mobility and software-as-a-service opportunities.



It’s already 10am (i.e., my self-imposed “send” time), so here are some very brief updates to stuff we’ve discussed previously:

CalPERS: The long-awaited strategic review of CalPERS’ alternative investment management program is complete, and was presented to the CalPERS Investment Committee on Monday. You can get the full report here, but the general gist is: You’re not quite the Investor of Choice that you set out to be following your last strategic review in 2000, but you’re within spitting distance. Some key insights/recommendations include:

  • CalPERS staff is overworked, due to an overabundance of GP relationships managed in-house (135 active GP relationships, compared to a recommended 30). Review recommends the hiring of an additional senior staffer, and the outsourcing of more commitment activities for small-to-mid-sized GPs (via captive funds-of-funds, etc.). It also recommends that at least two CalPERS staffers always be in Sacramento, streamlining of the commitment process and a more vertical management structure.
  • CalPERS should consider outsourcing the oversight of troubled partnerships.
  • CalPERS should maintain its relationship with Grove Street Advisors, by creating a follow-on VC investment partnership.
  • CalPERS should maintain its other third-party AIM advisors, including Hamilton Lane, Pacific Corporate Group, LP Capital Advisors and Probitas Partners.
  • CalPERS did not receive a requested fund allocation from 15 general partners who cited FOIA requirements as the rationale.

A pension system spokesman said that the AIM staff will analyze the recommendations over the next couple of months. In semi-related news, CalPERS approved fund commitments to Birch Hill Equity Partners III, ICV Partners II, Pinnacle Ventures II and the WLR Recovery Fund III.

Refco: Dubai Investment Group led a $1 billion offer for the entire troubled company, but was rejected (the rejection was just reported by Bloomberg). This means, of course, that the J.C. Flowers-led deal/negotiations can continue. Also, Refco shareholder Thomas H. Lee Partners held a conference call with its limited partners last Thursday, but answered many of the more probing questions with variations on “no comment.” An LP I spoke with about the call said that he understood the reticence, given potential litigation against TH Lee. He also expressed obvious displeasure with the whole mess, although he joins every LP I’ve spoken with in saying that Refco will not sink TH Lee’s upcoming fund-raising drive (or even hamper it).

AIG: The firm said in an SEC filing that it has secured $182 million for its AIG Asian Opportunity Fund II, which is targeted at $750 million. Recently-terminated GP Stephen Tseiu is not listed on the document.


    Top Three

ShopKo Stores Inc. (NYSE: SKO) has terminated its acquisition agreement with Goldner Hawn Johnson & Morrison, instead accepting an $877 million offer from Sun Capital Partners. GHJM had raised its offer price multiple times over the past several months, and actually ended up with a final offer identical to that of Sun Capital ($29 per share). ShopKo chose Sun Capital, however, which means that it will be required to pay GHJM a $13.5 million break-up penalty. Leverage for the Sun Capital acquisition will be provided by Wachovia Bank, National Association, Wachovia Capital Markets LLC and Ableco Finance LLC.

Vernier Networks Inc., a Mountain View, Calif.-based provider of enterprise network access management products, has raised $21 million in Series E funding. Venrock Associates led the deal, with Venrock managing general partner Ray Rothrock joining the Vernier board of directors. Return backers include Foundation Capital, DCM-Doll Capital Management, Allegis Capital, UV Partners, Masthead Ventures and Weber Capital. The company has raised over $65 million in total VC funding since its 2001 inception, plus a recent $5 million in debt financing from Silicon Valley Bank and Gold Hill Capital.

Cisco Systems Inc. (Nasdaq: CSCO) announced a $1.1 billion investment initiative in India. It is expected to be implemented over the next three years, and includes $750 million for R&D activities, $150 million of leasing and other financial solutions to Cisco customers and partners (via Cisco Systems Capital), $100 million in venture capital earmarked for Indian startup companies and $100 million for customer support operations.

    VC Deals

Xencor Inc., a Monrovia, Calif.–based developer of protein therapeutics and antibody drugs, has raised $20 million in Series D funding round led by Zen Investments LLC. Xencor has raised more than $85 million in total VC funding since its 1997 inception.

Kika Medical SA, a Paris, France–based clinical trial knowledge management and services company, has raised 7.5 million euros in Series B funding. NGN Capital led the deal with a 7 million euros infusion.

Numatech Industries Inc., an Ontario, Canada-based supplier of converted corrugated plastic products, has raised Cdn$10.5 million in private equity and subordinated note funding from VenGrowth.

PolarLake Ltd., a Dublin, Ireland-based provider of application integration based on enterprise service bus (ESB) architecture, has raised $7 million in new VC funding. Atlantic Bridge Ventures led the round, and was joined by return backers Add Partners and Delta Partners.

ProNAi Therapeutics Inc., a Kalamazoo, Mich.-based drug company focused on cancer and other complex genetic diseases, has raised $2.25 million in Series A funding from Apjohn Ventures, the Grand Angles and the Biosciences Research Commercialization Center at Western Michigan University. The company also has raised $1.75 million in convertible note financing from the State of Michigan‘s Technology Tri-Corridor.

ThingMagic Inc., a Cambridge, Mass.-based RFID startup, has raised $5 million in additional Series A funding from The Tudor Group. The round is now closed with $15 million, based on a $10 million first close from firms like Exxel Group, Inventec Appliances, Morningside Technology Ventures and Top Line Growth Capital.

Transoma Medical Inc., an Arden Hills, Minn.-based maker of implantable wireless vital sign monitors, has raised over $12.72 million in Series B funding, according to a regulatory filing. Affinity Ventures was joined on the deal by return backers Canaan Partners and Polaris Venture Partners.

Harkness Pharmaceuticals Inc., a San Diego-based drug company focus