PE Week Wire: Thurs., May 10, 2007

On Tuesday, I posed the following question: What is the latest private equity firm to consider selling off a management company stake. Hint: The apple doesn’t fall far from the tree.

The vast majority of respondents went with Sequoia Capital, given that it was: (i) An early investor in Apple Computer and (ii) Because sequoias are trees. Very logical deductions, but I was going for something slightly less literal – and easily could have substituted “chip off the old block.”

The correct answer is (drumroll, please)… Ares Management, a 1997 spinout from Apollo Management (which also is gauging interest in a possible management company sale). I’m told that the Los Angeles-based firm is in early discussion with a small circle of potential buyers, but that it has not yet retained an investment bank.

Ares manages several private equity and debt funds, plus a publicly-traded business development company called Ares Capital Corp. (Nasdaq: ARCC). Its first private equity fund had called down approximately 80% with a 27.1% IRR through the end of Q3 2006, according to investor CalPERS. Its second private equity fund closed just last year, and only had called down around 10% of its capital through the CalPERS reporting period.

An Ares spokesman said that the firm would have “no comment” on the sale process. But I have a few comments, because my job description demands it. Here we go, in notes format:

*** Ares is not unique in its pursuit of a management company stake, nor is it even part of a small club. Almost every reputable private equity firm around has begun putting feelers out about such a transaction, with the exception of a few that have already closed such deals in the past (Carlyle Group with CalPERS, for example). I even learned yesterday that a fund-of-funds is considering the option.

*** Only a fraction of these deals will ever get done. Some will obviously falter because the firms themselves back out, but the bigger issue will be a limited number of partners. I mentioned that Ares so far only has talked with a “small circle” of buyers, and the same statement could have been made for most firms engaged in such discussions. These would be large, long-term commitments – which leaves out almost everyone except for the largest pension funds, a few publicly-traded corporations and a variety of Middle Eastern interests. Of equal import, it is unlikely that many of these buyers would want to do more than one or two of these deals – at least until they’ve had some time to evaluate performance.

*** Why are so many firms interested? Because private equity has become the recent stock market boom’s consensus driver, and general partners are looking to cash in. Blackstone plans to do it via an IPO (and others may follow), but a small management company sale is generally viewed as the safer route (particularly if we’re nearing a private market peak).

*** There also is that pesky issue of tax treatment changes for capital gains. I don’t want to rehash the entire issue – although feel free to keep ripping me here – except to say that the prospect of lowered take-home profits is helping fuel this rush to sell. The obvious conflict, of course, is that it should have the exact opposite effect on buyers. So, unless pension fund managers opt to short legislative change, the tax issue is probably a wash for the purposes of this conversation.

*** One exception to the supply/demand gap could be a new OTC private market being devised by Goldman Sachs (sounds like a more organized and public version of the secondaries market), which is described in today’s Wall Street Journal. This is apparently the option that Oaktree is considering.

*** Finally, there is the overall issue of how such sales would affect the overall limited partner community. You know, the vast majority of investors either too small or too conservative to engage in such transactions. There really is no clear answer here. On the one hand, this could be a boon, with experienced/sympathetic LPs having a greater say in GP decision-making. On the other, these LPs could realize that their interests really are more aligned with GPs than with their LP brethren, and could prove punishing at worst, or irrelevant at best.

*** Quiz Time: Can you name the new partner at venture capital Foundation Capital? Hint: He rocks internationally. And, no, it’s not Bono.

Top Three

Joost Inc., a New York-based provider of Internet television services, has raised $45 million in Series A funding. Index Ventures led the deal, and was joined by Sequoia Capital, Li Ka Shing Foundation, CBS and Viacom. As previously announced, CBS and Viacom also are content partners with Joost, providing channels and programming.

Allied Capital has agreed to sell its majority equity interest in Healthy Pet Corp. to VCA Antech Inc. (Nasdaq: WOOF). The deal values HPC at approximately $153 million, and is expected to close later this quarter. HPC is a Shelton, Conn.-based operator of veterinary hospitals, and received its first backing from Allied Capital in 2005.

Draper Fisher Jurvetson and FIR Capital Partners have formed a joint $40 million venture capital fund focused on early-stage opportunities in Brazil. The two firms also will launch a $100 million Brazil fund later this year, which will target non-Brazilian limited partners.

VC Deals

Jajah Inc., a Menlo Park, Calif.-based Internet telephone company, has raised $20 million in Series C funding. Intel Capital led the deal, and was joined by return backers Sequoia Capital and Globespan Capital Partners. It previously had raised around $8 million.

Magnum Semiconductor Inc., a Fremont, Calif.-based supplier of ICs, software and reference platforms for audio and video content, has secured $20 million of a $27 million Series C round, according to a regulatory filing. Investor Growth Capital was joined by return backers August Capital and Investcorp Technology Ventures. Magnum was spun out of Cirrus Logic in 2005.

VivoTech Inc., a Santa Clara, Calif.-based provider of wireless payment software and chips, has raised around $19.9 million in Series C funding, according to a regulatory filing. It has only called down approximately $15 million so far. First Data Corp. led the deal, and was joined by return backers like Alloy Ventures, Draper Fisher Jurvetson and Nokia Growth Partners. FT Partners served as financial advisor on the deal. VivoTech announced the transaction last month, but without dollar amounts.

PlayPhone Inc., a San Jose, Calif.-based mobile media and entertainment company, has raised $18.75 million in Series C funding. Scale Venture Partners led the deal, and was joined by return backers Cardinal Venture Partners and Menlo Ventures. The company previously raised around $12.1 million in venture funding, since its 2003 formation.

StrongMail Systems Inc., a Redwood shores, Calif.-based provider of email delivery software, has raised $13 million in third-round funding. DAG Ventures led the deal, and was joined by return backers Evercore Partners, Globespan Capital Partners and Sequoia Capital. The company previously had raised $15.5 million.

Technorati Inc., a San Francisco-based search engine for the blogosphere, has expanded its Series C round to $11.52 million, according to a regulatory filing. It held a $7.6 million first close last June, and later expanded the round to $10.52 million. DG Incubation, operator of Technorati Japan, is listed as a new shareholder, alongside existing backers Draper Fisher Jurvetson and Mobius Venture Capital., a New York-based provider of live online tutoring services, has raised $9.5 million in its second round of VC funding since a 2006 recap. Intel Capital led the round, and was joined by Ascend Venture Group, Kidron Opportunity Fund and return backer Dawntreader Ventures. also raised $4 million in venture debt from MMV Financial.

Cape Clear Software Inc., a Dublin, Ireland-based provider of an enterprise service bus platform, has raised $4.95 million in Series D funding, according to a regulatory filing. Return backers include ACT Venture Capital, Accel Partners, Greylock and InterWest Partners. Cape Clear has raised nearly $38 million in total VC funding since its 1999 inception.

WebCollage Inc., a New York-based provider of online merchandising networks to manufacturers, has raised around $3.59 million in Series E funding, according to a regulatory filing. Backers include Sierra Ventures, Cedar Ventures and Gilde Investment Management. The company has raised over $36 million in total VC funding since its 2000 inception.

Olive Software Inc., a Santa Clara, Calif.–based provider of XML automation technology, has raised $5 million in venture debt funding from BlueCrest Capital Finance. The company previously raised $15 million over two rounds of VC funding from Pitango Venture Capital and Sequoia Capital.

Buyout Deals

Wellco Enterprises Inc. (AMEX: WLC) shareholders approved a $14 per share buyout by Golden Gate Capital and Integrity Brands. Wellco is a Waynesville, N.C.-based maker of military boots and other rugged footwear.

Lehman Brothers has agreed to acquire Eagle Energy Partners, a Houston, Texas-based energy services company. No financial terms were disclosed. Lehman already owned a one-third stake in Eagle Energy.

Box Studios, a New York-based provider of digital retouching and digital post production services, has raised an undisclosed amount of private equity funding from Friend Skoler & Co.

PE-Backed IPOs

Aecom Technology Corp., a Los Angeles-based provider of technical and management support services, priced 35.15 million common shares at $20 per share ($18-$20 range), for an IPO take of approximately $703 million. It will trade on the NYSE under ticker symbol ACM, while Morgan Stanley, Merrill Lynch and UBS served as co-lead underwriters. Shareholders include U.S. Trust (29.86% pre-IPO stake), GSO Capital Partners (10.68%), J.H. Whitney & Co. (10.68%), CalPERS/PCG Corporate Partners (3.74%), JPMorgan Partners and Weston Presidio.

PE-Backed M&A

Canon Communications LLC of Los Angeles has acquired four manufacturing technology events from UK-based Trident Exhibitions Ltd. The shows are: IPOT; Machine Vision and Displays Technology; MTEC; Machine Building, Drives & Automation; and Practical Vacuum. No financial terms were disclosed. Canon is controlled by Spectrum Equity Investors.

GMAC Insurance, a business unit of GMAC Financial Services, has agreed to acquire Provident Insurance, the UK-based automotive insurance division of Provident Financial PLC. The deal is valued at approximately £170 million in cash, and is expected to close later this quarter. GMAC is owned by Cerberus and General Motors.

J.C. Flowers & Co. has agreed to acquire an ownership position in Direct Response Corp., a Meriden, Conn.–based provider of direct-to-consumer auto insurance. No financial terms were disclosed. J.C. Flowers will become DRC’s largest investor, including the acquisition of just under half the DRC shares currently held by Morgan Stanley Capital Partners III (managed by Metalmark Capital).

Pouschine Cook Capital Management has acquired a control position in Great Lakes Home Health and Hospice, a Great Lakes, Mich.-based operator of six hospice facilities and provider of home healthcare and hospice services. No financial terms were disclosed for the deal, which was first reported by LBO Wire.

PE Exits

AIG Highstar Capital has sold its 50% stake in Northern Star Generation LLC to UBS Americas for an undisclosed amount. Northern Star is a Houston, Texas-based owner, operator, and acquirer of U.S. energy facilities. It was formed in early 2004 by AIG Highstar and Ontario Teachers’ Pension Plan (which is maintaining its position).

AIG Newbridge Capital has retained Goldman Sachs to manage a sale process for South Korean telecom company Hanaro Telecom, according to Maeil Business Newspaper.

Kohler Co.’s Global Power Group has agreed to acquire Italian engine maker Lombardini Srl from a fund managed by BC Partners. No financial terms were disclosed.

OnCap is nearing a deal to acquire pizza chain operator CiCi Enterprises from Levine Leichtman Capital Partners, according to LBO Wire. The deal is reported to be worth approximately $250 million, with North Point Advisors managing the sale process.

TSG Consumer Partners has sold PureOlogy Research LLC to L’Oreal USA Inc., a subsidiary of L’Oreal SA. No financial terms were disclosed. PureOlogy is an Irvine, Calif.–based provider of products for color-treated hair, and sold a majority position to TSG in 2004.

Firms & Funds

Apollo Management is planning to raise at least $15 billion for its seventh buyout fund, according to Private Equity Insider. The article says that the plan was unveiled to limited partners during an annual meeting late last week, and that firm CEO Leon Black did not specify a fund cap. Apollo closed on $10 billion for its sixth fund in February 2006.

Continuum Capital Partners has launched as a Bay Area growth equity firm that will soon begin marketing a $500 million debut fund, according to Private Equity Insider. Firm management includes Greg Black (formerly with Warburg Pincus), Vladimir Jacimovic (New Enterprise Associates) and Ashley Fiedlein (General Atlantic).

Institutional Venture Partners is expected to hold a first close today on its twelfth fund, according to VentureWire. The fund is being marketed with a $450 million target and $600 million soft cap.

IDEA Fund Partners has held a first close on its inaugural fund, which will focus on seed and early-stage opportunities in North Carolina. No terms of the first close were disclosed, although IDEA did say that the final fund target is $25 million.

Teachers’ Private Capital has opened a London office, which is its first effort outside of Canada. He office is led by director Andrew Claerhout, and will focus on European and international private equity opportunities.

Human Resources

Dan Simon and Karan Kapoor have joined Wedbush Capital Partners as VP of finance/administration and senior analyst, respectively. Simon previously was CFO of DynaFund Ventures, while Kapoor was with Brandes Investment Management. Wedbush also has promoted Ben Wu to associate.

Mark Ozenick has been named senior vice president of private equity with professional services company Thomas Group Inc. (Nasdaq: TGIS), where he will be responsible for business development and account management to the U.S. private equity market. He previously was COO of Elite Aviation and, before that, was founder and CEO of HeliFlite Shares.

Brightspark Ventures has promoted Salim Teja to partner and Steven Bloom to partner and CFO.Teja joined the firm in 2003, while Bloom joined in 1999.

Jonathan Chou has joined Eureka Growth Capital as a senior associate. He previously was with LEK Consulting as an engagement manager in the firm’s M&A and strategic consulting practices.