PE Week Wire: Tues., May 8, 2007

If there’s one thing that keeps private equiteers up at night, you’d think it would be the prospect of a debt market collapse. But judging by some recent cocktail party kibitzing, the real worry is that federal lawmakers will change their tax treatment of carried interest from capital gains to ordinary income. Oh the horror of being filthy rich instead of obscenely rich…

Much of this consternation has been prompted by the combination of a Democratic Party majority with a bipartisan mandate to increase federal revenue. Yesterday, however, Senate Finance Committee chief Max Baucus (D-MO) offered a paper bag to hyperventilating investors, by telling the National Press Club that his committee is “nowhere close” to drafting such legislation. Or, as Baucus put it: “People need to keep their shirts on here.”

Before continuing, it’s worth noting that the National Venture Capital Association has contributed $10,500 to Baucus since 2001. Consider yourself disclaimed.

Baucus is certainly correct that tax change speculation has far outpaced senatorial examination, largely because private equity remains confusingly opaque in many quarters. But I’d be stunned if something doesn’t happen in this area. Probably not a full switch from capital gains to carried interest, but rather a hybrid approach whereby: (a) Profits derived from general partner commitments will continue to receive capital gain status; (b) Remaining profits will be taxed as ordinary income.

Disclaimer Deux: What follows is at odds with a past column. Consider me evolved.

After all, why should a general partnership receive capital gain benefits from returns on someone else’s capital? Moreover, let me repeat the point about the federal government’s urgent need to raise revenue. Some very sloppy back-of-the-envelope math shows that a hybrid tax treatment change could generate in excess of $7 billion per year. In pragmatic terms, that’s nearly enough to fund the Iraq War for an entire month.

Oh, but there’s one major caveat to the above pragmatism. Those private equiteers are not just sweating and watching Cribs reruns while awake at night. They’re also devising ways to restructure their firms/funds if such a change comes to pass. I don’t know how they’ll do it – but suffice to say that more than a few PE attorneys are already trying to figure it out.

*** Stephen Burrill yesterday gave his annual State of the Biotech Industry talk yesterday at BIO 2007, and said that he’d post the presentation on his website. It’s not there yet, but should be up later today.

*** I’m no security expert, but if a federal building is successfully breached twice by terrorists, wouldn’t you improve the security system? Perhaps sensors in the underground access tunnels?

*** Quiz Time: 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.

*** Internship Drive update: Several participating firms have already made hires based on the drive, and have had their postings pulled down. Just a warning for any procrastinators out there…

Top Three

Portola Pharmaceuticals Inc., a South San Francisco-based drug company focused on thrombosis and related cardiovascular diseases, has raised $70 million in Series C funding. New backers include Brookside Capital, AllianceBernstein, Teachers’ Private Capital, Goldman Sachs, T. Rowe Price, IBTM and CIDC. Returnees included Abingworth Management, Alta Partners, Advanced Technology Ventures, Frazier Healthcare, MPM Capital, Prospect Ventures and Sutter Hill Ventures. Portola now has raised around $160 million in total VC funding.

Clear Channel Communications Inc. (NYSE: CCU) has delayed its shareholder meeting by two weeks, in order to further evaluate a sweetened buyout offer from Bain Capital and Thomas H. Lee Partners. Clear Channel initially dismissed the buyout firms’ offer to raise their bid from $39 per share to $39.20 per share, but later reconsidered at the request of certain shareholders.

Universal American Financial Corp. (Nasdaq: UHCO) has agreed to acquire pharmacy benefits manager MemberHealth Inc. for approximately $630 million (55% cash, 45% UAF stock). The deal is being backed by a $350 million PIPE investment in UAF by Lee Equity Partners, Perry Capital, Union Square Partners Management (f.k.a. Capital Z) and Welsh, Carson, Anderson & Stowe. The PIPE is valued at $20 per share, with $100 million funded within the next two weeks and the remainder to be funded when the MemberHealth transaction closes in Q3.

VC Deals

Solaicx Inc., a Santa Clara, Calif.-based maker of silicon wafers for photovoltaic panels, has raised $27.1 million in Series C funding. D.E. Shaw led the deal, and was joined by Mitsui & Co. and return backers Applied Ventures, Big Sky Ventures, Firsthand Capital Management and Greenhouse Capital Partners. Solaicx has now raised around $39 million in total VC funding since 2005.

Crossbeam Systems Inc., a Boxborough, Mass.-based provider of network security solutions, has raised $21 million in Series F funding. Tudor Investment Corp. led the deal, and was joined by return backers Charles River Ventures, Commonwealth Capital Venture Partners, Focus Ventures, Intel Capital, Matrix Partners and North Bridge Venture Partners. Crossbeam has now raised around $102 million in total VC funding since its 2000 inception.

Xelerated, a Santa Clara, Calif.-based fabless semiconductor company, has raised $23 million in fourth-round funding. Sixth Swedish National Pension Fund led the deal, and was joined by return backers Atlas Venture, Alta Partners, Accel Partners and Amadeus Capital Partners.

BSG Alliance Corp., an Austin, Texas-based provider of on-demand enterprise software, has raised $20 million in new VC funding. Foundation Capital and Hummer Winblad Venture Partners co-led the deal, and were joined by return backer Powershift Ventures.

OpVista Inc., a Milpitas, Calif.-based optical networking company, has raised $15 million in its second round of funding since a 2006 venture recap. ComVentures led the deal, and was joined by return backers DCM and Sevin Rosen Funds.

RecycleBank has raised $13.1 million in Series A funding from RRE Ventures and Sigma Partners. The Philadelphia-based company partners with cities and businesses to reward households that recycle. It previously had raised seed capital from Columbia University’s Eugene M. Lang Center for Entrepreneurship.

Intercasting Corp., a Sand Diego-based provider of media applications for personal mobile devices, has raised $12 million in Series B funding. Venrock led the deal, and was joined by return backers Avalon Ventures and Masthead Venture Partners.

DepotPoint, a Bellevue, Wash.-based provider of an application suite for the real estate foreclosures market, has raised $4 million in Series B funding from Trident Capital.

Sentrigo Inc., a Woburn, Mass.-based provider of database security software, has raised $3.5 million in Series A funding from Benchmark Capital.

Combinent BioMedical Systems, a Cambridge, Mass.-based developer of a vaginal drug delivery platform, has raised around $3 million in first-round funding. Participants include Commons Capital, Cytyc Development Co. and Vimac Ventures.

Makana Solutions Inc., a Lexington, Mass.-based provider of on-demand software for designing sales compensation plans, has raised $3 million in Series A funding from TD Capital Ventures.

Comeks Inc., a Finland-based developer of tools to create user-generated mobile content, has raised an undisclosed amount of first-round funding from Accel Partners.

Buyout Deals

Macquarie Bank and TPG have formally abandoned their bid for Australian airline carrier Qantas, after Australian regulators refused to allow the buying group to count supporting shares that it acquired after last Friday’s deadline. The firms originally said that they would appeal the ruling, but have since changed their minds.

3i Group reportedly has entered exclusive talks to acquire a stake in noted UK architectural firm Foster & Partners, in a deal that could value the business at between £400 million and £500 million. Catalyst Corporate Finance is advising Foster & Partners. Foster projects include the Beijing Airport, the new Wembley Stadium and the Millennium Bridge across the Thames.

Woodside Capital has acquired and merged Rehrig International and United Steel & Wire, both manufacturers of shopping carts and other material handling equipment for retailers. No financial terms were disclosed. The combined company will be based in Richmond, Va., and be named Rehrig United International.

ZS Fund has acquired VSPI Inc., a Troy, Mich.–based provider of commuter vanpooling services. No financial terms were disclosed, except that the deal was backed by $44 million in credit facilities from NewStar Financial.

The New York Times Co. has completed the sale of its Broadcast Media Group to Oak Hill Capital Partners for $575 million. The group consists of nine network-affiliated television stations.

Advent International is nearing a £550 million deal to acquire UK shareholder services company Lloyds TSB Registrars. Lehman Brothers is advising Lloyds TSB on the sale.

HgCapital has paid €69 million to acquire a French wind farm portfolio from German power producer Enertrag. Bank of Scotland provided leveraged financing. The deal involves four wind farms located in the Picardy region of France. One is already in operation, with the other three to be built over the next year. As part of the deal, Enertrag will operate and maintain the wind farms for 20 years.

Repechage Investments Ltd., a fundless equity sponsor, has acquired Vancouver-based pub chain operator Elephant & Castle Group Inc. (OTC: PUBSF). No overall terms were disclosed, except that Fifth Street Capital is providing $7.5 million in second-lien notes and GE Canada is providing senior notes.

Trans-Fast Remittance LLC, a New York-based money transfer company focused on the U.S.-to-Latin America market, has received an undisclosed amount of private equity funding from Greenhill Capital Partners.

PE-Backed IPOs

Helicos Biosciences Corp., a Cambridge, Mass.-based DNA sequencing company, has set its IPO terms to 5.4 million common shares being offered at between $13 and $15 per share. It plans to trade on the Nasdaq under ticker symbol HLCS, with UBS serving as lead underwriter. The company has raised around $67 million in VC funding from firms like Flagship Ventures (20.6% pre-IPO stake), Atlas Venture (17.6%), Highland Capital Partners (17.6%), MPM Capital (12.9%) and Versant Ventures (9.9%).

PE Exits

Natural Gas Partners has sold approximately 55% of its ownership stake in Energy Transfer Equity LP (NYSE: ETE) and related entities to Enterprise GP Holdings LP (NYSE: EPE). The total deal is valued at over $744 million, or $42 per unit. Natural Gas Partners helped form Energy Transfer in October 2002, following the acquisition of a $265 million package of midstream assets from Aquila.

Hopewell Ventures has sold Chicago-based online health information company TLContact ( to Revolution Health Group. No financial terms were disclosed. The sale represents the first-ever liquidity event for Hopewell, which was formed three years ago to invest in Midwestern companies.

HealthSport Inc. (OTC BB: HSPO) has completed its acquisition of InnoZen Inc., a Woodland Hills, Calif.–based maker of quick-dissolve strips for the delivery of over-the-counter medicines. The deal is valued at approximately $40 million in HealthSport stock. InnoZen raised $2.94 million in Series A funding two years ago, led by Tech Coast Angels.

Firms & Funds

Fortress Investment Group has held a $2.84 billion first close for a new private equity fund focused on opportunities in North America and Western Europe. The fund has a total cap of $5 billion, which will include $1 billion from Fortress management.

Human Resources

David Bole has joined Quantum Energy Partners as a managing director. He previously was president of SouthView Energy LP and, before that, was a managing director with Randall & Dewy (division of Jefferies & Co.).

Melis Kahya has joined TSG Consumer Partners as an associate. She previously was an I-banking analyst with JPMorgan, where she focused on the consumer and retail sectors. In other TSG personnel news, managing directors Alex Panos and Yasser Toor have relocated to New York from San Francisco.

Bear Stearns Asset Management has hired: Margo Cook as head of institutional business; James Barrett as global head of sales; and Bill Best as head of global hedge fund sales. Cook previously was CIO and head of institutional asset management with Bank of New York. Barrett was head of institutional sales and marketing with Bank of New York, while Best was a managing director of business development with VegaPlus Capital Partners.