PE Week Wire: Wed., Aug. 1, 2007

The sun is shining, the Bancrofts acceded and the beloved Celtics are suddenly 5-2 to win the NBA championship. In other words, it’s time for some Wednesday Warblings.

First up are some responses to my A Third Way column, which discussed a possible compromise on the carried interest tax issue (albeit a compromise among Democrats, rather than between parties). Eric writes: “Are you aware of another approach to potential compromise being bandied about? I’m speaking of the ‘imputed interest’ solution. The GP would be charged imputed interest on the funds invested ‘on the GP’s behalf’ by the LPs – in other words, 20% (assuming no complexities like hurdle rates, etc.) For example, on a $20mm investment, the GPs would pay tax each year on $4mm at ordinary rates (then gains would remain at capital rates). The biggest issue with this would probably be phantom income – the GPs have to pay tax on income they haven’t actually received in cash.”

Chris: “I firmly believe that carried interest should be accorded capital gains treatment and, if that were to change, PE firms and their attorneys would no doubt find other ways to replicate those economics. Having said that, it seems to me the PE industry’s arguments would be bolstered by going ‘back to the future’ and moving wholesale to a waterfall by which carried interest income is only distributed after committed capital is returned… VC and PE firms have eroded the traditional waterfall structure and, in doing so, have unwittingly given credence to those who argue for ordinary income treatment. By moving back to a committed capital standard, the industry would not only defuse this argument by truly making carried interest a long-term form of income, but also eliminate the supposed competitive pressures (primarily employee retention arguments) which many firms have used to erode more traditional waterfall structures. LPs would also benefit from a better alignment of! interests with their fund managers.”

Nick: “If the basic Democratic sound bite – ‘Why should billionaires pay 15% taxes on their income’ – is a clear winner, wouldn’t ‘Why shouldn’t everyone pay 15% taxes on their income’ be better?”

Joan: “You reported that Obama led all presidential candidates in terms of getting campaign contributions from the PE industry, but that was before he came out in favor of the carried interest tax change. He either should reverse course, stake out some middle ground – like the Third Way you discuss – or start looking for some different donors.” I definitely agree that he’ll take a hit from that Joan, but not necessarily as much as one might think. It seems that PE pros and VCs are very willing to silo their political beliefs and business interests. For example, many big-time Democratic fundraisers in Silicon Valley give to VenturePAC, which donates a majority of its stash to Republicans.

*** Tony on my belief that the buyout sky isn’t yet falling: “I enjoy your comments, but please don’t start putting lipstick on the pig as it related to the private equity industry. I know that is the hand that feeds you, but be careful.” Casey chimes in with similar sentiments: “You’ve obviously been spending too much time drinking the Cool-Aid in LBO firm boardrooms. How can you not hear the Fat Lady? She’s turned up to 11.”

*** Mike: “Why didn’t you mention the Celtics deal? It should have been in Top Three.” I did mention it Mike, with the note that Doc will unfortunately mess it up. It’s like buying a Porsche and then having Toonces drive it home from the lot

*** Worth noting that various emails this week have referred to me as a “lunatic lefty” for doubting Iraq War success, and also as a “neocon suckup” for suggesting the Iraq War has boosted the U.S. economy. As Walt Whitman once wrote: I am large, I contain multitudes…

Top Three

Adspace Networks Inc., a New York-based operator of an in-mall digital video advertising network, has raised $20 million in Series E funding co-led by The Walnut Group and The Hauser, Davis & Tysoe Group. Return backers include AIG, Steelpoint Capital, DCM and GIC Investments. AdSpace has raised around $63 million in total VC funding since its 1998 inception.

3i Group has pulled its proposed auction of UK towing company NCP Services, according to The Daily Telegraph. 3i was seeking a sale price of around £250 million, but potential buyers reportedly were unable to raise enough debt to fund a deal at that price. Suitors included Montagu Private Equity, General Atlantic, HBOS and European Capital.

Daniel Rosensweig and Edward Sippel have agreed to join Quadrangle Group as an operating principal and managing principal, respectively. Rosenweig previously served as chief operating officer for Yahoo and, before that, was a partner and managing director for TVG Capital Partners. He will open a new Quadrangle office in Silicon Valley. Sippel previously was a partner and managing director with TVG Partners. He will initially be based in New York, but will open a new Quadrangle office in Hong Kong in the latter half of 2008. Quadrangle currently has offices in New York and London.

VC Deals

Panda Security, a Bilbao, Spain-based security software solutions company, has raised €10 million in new VC funding. HarbourVest Partners and Atlantic Bridge Ventures were joined by return backers Investindustrial and Gala Capital.

Associated Content, a Stamford, Conn.-based online publishing company focused on both professional and user-generated content, has raised $10 million in Series B funding. Canaan Partners led the deal, and was joined by return backers Softbank Capital and Tim Armstrong. It raised $5.4 million in first-round funding in January 2006.

Mobius Therapeutics, a St. Louis-based developer of systems for the surgical treatment of glaucoma, has raised $3.5 million in first-round funding, according to a regulatory filing. No investor information was disclosed.

SypherLink Inc., a Dublin, Ohio-based developer of automated mapping and rapid virtualization software, has raised $3.5 million in Series B funding. Stuart Mill Venture Partners led the deal, and was joined by return backers Battelle Ventures, Reservoir Venture Partners and Innovation Valley Partners (a Battelle Ventures affiliate fund). SypherLink raised a $3.5 million Series A round in 2005.

Buyout Deals

Accor has agreed to sell its Italian food services business to Barclays Private Equity for €135 million. The business generated €312.3 million in 2006 revenue, and is being sold so that Accor can refocus on its core services and hotels businesses.

Altus Capital Partners has led a buyout of Thermafiber Inc. from Hercules Fiber II LLC, for an undisclosed amount. Thermafiber is a Wabash, Ind.-based producer of mineral wool insulation products for commercial and industrial applications.Altus was joined on the deal by undisclosed co-investors and Thermafiber management.

Astorg Partners has agreed to sponsor a management buyout of French funeral company OGF Group. No financial terms were disclosed. The deal represents a partial exit for Vestar Capital Partners, but it will remain an investor. Credit Suisse is providing leveraged financing. OGF reported around $685 million in sales last year, and employs 5,800 people throughout France.

Cerberus Capital Management has bought the assets of Tower Automotive (OTC BB: TWRAQ) out of bankruptcy for approximately $1 billion. Tower Automotive is a Novi, Mich.–based designer and producer of vehicle structural components and assemblies used by every major automotive OEM.

CVC Capital Partners Asia Pacific has agreed to buy Taiwanese curtain maker Nien Made (TW: 9915). The deal is valued at T$18 billion (US$549 million), with Nien Made stockholders to receive T$41.28 per share (13.6% premium to Monday’s closing price).

EGL Inc. (Nasdaq: EAGL) shareholders have approved a $47.50 per share buyout offer from Apollo Management, which would value the company at approximately $2 billion. The deal is expected to close tomorrow. EGL is a Houston, Texas-based logistics provider.

HealthSouth Corp. (NYSE: HLS) has completed the sale of its Diagnostics Division to The Gores Group. No financial terms were disclosed. The unit has been renamed Diagnostic Health Corp., and includes a network of 53 freestanding diagnostic imaging centers in 19 states and the District of Columbia.

Levine Leichtman Capital Partners has sponsored a recapitalization of Beef O’Brady’s Inc., a Tampa, Fla.-based operator of family-oriented sports bar restaurants, according to LBO Wire. No financial terms were disclosed.

Linx Partners is nearing a deal to acquire Cimarron Central LLC, a Guyman, Okla.-based manufacturer of production and processing equipment for natural gas companies in the Rocky Mountains region, No financial terms have been disclosed for the pending deal, which was first reported by LBO Wire.

Nestor Healthcare, a UK healthcare services group that received an unsolicited approach from a private equity firm in early June, is still in discussions with several possible acquirers. Announcing the company’s interim results, Nestor chairman John Rennocks pointed out that the talks may come to nothing, but that he expects to make a further announcement in due course.

Prospect Partners has acquired Energy Solutions International Inc., a St. Paul, Minn.-based provider of energy-efficient lighting systems for industrial, retail and commercial buildings. No financial terms were disclosed for the deal, which was done in partnership with ESI management.

Samuel Manu-Tech Inc. (TSX: SMT) has sold subsidiary Energy Steel Products Inc. to ESP management and private equity firm Lone Star. The deal is valued at $25 million, subject certain adjustments for working capital. ESP provides stainless steel inventory to metal service centers.

Water Street Healthcare Partners has acquired a majority stake in Alpine Biomed, a Fountain Valley, Calif.-based maker of diagnostic equipment used in gastroenterology, urology and neurology. No financial terms were disclosed for the deal, which enabled Alpine to subsequently purchase the neurology diagnostic product line of Medtronic Inc. (NYSE: MDT).

PE-Backed IPOs

Genoptix Inc., a Carlsbad, Calif.-based provider of personalized medicine services for management of hematolymphatic disorders, has filed for an $86.25 million IPO. It plans to trade on the Nasdaq under ticker symbol GXDX, with Lehman Brothers serving as lead underwriter. Genoptix has raised around $64 million in VC funding since 1999, from firms like Enterprise Partners, Chicago Growth Partners, William Blair Capital Partners, Alliance Technology Ventures, Tullis-Dickerson and Excelsior Venture Partners.

This week’s IPO calendar includes expected pricings from Concho Resources Inc. and Virtusa Corp. Next week’s calendar lists Masimo Corp., Cross Match Technologies Inc. and HireRight Inc.

PE Exits

KPS Capital Partners has completed the $338 million sale of Blue Ridge Paper Products to Rank Group Ltd. of New Zealand. Blue Ridge is a Canton, N.C.-based manufacturer of specialty paperboard packaging products. KPS acquired a majority position in 1999, while employees hold a 39% position.

Neuren Pharmaceuticals (ASX: NEU) has agreed to acquire Hamilton Pharmaceuticals Inc., a Washington, D.C.-based drug developer focused on CNS disorders, for US$4.4 million of Nueren ordinary shares and a variety of milestone-based earnouts. In addition, Hamilton shareholders Vivo Ventures and CNF Investments have agreed to invest $3 million into Neuren. Hamilton Pharmaceuticals had raised an $11 million Series A round in April 2005 from Vivo, CNF and Index Ventures.

Nordic Partners has completed its sale of Denmark-based Dangaard Telecom AS to Brightpoint Inc. (Nasdaq: CELL). The total deal is valued at around $600 million, including $300 million in assumed debt and 30 million shares of Brightpoint stock.

Skywire Software of Frisco, Texas has agreed to acquire Whitehill Technologies of Markham, Ontario, in order to form a combined provider of software and services for insurance, financial services, legal, and professional services. No financial terms were disclosed. Whitehall has raised VC funding from GrowthWorks and Latitude Capital Partners.

PE-Backed M&A

EK Success Ltd., a Clifton N.J.-based scrapbooking company, has agreed to acquire two companies, according to Standard & Poor’s Rating Service. The company names were not disclosed, but S&P said that the acquisitions will be financed via $126 million in new equity from existing EK shareholder GTCR Golder Rauner.

LSI Corp. (NYSE: LSI) has completed the sale of its consumer products business to Magnum Semiconductor Inc., a Fremont, Calif.-based supplier of ICs, software and reference platforms for audio and video content. No financial terms were disclosed. Magnum has raised $52 million in VC funding since its 2005 spinout from Cirrus Logic. Shareholders include Investor Growth Capital, WK Technology Fund, KTB Ventures, Gold Hill Capital and return backers August Capital and Investcorp Technology Ventures.

Firms & Funds

Castanea Partners has closed its third small-to-mid market buyout fund with $575 million in capital commitments. This includes a 4475 million core fund and a $100 million overflow fund to be used to support larger deals. The Newton, Mass.-based firm raised $200 million for its prior fund in 2004, and typically invests between $10 million and $75 million in leveraged buyouts, growth equity opportunities and special situations.

US Renewables Holdings of Los Angeles has closed its second fund with $475 million in capital commitments, with a continued focus on renewable power generation, clean fuels and related logistics. Credit Suisse served as placement agent.

Human Resources

Kevin Rollins has joined TPG Capital as a senior advisor. He previously served as president and CEO of Dell Inc. and, before that, was a partner and director at Bain & Company.

Christopher Cook has joined the Los Angeles County Employee Retirement System (LACERA) as a senior investment analyst for private equity. He spent the past six years with Pathway Capital Management.

Siemens AG said that Dominik Asam will become president and head of the management board for Siemens Financial Services, effective October 1. Also on that date, Siemens Venture Capital will be integrated into SFS. Asam has headed Siemens’ corporate finance treasury since 2006.

Harris Williams & Co. has promoted seven members of its Richmond, Va. office. Bob Baltimore, James Clark, Derek Lewis and Drew Spitzer have been promoted to director, while David Keys, Brian Lucas and Geoff Smith have been promoted to vice president.

Kevin O’Leary has joined the strategic advisory board of Genstar Capital, where he will advise on Canadian opportunities. He co-founded Toronto-based The Learning Co. which was acquired by Mattel Toy Company in 1999.In 2003, he founded Storage Now.

Trevor Chaplick has joined Proskauer Rose as a partner in the corporate department and co-head of the firm’s Washington D.C. office. He was the founder and former managing partner of Wilson Sonsini Goodrich & Rosati’s Washington office.