PE Week Wire: Wed., June 27, 2007

I spoke with Rep. Sandy Levin (D-MI) on Monday, about the carried interest bill he introduced in Congress. It did not go well.

We then spoke again yesterday for about 20 minutes. It went better, but still not terribly well.

To preface, I generally support the idea of treating carried interest as ordinary income. I know I’ve hedged a bit on this in the past, but most of the arguments against such a change have fallen flat with me. I respect them and am always willing to reconsider (participate in the debate here), but for now cannot support what appears to be a double-standard. In other words, Rep. Levin had a sympathetic ear.

I began by asking him if his primary motive was to raise federal tax revenue, and he said it was not. Instead, he was motivated by a sense of tax fairness. Levin explained: “It was brought to my attention a few months ago by a tax lawyer, who was a former classmate of mine. He said it didn’t make any sense… I looked into it and couldn’t find a rationale for treating this any differently from the income others receive for services.”

I then asked why his bill had no Republican co-sponsorship, particularly given the bi-partisan authoring of the so-called Blackstone Bill. No real answer, except that he expects to get GOP support after Congress holds hearings on the matter next month. Ok.

Then came the trouble. I asked Levin to respond to the most persuasive counter-argument against his bill – the one about how carried interest should be treated like founders’ equity (i.e., as capital gains). But Levin didn’t have an answer. Even worse, he did not seem to understand the question – even though I repeated it using varying language no less than four times. At one point, his spokeswoman had to break in and try to explain it to him.

Levin kept repeating that company options are treated as ordinary income, but I kept replying that I was talking about founders’ equity – not normal options that a salaried employee like me would have (were Thomson to be so generous, which it is not). He promised to call back with an explanation. His spokesperson emailed to apologize, saying it was her fault for not speaking with me ahead of time, so that “we would have been ready for your questions.”

She missed the point – Levin should have been ready for my questions, because Levin introduced the bill. Maybe I’m just a hopeless legislative romantic, but I’d like to think that Congressmen pay attention to pro/con arguments after proposing bills. Three full days had passed between the bill’s introduction and my interview with Levin. Is it too much to ask that he take an active interest in its aftermath? The “founders’ equity” debate was all over the place, including both comments and blog posts at peHUB. NVCA president Mark Heesen has been trumpeting it for months…

I spent Monday night wondering if I had inadvertently ginned up a legislative push to treat founders’ equity as ordinary income (i.e., spit on the good graces of even more readers). But no worries, as Levin continued to support founders’ equity as capital gains, during yesterday’s follow-up call.

So how did he reconcile founders’ equity with his bill? Very carefully.

Levin argued that founders have an asset at stake (i.e., their position in the company). Private equity funds also have an asset at stake, but distinguished that fund managers do not (save for any money they invest individually into the fund). It is a very thin line, and I’m not too confident that it will hold up next month during hearings. Just wait until the matter gets confused by the introduction of entrepreneurs-in-residence (which I tried yesterday – to which Levin seemed genuinely interested in, but unaware of).

Again: I support the tax change. But I also think its Congressional backers are going to have to educate themselves very quickly, if they want to persuade skeptical colleagues. As of today, they do not seem to have done so.

*** Larry says that VC and buyout fund profits are different. And not just because very few of the former actually make a profit anymore…

*** Finally, one last reminder for those who have not yet participated in the ACG/Thomson DealMakers Survey. It asks you – the experts – about the current and projected dealmaking environment. You’ll be first to see the results via PE Week Wire, so I encourage you to participate. Here is the link. It should take approximately five minutes to complete.

Top Three

Bain Capital has agreed to acquire Guitar Center Inc. (Nasdaq: GTRC), a Westlake Village, Calif.-based retailer of guitars, amplifiers, percussion instruments, keyboards and pro-audio and recording equipment. The total deal is valued at approximately $2.1 billion, with Guitar Center stockholders to receive $63 per share in cash (26% premium over yesterday’s closing price). Goldman Sachs ran the auction, while Peter J. Solomon Co. advised Guitar Center.

U-Systems Inc., a San Jose, Calif.-based maker of automated breast ultrasound systems, has raised $16.5 million in fifth-round funding. Siemens Venture Capital led the deal, and was joined by President International Development Corp., iD Innovation, China Investment & Development Co. and TSC Bioventures. Return backers included Sycamore Venture Capital, MDS Capital, Radius Ventures, Kinetic Capital and United Investments and new investors. U-Systems previously raised $42 million, including a $25.6 million Series D round in 2003 at a $46 million post-money valuation.

Data Domain Inc., a Santa Clara, Calif.-based provider of storage appliances for disk-based backup and network-based disaster recovery, raised $110.85 million in its IPO. It priced 7.39 million common shares at $15 per share ($11.50-$13.50 range), for an initial valuation of around $777 million. It will trade on the Nasdaq under ticker symbol DDUP, while Goldman Sachs and Morgan Stanley served as co-lead underwriters. Data Domain had raised around $41 million in VC funding since 2002, from firms like Greylock Partners (30.3% pre-IPO stake), New Enterprise Associates (28.9%), Sutter Hill Ventures (16.8%) and HRJ Capital.

VC Deals

PregLem, a Geneva, Switzerland-based drug company focused on benign gynecological conditions and infertility, has raised CHF 32 million ($26m) in Series A funding. Sofinnova Partners led the deal, and was joined by NeoMed Management and MVM Life Science Partners. PregLem also announced that it has signed a licensing agreement with Ipsen (Euronext: IPN), under which Ipsen will grant PregLem worldwide development and commercialization rights to certain Ipsen compounds, for use in reproductive medicine only.

Serentis Inc., a UK drug startup formed by former Arakis Ltd. executives, has raised $20.47 million in Series A funding, according to a regulatory filing. Backers include Novo AS, MVM Life Science Partners and Apposite Capital.

Coradiant Inc., a Poway, Calif.-based provider of real-user monitoring equipment for data center applications, has raised $15 million in Series E funding. Mesirow Financial Private Equity led the deal, and was joined by return backers Desjardins, DCM, GrandBanks Capital and Miramar Venture Partners. Coradiant has raised around $55 million in total VC funding since 2000.

Intacct Corp., a San Jose, Calif.-based provider of on-demand financial applications, has raised $14 million in new VC funding. Sigma Partners and Sutter Hill Ventures co-led the deal, and were joined by return backer Emergence Capital Partners. Intacct previously raised around $56 million from Emergence, JK&B Capital and Hummer Winblad Venture Partners.

Archive Systems Inc., a Fairfield, N.J.-based provider of document process automation solutions, has raised $11.5 million in Series B funding. Carlyle Venture Partners led the deal, and was joined by return backers Edison Venture Fund and NJTC Venture Fund.

Cellutions Inc., a Duluth, Ga.-based developer of medical devices to treat cellulite, has raised $7 million in Series B funding at a $23.5 million post-money valuation, according to VentureWire. Versant Ventures led the deal, and was joined by return backers Accuitive Medical Ventures, Carlyle Venture Partners and SV Life Sciences.

Wonga, a UK-based online service for same-day personal debt management, has raised $6 million in first-round funding from Balderton Capital (f.k.a. Benchmark Capital Europe).

Avalon Healthcare Holdings Inc., a Tampa, Fla.-based provider of high-deductible consumer-directed health plans in Florida, has raised $3.7 million. Manning & Napier Advisors led the deal with a $2.3 million investment, and were joined by return backers like Inter-Atlantic Group.

Neopolitan Networks, a Palo Alto, Calif.-based Ethernet network service provider, has raised $3.17 million in Series A funding. Topspin Partners and OakStone Ventures co-led the deal.

Sugar Publishing, a San Francisco-based blog publisher, has raised an undisclosed amount of second-round funding, according to TechCrunch. NBC Universal led the deal, with return backer Sequoia Capital also participating. Sequoia invested an initial $5 million last fall.

Trackvia, a Lakewood, Colo.–based provider of an online database application for managing and sharing business-critical data, has raised an undisclosed amount of first-round funding from Flywheel Ventures.

Buyout Deals

Atlantic Street Capital Management has acquired Ace Expediters Inc. (Ace), an Orlando, Fla.-based logistics management company.Ace provides dedicated route delivery solutions and other third-party logistics services to a variety of customers, particularly retailers. No financial terms were disclosed.

American Capital Strategies Ltd. has acquired TriVIN Inc., a Groton, Conn.–based provider of title management services to automobile lenders and electronic vehicle registration services to automobile dealers. American Capital provided $106 million in equity and debt, while TriVIN management contributed an undisclosed amount of equity.

ARC International has retained Morgan Joseph & Co. to sell crystal and dinnerware maker Mikasa Inc., according to The offering is currently in a pre-marketing phase, with books expected to be sent to financial sponsors within weeks.

Bain Capital has agreed to acquire German yacht builder Bavaria Yachtbau GmbH. No financial terms were disclosed for the deal, which is expected to close on July 31.

Carousel Capital has acquired an undisclosed stake in Jameson Corp., a Clover, S.C.-based provider of tools and equipment for utility workers and the military. Leveraged financing was provided by CapitalSource and Roynat Capital.

RFE Investment Partners has acquired Metal Systems Inc., a Chattanooga, Tenn.-based provider of custom metal enclosures and operating centers that protect low, medium and high voltage electrical equipment. No financial terms were disclosed, except that NewStar Financial provided senior debt financing.

MITY Enterprises Inc. (Nasdaq: MITY) shareholders have approved a $21.50 per share buyout by Sorenson Capital Partners and Peterson Partners. MITY makes institutional furniture.

PE-Backed IPOs

AuthenTec Inc., a Melbourne, Fla.-based provider of fingerprint sensors, raised $82.5 million in its IPO. It priced 7.5 million common shares at $11 per share ($9-$11 range), for an initial valuation of approximately $286 million. It will trade on the Nasdaq under ticker symbol AUTH, while Lehman Brothers served as lead underwriter. It had raised $71 million since 1999, from firms like Sierra Ventures (20.8% pre-IPO stake), Harris Corp. (18.7%), Carlyle Venture Partners (12.8%), Advantage Capital Partners (8.6%), Newlight Associates, TI Ventures, Knickerbocker LLC, Bencas Capital and Stonehenge Capital.

Comscore Inc., a Reston, Va.-based provider of online consumer behavior analysis, raised $82.5 million in its IPO. The company priced five million common shares at $16.50 per share ($14-$16 range), for an initial valuation of around $452 million. Comscore will trade on the Nasdaq under ticker symbol SCOR, while Credit Suisse and Deutsche Bank Securities served as co-lead underwriters. It had raised over $92 million in total VC funding since its 1999 inception, from firms like Accel Partners (26.1% pre-IPO stake), JPMorgan Partners (11.1%), Institutional Venture Partners (9.7%), Lehman Brothers (7.7%), Adams Street Partners (7.5%), Topspin Partners (5.2%), Flatiron Partners, vSpring Capital, Devine InterVentures and Rembrandt Venture Partners.

Spreadtrum Communications Inc., a Shanghai-based fabless maker of wireless chipsets, raised $124.6 million in its IPO. It priced over 8.9 million American depository shares at $14 per share ($11-$13 range). It will trade on the Nasdaq under ticker symbol SPRD, while Morgan Stanley and Lehman Brothers served as co-led underwriters. Shareholders include New Enterprise Associates (24.24% pre-IPO stake), Fortune Venture Group (11.61%) and Pacific Venture Partners (7.7%).

PE Exits

Basell has agreed to acquire Salt Lake City-based chemicals company Huntsman Corp. (NYSE: HUN) for $5.6 billion in cash. The total transaction value is $9.6 billion, including assumed debt. The Huntsman family and MatlinPatterson Global Advisors are Huntsman’s majority shareholders.

Firms & Funds

Falconhead Capital has closed its second fund with $290 million, including a discretionary co-investment fund with $35 million. The New York-based firm focuses on mid-market private equity opportunities in the consumer, leisure and lifestyle sectors.

The Colorado Public Employees’ Retirement Association has committed $200 million to Warburg Pincus’ tenth fund, which is targeting $12 billion.

Human Resources

Eric Schwartz reportedly will step down as co-head of asset management at Goldman Sachs, after 23 years with the firm. Hill become a senior director, while fellow co-head Peter Kraus will remain in his position.

Don Drakeman and Rudi Pauwels have joined London-based Advent Venture Partners as venture partners on the firm’s life sciences team. Drakeman previously founded both Medarex Inc. and Genmab AS, while Pauwels founded such companies as Tibotec, Virco and Galapagos.

Steve Nietupski has joined Alvarez & Marsal as a New York-based managing director in the firm’s transaction advisory group. He previously was with PricewaterhouseCoopers’ transaction services practice.

Transportation Resource Partners has promoted David Mitchell to managing director. He joined the firm in 2002 as a principal.

Philippe Bouissou has joined Silicon Valley consultancy Milestone Group Inc. as a managing partner, focused on emerging growth companies. He previously was a managing director with Astra Venture Partners and, before that, a general partner with both Ventech and Allegis Capital.