peHUB Wire: Friday, May 1, 2009

In the past 48 hours, I’ve received more than a dozen variations of this email from Randy: “You wrote last year that TPG’s investment in Washington Mutual was the worst private equity deal ever. Does Cerberus’ investment in Chrysler now take the title?”

What I find so interesting about the question is that I was first asked it during an NPR interview two years ago (just as the deal was becoming official). The phrasing of that query was more speculative, of course, but I’ll answer now as I answered then (save for different tensing): No, it’s not the worst private equity deal ever. It may, however, be the one that exhibited the most hubris.

Before continuing, let me stipulate that Cerberus/Chrysler may indeed have been the largest money suck in PE history. But we just don’t know, because (a) Cerberus’ out-of-pocket has never been disclosed, and (b) The fate of Chrysler Financial is not yet sealed. In other words, this question has to be answered qualitatively rather than quantitatively.

In general, there are two types of mega-buyouts: Buyouts of strong companies that the PE sponsor plans to make stronger, and buyouts of weak companies that the PE sponsor is charged with saving. Chrysler was clearly in that latter category. In fact, it was such an albatross around Daimler’s neck, that (from a pure market cap perspective) it essentially paid Cerberus to take the majority stake of its hands. This is the Manny Ramirez to the Dodgers scenario, where the Red Sox paid his contract through all of last season, just to be rid of him.

In other words, Chrysler was dying long before Cerberus showed up. Moreover, the buyout occurred before the economy turned sour, which has led to struggles for even the heartiest of automakers (as opposed to TPG/WaMu, which occurred after things had turned to pot).

I’m not suggesting that Cerberus did an admirable job, or that it is blameless. It did not, and it is not. And Cerberus was certainly tone-deaf to think it could buy such an iconic American company without having to come out from its self-confined shadows.

But this was a turnaround attempt from day one, and an extreme longshot at that (if it was obvious to me during that NPR interview, it must have been obvious to Cerberus). I also don’t see it as having much of a sobering effect on the industry at large, since it was always such an outlier (as opposed to WaMu, which was a type of deal most big firms were either doing or thinking about doing).

So feel free to send me emails in CAPS about how I’m letting Feinberg and company off the hook, but I simply see this as a very bad private equity deal. Not the worst one.

***Speaking of Bankruptcies, (this is Erin writing) Sun Capital’s Mark IV filed for Chapter 11 today, as predicted. Just for some additional details, Sun had already marked the auto supply company down to zero and told investors it didn’t expect to recover any of its investment (unlike with Kellwood, another large investment it has been marked down to zero.) Sun Capital’s fourth fund put up 30% of the $135 million equity investment in Mark IV; fund five covered the remaining 70%. The company has already lined up DIP financing from JP Morgan. I’m curious to see if Sun Capital will attempt to ga! in control of the company on the other side of bankruptcy, as it has with two of its recent Chapter 11’s, Fluid Routing and Big 10 Tire. The difference here is that Mark IV is the firm’s largest bankruptcy, equity-wise. Indalex, with a $100 million equity check, is number two.

***Dan is at the 2009 Nantucket Conference, where he’ll be liveblogging a keynote speech from Rich Miner, of the newly-formed Google Ventures. Tune in here at 10:45 ET to follow along and comment on his running commentary.

***Shameless Promotion: Venture Capital Journal has a new Webinar in the works: Raising a VC Fund in a Bear Market. It’s a 90-minute program designed to show you how to get your first or second venture fund off the ground this year. Register by May 1 and receive a complimentary emerging manager program. Click here for more info and to register.

Top Three

Sun Capital Partners portfolio company Mark IV Industries has filed for Chapter 11 bankruptcy protection. The company has debt of more than $1 billion and assets up to $500 million.

PhotoThera Inc., a Carlsbad, Calif.-based developer of transcranial laser therapy for the treatment of acute ischemic stroke, has raised $50 million in Series D funding led by Warburg Pincus.

U.S. Shipping Partners, an oil transportation services business backed by Sterling Partners, has filed for Chapter 11 Bankruptcy Protection.

VC Deals

FreeWheel, a San Mateo, Calif.-based provider of monetization rights management solutions for video content owners and publishers, has raised $12 million in Series C funding. Foundation Capital led the round, and was joined by return backer Battery Ventures.

Fring, a mobile Internet community and communication service, completed its third round of funding. All previous Fring investors participated in this round including U.S. based North Bridge Venture Partners, Pitango Venture Capital, Veritas Venture Partners and VenFin Limited.

Nittany Polymedics, a polymer medical and dental product maker, has received a $750,000 investment from Life Sciences Greenhouse of Central Pennsylvania, a seed and pre-seed stage investor in emerging companies.

Arteriocyte, a commercial stage biotechnology company based in Cleveland, Ohio, has recieved $4.99 million from Ohio Third Frontier Commission’s Research Commercialization Program to expand clinical applications for its products. The company has received venture backing from DW Healthcare Partners.

Buyout Deals

Alcoa Inc agreed to sell its wire harness and electrical distribution business to Platinum Equity, a California-based private equity group. Terms of the sale were not disclosed.

Warburg Pincus is selling Archimedes Pharma, a Britian-based firm with a promising treatment for sudden bouts of pain in cancer sufferers, Reuters reported. Archimedes Pharma had sales of just 20.4 million pounds ($30.3 million) in 2008. Warburg Pincus has invested more than $64 million in the company since 2005.

Two bidders remain in the auction for the waste management unit of Essent Milieu, a Dutch utility company. BC Partners and a consortium including RREEF Alternative Investments has dropped out.

ComVest Investment Partners III, a private equity firm based in Sunrise, Fla., has entered into a merger agreement with NationsHealth, a medical products and services company, for $0.12 per share in cash. ComVest will make an additional $5.0 million investment in NationsHealth at closing.

Bruno’s Supermarket, a bankrupt company previously backed by Lone Star Funds, has signed an agreement to sell 31 stores to an affiliate of C&S Wholesale Grocers for $45.8 million. Bidders for the assets included Gordon Brothers Group, Hilco Merchant Resources LLC and a joint venture made up of liquidators Great American Group, Tiger Capital, SB Capital and Hudson Capital Partners.

Walt Disney Co. has purchased a 30% stake in Providence Equity Partners invested $100 million in the company for a 10% stake. Other holders include NBC, News Corp’s Fox and Disney’s ABC.

PE-Backed M&A

Sun Capital Partners, a turnaround buyout shop located in Boca Raton, Fla., has through portfolio company Nur Die Group, acquired the assets of Vatter GmbH, a Garman hosiery company and supplier to Nur Die Group.

PE Exits

China Zhongwang Holdings priced its initial public offering at the lower end of an indicated range, according to a term sheet obtained by Reuters on Thursday, raising $1.3 billion in the world’s biggest IPO so far this year. Shareholders include Olympus Capital Holdings Asia.

NetXen, an Ethernet card maker, has sold to QLogic for $21 million. The company, based in California, had raised venture capital from Accel Partners, Benchmark Capital, DAG Ventures and Integral Capital Partners.

Firms & Funds

Battery Ventures’ ninth fund will be the same size as its current fund, a $750 million core fund with a $250 million sidecar. The fund will include longtime partner Tom Crotty, who will exit the firm for its tenth fund.

Human Resources

Terry McGuire of Polaris Ventures has been elected chairman of the board of the National Venture Capital Association. The NVCA also named six new members to its board: Michael Elliott, Noro-Moseley Partners; Michael Greeley, Flybridge Capital Partners; Josh Green, Mohr, Davidow Ventures; James Marver, VantagePoint Ventur! e Partners; Jason Mendelson, Foundry Group; and Sherrill Neff, Quaker BioVentures. Additionally, Kate Mitchell of Scale Venture Partners was named NVCA Chairwoman elect for 2010-11.