News digest, April 23, 2007

Life sciences remains hot investment sector

Health care related venture capital deals rose in the first quarter of 2007, according to the VentureOne Ernst & Young Venture Capital Report. The report shows that VCs invested $2.8 billion in 167 health care deals in the first three months of the year, compared to $1.74 billion invested in 152 deals in the same period last year.

Deal activity in the IT sector, however, fell flat as VCs invested $3.1 billion in 336 deals in the quarter, compared to $3.7 billion invested in 364 deals in the first quarter last year.

The VentureOne survey is due to come out on Monday.

On Tuesday, PricewaterhouseCoopers, the National Venture Capital Association and Thomson Financial (publisher of PE Week) are expected to release the latest MoneyTree Report, a quarterly survey of VC investment activity in the United States. Just to recap last year’s findings, VCs invested $25.5 billion in 3,416 deals, which marked the highest level of venture investment activity since 2001, according to MoneyTree.

CalPERS to cast ‘No’ vote on Clear Channel deal

The California Public Employees’ Retirement System says that it plans to vote against the proposed $19 billion buyout of Clear Channel Communications by Bain Capital and Thomas H. Lee Partners.

CalPERS becomes the latest Clear Channel shareholder to publicly oppose the deal, following Fidelity Investments, Highfields Capital Management and T. Rowe Price. CalPERS holds just under 1% of Clear Channel stock. Separately, Bain and T.H. Lee late last week raised their offer for Clear Channel from $37.60 per share to $39 per share (or from about $19 billion to $19.7 billion). The firms have reportedly become concerned that they could fall short in the shareholder vote. Early indications, however, are that the increase still might not sway enough opposition shareholders.

Clear Channel, which operates 1,100 radio stations, announced its sale to Bain and T.H. Lee in November. The deal comes at a time when the radio advertising market is weak as more and more listeners are migrating to digital music, Internet media and satellite radio.

Predicting future performance

Every private equity firm brags in public about how its funds are top-quartile, but it’s often a different story once they get behind closed doors with prospective limited partners. Some firms can legitimately maintain their public face, but the vast majority plead for why things will be different the next time around.

Unfortunately, it appears that past performance is a fairly strong indicator of future performance. Private Equity Intelligence recently completed a study of 3,400 funds managed by 1,159 firms, and found that GPs managing a top-quartile fund has a 43.3% probability of having its next fund also land in the top quartile. The top-quartile funds have just a 10.8% chance that its follow-on will be bottom-quartile.

Conversely, GPs managing bottom-quartile funds have a 35.1% chance of remaining in the basement. Moreover, GPs managing bottom-quartile funds have a 59.5% chance of having their next fund under-perform median benchmarks, with just a 16.1% likelihood that it will reach top-quartile.

CEO salaries jump up at VC-backed companies

Compensation for CEOs at venture-backed tech companies rose by nearly $30,000 this year, more than in any other sector, according a recent semi-annual executive compensation survey by Dow Jones CompensationPro.

More than 700 executives at U.S. venture-backed companies responded to the survey, which found that tech CEOs earn a median $289,000 this year, up from $260,000 a year ago.

Total compensation for CEOs of VC-backed health-care companies also climbed to a median $300,000, compared to $284,000 a year ago. Total CEO compensation increased somewhat for the other industry tracked, products and services, to $260,000, compared to about $250,000 the year before.

Google to snap up DoubleClick

Google Inc. (Nasdaq: GOOG) has agreed to acquire online marketing company DoubleClick Inc. from Hellman & Friedman and JMI Equity for $3.1 billion in cash. H&F led a $1.1 billion buyout of DoubleClick in 2005, with JMI Equity participating as a minority investor.

However, the deal provides a better return than what appears on the surface.

For starters, following the acquisition by H&F and JMI Equity, DoubleClick refocused its business strategy as Dallas-based Alliance Data Systems Inc. bought DoubleClick’s email marketing service for $90 million in early 2006 and it also bought the company’s Abacus data management unit for $435 million late last year. Both cash acquisitions allowed DoubleClick to retire much of its debt, so almost all of the $3.1 billion sale foes to H&F and JMI Equity.

In addition, The Deal reported that DoubleClick had $400 million in cash in 2005 when the private equity firms bought it two years ago, so the actual price paid was only $700 million.