PE Week Wire, Dec. 1, 2006

The rain is falling, the dollar is sliding and I’ve got to head downstairs to moderate an LP panel at the Yale SOM Private Equity Conference. In other words, it’s time for some Friday Feedback.

First up are some responses to Tuesday’s column about the massive fees collected as part of the HCA buyout. Tom writes: “Why do you fall victim to the nonsense that private equity firms own these companies. If I am not mistaken, the LPs ultimately own these companies, and the GPs own a measly 1-5%. The GPs are supposed to work for the LPs, just like public company CEOs work for their shareholders. It seems like Dennis Kozlowski’s behavior at Tyco is more similar to KKR and Bain’s fee gluttony than dissimilar.”

AS writes: “As long as fee income provisions weigh in the GP’s favor, we’ll continue to see these transaction and management fees built into deals. I doubt that fee income provisions are ever the deciding factor for LPs, but they should at least consider them, and give credit to the fund managers who share fee income fairly. Most LP’s probably think the effect is nominal, but if the GP has an incentive to take too much out of the company too soon, the effect can be more pronounced than the LP would initially expect.” Anonymous LP adds: “I do not believe the LPs deserve any sympathy whatsoever. The level of LP apathy at negotiating terms in fund documents is incredibly high – the few times I have tried to mobilize people on a meaningful issue, such as fee offsets, the prevailing response is an apathetic ‘it’s the market’ or ‘we’re OK with it as is.’ Simply put, until the LP community takes a stand on fees, buyout firms can and will continue to charge high deal fees.”

Karl writes: “I share your observations about the appropriateness of fee-taking by those charged with responsibility for creating shareholder value. I am sure that the rationale is that the deal sponsors are delivering ‘enough’ return to other constituents–demonstrated by the large appetite of those other constituents to participate… Probably the biggest concern I have with all of the buyout and hedge fund activity is that so many of our ‘best and brightest’ resources are being devoted to an activity which doesn’t create any long-term value for anybody other than the engineers of the activity. Don’t think it bodes well for the United States in the world economy on a longer term basis. Distinguish this from the role that the venture capital industry has played in making the United States the world leader in innovation.”

Finally, Michael adds: “How do the costs of being public compare to the $15 million annual management fee? We can officially check that off the list as not a real reason now, right?”

*** I’ve gotten a bunch of emails on the 4th Annual Internship Rodeo, and am still looking for a few more firms to participate. But to answer the two most common questions: (1) I will take care of all the MBA Forum access code issues this weekend. Again, apologies for the delay. (2) Please do not send me resumes if you are an MBA. Save them for the firms, once the listings post next week.

*** Next we have a feedback on yesterday’s column about prospective newspaper buyouts. An LBO pro writes: “Your points regarding newspapers are on the money. Charlie is right that there are papers earning at or above 20% operating margins, but they tend to be community (suburban or rural focused) papers that serve very targeted customer base with local content — not urban focused franchises as you showed with the NYT. As you state, the Internet has already hampered the Advertising picture at the urban papers and to argue otherwise is brain-dead and foolish… The vanity element is best compared (as you did) to ownership of sport franchise – the reality of the operating elements of the 2 businesses are similar and different. The urban newspapers are operating in a Unionized atmosphere and sports Franchises have similar union based employees these days – albeit at a ! much different price point. However minor league franchises are often subsidized (player costs) by the parent organization such as occurs with MLB.”

MR writes: “I was a journalist and I think the biggest problems facing newsrooms is the general disconnect most reporters have (outside the PE Week graces, of course) with the ‘real business world.’ Newspapers, although a true public service, are no less real businesses than Staples or IBM. The goal, simply, is to make money (and historically a lot of money). But many journalists I know take a holier-than-thou approach to their jobs and refuse to believe that they should be treated as regular employees.”

Finally, this comes via the anonymous tip button: “Dan, you personify the word ‘vanity.’ You constantly namedrop and make sure everyone knows what cable TV show you’ve been on. I’m sure your Mom is very proud, but we don’t really care. You offer personal anecdotes under the guise of connecting with your readership, yet you overlook the fact that no one cares what kind of car you drive or what team you root for… It undermines your credibility regarding the deeply intellectual topic that you are assigned… to cover. Most especially, you offer unabashed opinions on topics you have barely researched and opine from on high about the tragic errors that are being committed by the buyout firms around you. For example, I am sure LPs are greatly comforted that you did a Yahoo Finance search on profit margins for newspaper companies — that effort was likely a whole lot more insight-producing than the hundreds of hours that the legions of high-intellect professionals at KKR, Blacks! tone, Bain and others could possible come up with as they study the industry… I know you won’t print this.”

Have a good weekend…

New at

• 5 Questions with newspaper market analyst Ken Doctor

• Why Asthmatx didn’t mind pulling its IPO

• NVCA president Mark Heesen on why recommended regulations from the Committee on Capital Markets fall far short of meaningful progress.

Top Three

Asia Capital Holding, pan-Asian reinsurance startup based in Singapore, has raised $620 million from 3i Group and Khazanah Nasional Berhad (Malaysian government investment arm). 3i contributed approximately $200 million, while Morgan Stanley served as ACH’s exclusive placement agent.

BitTorrent, a San Francisco-based file-sharing company, announced that it has raised $20 million in second-round funding. Accel Partners led the deal, with return backer DCM also participating. reported earlier this week that the round would be $25 million, and stands by that reporting. We are told that the extra $5 million is being left open for some additional players who have expressed interest.

KKR and Texas Pacific Group are considering what could be a $100 billion buyout bid for retailer Home Depot, according to multiple press reports. Home Depot has a market cap of almost $80 billion, plus around $8 billion in debt.

VC Deals

Xanthus Pharmaceuticals Inc., a Cambridge, Mass.-based oncology drug development company, has raised $25 million in additional Series B funding. Return backers include HealthCare Ventures, GeneChem, GIMV, Hambrecht & Quist Capital Management, Still River Fund, Neomed, Kestrel Ventures, CDP Capital, CDIB BioScience Ventures and Yasuda. Xanthus has now raised $88 million in total VC funding.

BoneSupport AB, a Lund, Sweden-based maker of injectable ceramic bone substitutes, has raised around $19.79 million from HealthCap and NBGI Ventures.

OpenSpan Inc., an Atlanta-based provider of desktop surface integration software, has raised $8 million in first-round funding co-led by Sigma Partners and Matrix Partners.

Meraki Networks, a Mountain View, Calif.-based developer of wireless mesh hardware and software, has raised an undisclosed amount of bridge funding from Google and undisclosed angels, according to GigaOm.

IDG Venture Capital is in talks with News Corp. to help bring MySpace to China, according to The Wall Street Journal.

Buyout Deals

Fenway Partners has agreed to acquire tour and charter-bus operator Coach America from Kohlberg & Co. No financial terms were disclosed for the deal, which is expected to close early next year.

Lone Star Funds has increased the amount it will pay to buy Lone Star Steakhouse & Saloon Inc. (Nasdaq: STAR) from $27.10 per share to $27.35 per share.

Tennenbaum Capital Partners has completed its acquisition of Radnor Holdings Corp., a Radnor, Pa.–based provider of foodservice products like expandable polystyrene. The company will be renamed WinCup Inc.

Claire’s Stores Inc. (NYSE: CLE) has retained Goldman Sachs to help find a private equity buyer, according to Bloomberg. The Pembroke Pines, Fla.-based company is a costume jewelry retailer.

PE-Backed IPOs

Catalytic Solutions Inc., an Oxnard, Calif.-based maker of catalytic converter products, has completed an IPO on the AIM. It will trade under ticker symbol CTS, and will have a market cap of around Gbp78.5 million. Catalytic Solutions has raised over $82 million in total VC funding, from firms like Cycad Group, Ngen, Cinergy Ventures, GE Power Systems, RockPort Capital Partners, JPMorgan Partners, EnerTech Capital, BASF Venture Capital, Advent International, Kirlan Venture Capital, Honda Motor Co., SAM Private Equity and Presidio Venture Partners.

Affymax Inc., a Palo Alto, Calif.-based drug development company, has set its proposed IPO terms to 3.5 million common shares being offered at between $22 and $24 per share. It plans to trade on the Nasdaq under ticker symbol AFFY, with Morgan Stanley serving as lead underwriter. Affymax has raised around $160 million in VC funding since its 2001 inception, from firms like Apax Partners, MPM Capital, Sprout Group, Jafco, Bear Stearns Health Innoventures and Bessemer Venture Partners.

PE Exits

NDS Group (Nasdaq: NNDS) reportedly has agreed to acquire Jungo Ltd., a San Jose, Calif.-based provider of residential gateway software and technology platforms, for $100 million. Jungo has raised around $14.5 million in VC funding from firms like Cipio Partners, Intel Capital, Partech International and TeleSoft Partners.

Firms & Funds

Zone Ventures of Los Angeles is raising up to $200 million for its third fund, according to a regulatory filing.

Castile Ventures of Waltham, Mass. has secured $63.6 million in capital commitments for its $130 million-targeted third fund, according to a regulatory filing. Limited partners include MassPRIM, The City of Philadelphia Board of Pensions & Retirement and the Illinois State Board of Investment.

Human Resources

Jim McLean has agreed to join 3i Group as a Menlo Park, Calif.-based partner who will lead the firm’s U.S. IT practice. He previously was a partner with ComVentures, and also has worked at both Accel Partners and Highland Capital Partners.

Kneeland Youngblood, co-founder and managing partner of Pharos Capital Group, has joined the board of directors at Gap Inc. (NYSE: GPS).