PE Week Wire, Dec. 12, 2006

Later this week, the Teacher Retirement System of Texas will take up a gubernatorial request that it allocate up to $600 million for direct venture capital investments into Texas-based companies and related technology endeavors. It is an odd proposal, to be sure, but not necessarily one to be dismissed out of hand.

TRS currently makes all of its venture capital investments as a limited partner in unaffiliated venture capital funds, as do most public pension systems. For example, its upcoming alternative assets committee meeting will consider fund commitments to both Leonard Green & Associates and Providence Equity Partners. Also like most public pensions, TRS buttresses a fairly meager alternatives staff with third-party consultants (Hamilton Lane, in this case). As of August 2005, approximately 3.3% of the $93.32 billion system was invested in alternatives.

But this new proposal from Gov. Perry is an attempt to shake up the TRS model, in order to promote local economic growth. Specifically, Perry is concerned that the local venture capital community has all but dissipated in the post-bubble years, and that the result is an unfair disadvantage for Texas-based startups. And he’s right.

Texas receives the third-most venture capital of any state, but this year will receive less than 25% from in-state investors. Compare that to #2 Massachusetts with over 36% from in-state. Sure outsiders are coming in, but it’s always difficult to attract VCs from outside the 50-mile radius. The result often is that entrepreneurs are either trying to bootstrap themselves or picking up and moving to the Coasts.

“I think what we’ve seen is an over-correction since the bubble,” says Stephen Straus, a former Austin Ventures pro who currently is forming a new early-stage fund in Texas. “We’ve had almost no new funds begun since the bubble because lots of angels or would-be fund managers only got into the market in 1998 or 1999, so their only experience with the asset class is of being burned… People aren’t necessarily aware of the problem because so many bubble-era companies are kind of masking the lack of new VC-backed companies.”

The first governmental attempt to tackle the problem came two years ago, when Perry and legislators formed the Texas Emerging Technology Fund. The $200 million vehicle makes investments in three ways: Direct early-stage plays in Texas-based technology companies; Matching funds for federal grants; and an attempt to attract top academics and others with a strong history of commercialization.

So where does the new proposal come in? Perry wants TRS to allocate up to $600 million for follow-on investments for existing TETF portfolio companies/efforts. TRS would not be required to participate in any particular deal, while the portfolio company would likewise be permitted to secure funding elsewhere. Consider TRS to have “introductory rights” instead of “right of first refusal.” If TRS says yes, Perry also plans to ask other state system like UTIMCO to participate.

A legal staff memo for TRS suggests that it would have two ways to enact such a program: Either it could hire some in-house staffers to evaluate and manage the portfolio, or it could retain a third-party manager. The attorneys recommended the latter option.

As I wrote above, it is certainly an odd proposal. Critics – including newspaper editorial boards — already have said that TRS has no business doing anything beyond generating the highest possible returns. Indeed, I can’t find anything in the TRS investment mission that discusses economic development.

Others have argued that this smacks of throwing good money after bad. After all, if a company can’t get traditional VC funding in rounds B or C, maybe it doesn’t deserve the money. Moreover, might the TRS program feel pressured to do certain deals, in order to make the Governor’s original TETF program look better?

I wholeheartedly agree with both of these points, and this proposal is something I normally would take to the woodshed. And I really do want to. The problem is that the state really does have a venture capital shortage, and it would be irresponsible for the Governor to not address it.

So where does that leave my conclusion (which we really need to get to, as this is way too long)?

Truth is, I’m not certain. I don’t believe that TRS should set up this program as currently defined – in part because TRS does not have direct investing competency, and in part because local investment programs tend to have lower returns than geographically-diversified programs. I’m kind of partial to an idea of Stephen Straus, whereby the state would form a fund-of-funds dedicated to in-state managers. This might look like corporate welfare in the short-term, but could help rebuild what would become a self-sustaining VC ecosystem. Such a fund-of-funds would have to be backed by the state – not by TRS – because the state is responsible for economic development, whereas TRS is not.

Anyway, we’ll see what TRS says later this week. Looking forward to your thoughts in the meantime…

New at

The venture capital market is not approaching bubble volume, no matter what the FT headline writers say.

Alex Haislip on the hijacking of the Blueprint Ventures website, and on the Sequoia-Artis Blood Link.

Pete Tenereillo says that It’s the Platform, Stupid.

Even more listings for the Internship Rodeo (at MBA Forum).

And, as always, news and analysis updated throughout the day…

Top Three

Silver Lake Partners and Texas Pacific Group have agreed to acquire travel reservations company Sabre Holdings (NYSE: TSG) for $4.3 billion, according to The New York Times. Sabre shareholders will receive $32 per share, or a 15% premium over the company’s share price prior to news reports of an impending deal. And announcement is expected to come later today.

Marquee Inc. (f.k.a. Vvond), a Santa Clara, Calif.-based developer of software for secure on-demand access to a large movie library, has raised $15 million in Series B funding, according to a regulatory filing. Benchmark Capital was joined by return backer Greylock Partners.

Symrise AG, a German maker of flood flavorings, has priced a Euro 1.4 billion IPO in Frankfurt. It is the year’s largest IPO in Germany. EQT Partners held a 52% pre-IPO position, and now holds 20.7% of share capital (or 15.9%, if the over-allotment option is exercised in full).

VC Deals

Red 5 Studios, an Aliso Viejo, Calif.-based online game development studio, has raised $18.5 million in Series A funding co-led by Benchmark Capital and Sierra Ventures. Red 5 management includes World of Warcraft co-creators like Mark Kern., a Beijing-based online video sharing and distribution platform, has raised $12 million in venture capital funding from Sutter Hill Ventures, Farallon Capital and Chengwei Ventures. The company will officially launch on December 21.

Untangle Inc. (f.k.a. Metavize), a San Mateo, Calif.-based provider of enterprise network security and management software, has raised $10.5 million in Series A funding from firms like CMEA Ventures and Rustic Canyon Partners.

Kidaro, a provider of virtual desktop computing for the enterprise, has raised $10 million. Opus Capital led the deal, and was joined by return backers Genesis Partners and Storm Ventures. Kidaro has offices in both New York and Israel.

ClearTrip Travel Services, a Mumbai, India-based travel website operator, has raised $8 million in Series B funding, according to VentureWire. DAG Ventures led the deal, and was joined by return backer Sherpalo Ventures. No word on if existing ClearTrip shareholder Kleiner Perkins also participated.

Azimuth Systems Inc., an Acton, Mass.-based provider of Wi-Fi engineering test equipment, has raised $7.5 million in Series D funding from existing shareholders like Kodiak Venture Partners and North Bridge Venture Partners. The company has now raised around $31 million in total VC funding since its 2002 inception. In other Azimuth news, the company said that former E Ink chief Jim Iuliano will join the company as CEO.

Harmony Information Systems Inc., a Reston, Va.-based provider of software products and consulting services for the human services industry, has raised $7.5 million in Series A funding, according to a regulatory filing. Backers include JMI Equity and Updata Partners.

Oversi, an Israel-based provider of P2P content delivery solutions, has raised $6 million in second-round funding. Carmel Ventures led the deal, and was joined by return backers StageOne Ventures, Lab-One Innovations and TempoPark Fund.

Insider Guides Inc., a New Hope, Pa.-based social networking startup, has raised $4.1 million in Series A funding led by U.S. Venture Partners, according to a regulatory filing.

AlleWin Technologies Inc., an Ontario, Canada-based developer of technologies for enhancing wireless network performance, has raised $750,000 in Series A funding, according to a regulatory filing. Backers include Rho Canada Ventures and Rho Investment Partners Canada.

BeInSync, a Tel Aviv, Israel-based P2P file synchronization software company, has raised an undisclosed amount of new venture capital funding. Alta Berkeley led the deal, and was joined by return backers Eurofund and Aviv Ventures.

mPortico, an Herzliya, Israel-based mobile media company, has raised an undisclosed amount of venture capital funding from Jerusalem Capital and Gmul Investments.

Accelergy Corp., a Palo Alto, Calif.-based R&D company focused on high-throughput solutions for accelerated discovery, development and commercialization of advanced catalytic materials, has raised $25 million in Series B funding. Goldman Sachs led the round, and was joined by Sequoia Capital China, Lux Capital and return backers Nth Power, Technology Partners, Mobius Venture Capital and Advent International. [PE Week Wire reported on this deal yesterday, but without the dollar amount].

Buyout Deals

AIG Global Investment Group has agreed to purchase six port terminals for DP World of Dubai. No financial terms were disclosed, although the asking price was reported to have been around $700 million. DP World acquired the assets earlier this year, via its $6.8 billion purchase of UK-based Peninsular & Oriental Steam Navigation Company, but was convinced to sell after the idea of a Dubai-based company owning U.S. ports sparked a political furor in the States.

Macquarie Bank and Texas Pacific Group are expected to bid up to US$8.4 billion for Australian airline company Qantas Airways, according to The Wall Street Journal.

Doughty Hanson & Co. has agreed to acquire Spanish bus and bus station operator Avanza. No financial terms were disclosed for the deal, which is expected to close next month. This is Doughty Hanson’s first private equity investment in Spain.

Harrah’s Entertainment Inc. reportedly has received a sweetened buyout bid from Apollo Management and Texas Pacific Group. The revised offer of $87 per share (from $83.50), would value the total deal at $15.5 billion. Harrah’s is expected to formally consider the offer this week.

Franklin Electric Co. Inc. (Nasdaq: FELE) has sold its Bluffton, Ind.-based Engineered Motor Products Division to CapitalWorks LLC of Cleveland. No financial terms were disclosed. Evarts Capital advised Franklin Electric on the deal.

DLJ Merchant Banking Partners has acquired Total Safety U.S. Inc. from H.I.G. Capital Partners. No financial terms were disclosed, although LBOWire puts the total at around $200 million (including $70 million in equity). Total Safety is a Houston, Texas–based outsourced provider of mission-critical safety services and equipment to the refining, petrochemical, upstream and general industrial markets. It has approximately $110! million in annual sales.

WestView Capital Partners has sponsored a recapitalization of TriTech Software Systems, a San Diego-based provider of public safety software solutions. No financial terms were disclosed. TriTech founder and CEO Chris Maloney will continue to be majority shareholder, while WestView will hold a minority ownership position.

Friend Skoler & Co. has invested in Accessories Marketing Inc., a manufacturer and marketer of flat tire prevention and repair products. No financial terms were disclosed. Company management also participated in the equity tranche, as did senior note leader CIT. National City Equity Partners provided subordinated notes.

Thompson Street Capital Partners has agreed to acquire three electrical distributors — Connecticut Electric & Switch Manufacturing Co., Tacoma Electric Supply and Parallax Power Supply — from majority shareholder Randy Mauermann, according to LBOWire. No financial terms were disclosed.

RoundTable Healthcare Partners has completed its purchase of Bioniche Life Sciences Inc.’s 10% ownership stake in Bioniche Pharma Group Ltd. RoundTable concurrently made a further equity investment in the Company to support growth initiatives.Financial terms of the BLSI purchase and RoundTable’s incremental equity investment were not disclosed.

PE-Backed IPOs

AMC Entertainment Inc., a Kansas City-based movie theater chain, has filed for a $750 million IPO. Shareholders include JPMorgan Partners (20.78%), Apollo Management (20.78%), Bain Capital (15.09%), The Carlyle Group (15.09%) and Spectrum Equity Investors (9.76%).

Solarfun Power Holdings Co Ltd., a China-based manufacturer of photovoltaic cells and modules, has filed for a $186.3 million IPO. It plans to sell 12 million American depository shares at between $11.50 and $13.50 per share, and to trade on the Nasdaq under ticker symbol SOLF. Goldman Sachs (Asia) is serving as lead underwriter. Shareholders include Citigroup Venture Capital, Hony Capital, LC Fund III and Good Energies Investments Ltd.

PE-Backed M&A

Local Insight Media LLC, a provider of print directories and Internet-based local search services in Alaska and the Caribbean, has agreed to merge with CBD Media LLC, a publisher of the Cincinnati Bell-branded yellow pages. The deal will result in Local Insight owner Welsh, Carson, Anderson & Stowe owning a majority of the combined company, with CBD backer Spectrum Equity Investors retaining a “substantial minority stake.” No financial terms were disclosed, except that the combined company will have consolidated annual revenues of approximately $200 million.

Other Deals

I4 Commerce Inc., a Timonium, Md.-based provider of merchant payment solutions for multi-channel retailers, has secured $640 million in corporate debt financing from Citigroup. The funds will be used to support growth of the company’s consumer loan portfolio, and for working capital. I4 Commerce has raised over $130 million in VC funding from firms like Azure Capital Partners, Crosspoint Venture Partners, First Data Corp., Citigroup, GRP Partners and WGM Technology Ventures.

Firms & Funds

The Teachers’ Retirement System of Illinois has increased the private equity allocation for its $39 billion portfolio from 6% to 8 percent. It also made two fund commitments: $100 million to Providence Equity Partners VI and $50 million to J.C. Flowers II.

Kohlberg Capital Corp., a business development company affiliated with Kohlberg & Co., has priced 13.5 million common shares at $15 per share, for an IPO take of approximately $202.5 million. It will trade on the Nasdaq under ticker symbol KCAP.

Human Resources

Jonas Risberg has joined 3i Group as a Stockholm-based partner. He will focus on venture capital opportunities in the IT and communications space. He previously was a partner with InnovationsKapital, where he worked on deals for companies like NordNav AB, Silecs Oy and Kreatel AB.

Robert Druskin has been named chief operating officer of Citigroup, and will be succeeded as president of Citigroup corporate and I-banking by Michael Klein and Thomas Maheras.

Richard White, a managing director and head of private equity with Oppenheimer & Co., has taken a board seat with Lakes Entertainment Inc. (Nasdaq: LACO).