PE Week Wire: Fri., April 25, 2008

By guest columnist David M. Toll

With the pain of tax season receding, I though it would be a good time to break out some soothing tax-reduction strategies for 2008. Credit the following four tips to Stefan R. Boshkov, a partner at Nixon Peabody LLP, who has spent the last 30-odd years advising buyout firms, venture firms, hedge funds and others how to lower their tax bills.

1) Convert Your Management Fees.

How would you like to lower your tax bill, as well as that of your limited partners? Many of you already know the trick—converting management fees to carried interest. But with the clock potentially ticking on the 15 percent tax rate on carried interest now is the time to push the envelope. Simply waive as much of the management fee as you can afford to, agreeing instead to take your fee out of later partnership profits. Voila: You pay 15 percent capital gains on the fee instead of the 35 percent ordinary income rate. Your taxable LPs get a break too. They often won’t be able to deduct management fees as an expense on their tax returns; but by getting fee-reduced profits down the road, they pay less tax on those profits. One downside to the strategy is the chance that your fund never becomes profitable enough to cover your management fee. The IRS also could challenge the technique on the argument that the capital gains tax rate wasn’t meant to apply to deferred income for ! services—even if that income, as in this case, is put at risk.

2) Convert Stock Sales To Asset Sales.

Are you acquiring a company through a holding company where management intends to roll over a portion of its equity? Where possible, try to construct these transactions as asset sales using the so-called 338H10 tax election. Doing so allows the portfolio company to depreciate and amortize, over several years, the full purchase price of the company, rather than just the book value as in a stock sale. How do you do it? The trick, Boshkov said, is to set up a C corporation as a subsidiary beneath the holding company to perform the actual acquisition. The favorable tax deductions even carry over through the next transaction, making the company more valuable to the next buyer. Is the IRS on board with the approach? Boshkov points to Revenue Ruling 84-44 as proof that the strategy works.

3) Don’t Wait On Dividend Recaps.

Like capital gains, most dividends get taxed at the favorable rate of just 15 percent. But that provision in the tax code expires at the end of 2010, and many expect that a Democrat-controlled White House and Congress would let it die. That could mean the return to a 35 percent tax rate on dividends for individuals, Boshkov said. Given the prospect for a higher tax rate, it’s time to start planning ahead to complete any dividend recapitalizations before the end of 2010.

4) Lobby hard.

The industry ducked a tax bullet last year when Congress failed to pass proposed legislation that would treat carried interest as ordinary income taxed as high as 35 percent. But the proposal could be resurrected any time. In addition, local lawmakers are now getting in on the act. New York City, for example, has floated a proposal that would levy a 4 percent tax on carried interest earned by local private equity firms and hedge funds under its Unincorporated Business Tax. (The actual tax paid could be as low as 2 percent through deductions and credits.) Private equity professionals would be wise to pool resources, hire lobbyists, and take their argument for the tax-friendly status quo to lawmakers before it’s too late.

Top Three

Kleiner Perkins Caufield & Byers has hired at least one executive from Goldman Sachs to help run a growth stage cleantech fund that one source says may top out over $400 million, PE Week Wire has learned. John Doerr and new hire Al Gore have been pitching the “Green Growth” fund to limited partners. One LP who heard the duo’s pitch at a recent meeting in New York said that the proposed fund would be earmarked for both private and public investments, as well as carve-outs and spinouts in the clean energy and resource efficiency market. Get the full story at

Angelo, Gordon & Co. has filed a registration statement with the Securities and Exchange Commission for an initial public offering of Angelo, Gordon Acquisition Corp, a newly incorporated special purpose acquisition (SPAC) formed by affiliates of AG Private Equity Partners IV LP and AG Funds LP. It was created to purchase one or more operating businesses and is seeking to raise $300 million in an offering to be underwritten by J.P. Morgan Securities Inc. Angelo, Gordon Acquisition will seek to sell 30 million units for $10 each.

Cambria Pharmaceuticals Inc., a Woburn, Mass.-based biopharmaceutical company, has closed a $5.4 million series A financing. Participating investors included Biogen Idec New Ventures, CommonAngels, and a number of individual investors. In addition, Cambria Pharmaceuticals changed its name from Cambria Biosciences LLC to reflect its focus on discovering small molecules to battle neurological disorders.

VC Deals

Truphone, a U.K.-based Mobile Internet network operator, has raised £16.5 million ($32.7 million) through a series B venture capital funding. The round was led by private investors, with all of Truphone’s existing backers—Burda Digital Ventures, Eden Ventures, Independent News & Media and Wellington Partners—also participating.

SaysMe Inc, a Los Angeles-based provider of politics-based, consumer-driven television advertising, has closed a series A financing led by Intel Capital and Prime Capital. Also participating were Ashton Kutcher’s Katalyst Films, advertising pioneer Bill Apfelbaum, and other prominent angel investors. The proceeds from this funding round will be used to expand SaysMe’s product offering beyond politics and to continue development of its suite of consumer-friendly technologies.

Autoquake, a U.K.-based online retailer of used cars, has closed a £6 million ($11.8 million) second round of venture capital funding led by Highland Capital Partners in conjunction with existing investor Accel Partners. The financing is in addition to the £3 million invested by Accel Partners in the summer of 2006.

Robeco Clean Tech Private Equity II, , along with SAIL Venture Partners LP, has invested $5 million in Enerpulse Inc., developer of the fuel-efficient Pulstar pulse plug. This additional funding brings the Enerpulse “B” round to a close at $10.5 million; SAIL and Altira Group provided initial funding. The funds will be used to accelerate and globalize sales of Pulstar.

Altor Networks, a Redwood City, Calif.-based developer of virtual network security products, has secured a $6 million second round of financing led by Accel Partners and Foundation Capital. , (Nasdaq:TSCM) has made an initial $1.2 million investment in Geezeo. For that outlay it acquired about 13 percent of the Framingham, Mass.-based company, and holds an option to purchase the rest of Geezeo anytime during the next 12 months

Hydrogen Engine Center Inc., an Algona, Iowa-based developer and manufacturer of alternative fuel internal combustion engines, engine controls and power generator systems, has completed a financing commitment of up to $4 million from a private equity institutional investor. The financing was arranged through GenCap Solutions of Dallas. .

Buyout Deals

Apax Partners Worldwide LLP, a private equity group with offices in the United Kingdom, restarted negotiations to acquire a stake in Escada AG, a luxury fashion brand based in Germany. The talks are with Russian investor Rustam Aksenenko, according to Financial Times Deutschland.

JMH Capital has acquired Service Radio Rentals Inc., provider of communications equipment, and Industrial Blinds Solutions LLC, which rents steel plates used to test the safety and performance of oil pipelines, according to LBO Wire, published by Dow Jones & Co. JMH Capital declined to give financial details of the businesses or the deals, saying only that the transaction fell in the lower end of the $20 million to $100 million the firm usually pays for companies. The Lafayette, La.-based companies were owned by oil industry veteran James Baldwin, who is keeping a minority stake and staying on in an advisory role.

HitecVision has agreed to provide $120 million in equity financing to Oslo-based oil and gas company Spring Energy Norway, which is pursuing growth opportunities in both mature and immature areas on the Norwegian Continental Shelf.

PE Exits

Comptel has acquired Axiom Systems, a U.K.-based software developer focused on the broadband fulfillment mark. No financial terms were disclosed. Axiom Systems had raised around $30 million in venture capital funding from firms such as Geocapital Partners and HgCapital.

Honeywell International Inc. (NYSE: HON) has received Federal Trade Commission approval to acquire Norcross Safety Products LLC, a maker of protective equipment for the general-safety, fire-service and electrical markets, for about $1.2 billion. Norcross Safety generated revenue of about $609 million last year. It is majority-owned by Odyssey Investment Partners.

Freenet AG a German-based Internet and mobile service provider that is seeking to acquire Debitel AG from Permira, reached a deal with a consortium over financing. Deutsche Bank, JPMorgan, Lehman Brothers Holdings, Royal Bank of Scotland Group, UBS, and UniCredit have agreed to allow Freenet to take over €1 billion ($1.56 billion) in debt. Freenet seeks to purchase Debitel for €1.6 billion, including debt.

PE-Backed IPOs

New World Resources seeks to raise up to £1.1 billion ($2.2 billion) in an initial public offering in London. The IPO would be the largest in Europe so far this year. The Czech coal miner intends to use proceeds to finance growth in the Czech Republic and Poland. The company set its IPO price range at £10.75 to £13.25 per share, which puts the offering’s total value at £892 million to £1.1 billion. New World Resources is owned by RPG Industries SE, whose four shareholders include Crossroads Capital Investments and First Reserve Corp.

BlackRock Inc., a New York-based investment management firm, has raised $275 million from the initial public offering of a fund of hedge funds on the London Stock Exchange. The amount raised is well short of the $500 million target established when the IPO was registered in March. The listed fund is called BlackRock Absolute Return Strategies Ltd.

Kion a maker of forklift trucks, ruled out an IPO in 2008 and gave a guarded update on its outlook for this year due to economic uncertainty. “Growth in the first three months of this year has been promising and has exceeded the equivalent period in 2007. However, given the overall economic uncertainty, we remain vigilant,” Kion Finance Chief Nedim Cen said. Kohlberg Kravis Roberts & Co. and Goldman Sachs bought Kion from Linde AG for $5.1 billion in a leveraged buyout in 2006.

PE-Backed M&A

Marathon Asset Management LLC has completed three add-on acquisitions for Contech LLC, a supplier of highly engineered, geometrically complex, lightweight cast component solutions for the automotive and commercial truck markets. Contech acquired certain business lines and assets of three companies in bankruptcy: Amcan Castings Ltd., Toora Poland SA and Lunt Manufacturing Co.

Morgan Stanley Private Equity has signed a definitive agreement to acquire a 60 percent share in Learning Care Group, which is the U.S. unit of A.B.C. Learning Centres. The transaction values the for-profit child care provider at $700 million.

Seriatim Ventures Inc. has signed a letter of intent to acquire Mountain Power Inc., a privately owned producer of large-capacity lithium ion battery modules. The transaction is subject to completion of satisfactory due diligence and receipt of regulatory and shareholder approvals. The transaction is expected to close no later than Nov. 15, 2008.

Satellier Inc a Chicago-based provider of work share solutions for the architecture, construction and building owner markets, has acquired Screampoint, a developer of “5D” digital city and digital building systems. No financial terms were disclosed. Satellier last fall raised $10.38 million in Series A funding led by Sequoia Capital.

Firms & Funds

Hercules Technology Growth Capital Inc. (Nasdaq: HTGC), a specialty finance company that provides venture debt and equity to venture capital-backed and private equity-backed technology and life science companies, is expecting to realize a potential gain from the proposed $720 million acquisition of Sirtris Pharmaceuticals by GlaxoSmithKline. Hercules plans to provide details at its earnings call on May 8, 2008.

Hudson Ferry Capital LLC, a small buyout firm founded two years ago by some Liberty Partners veterans, including co-founder Paul Huston, has temporarily stopped raising its debut fund as it focuses on closing a couple of deals, according to LBO Wire, published by Dow Jones & Co. The New York firm held a first close of $40 million in November on its first fund, which it started raising in late 2006 with a $400 million target.

Human Resources

Lehman Brothers Holdings Inc a New York-based investment bank, has named Makram Azar to the newly created position of global head of sovereign wealth funds. He previously headed consumer, retail and media for Europe, Middle East and Africa for the firm. Azar will work in Dubai.

Axela Inc., a Toronto-based innovator of protein interaction technology, has named Michael J. Treble chairman. Treble has extensive management and board experience in the diagnostic, pharmaceutical and research arenas, and a successful track record of taking venture-funded companies from concept to commercialization. Axela’s major investor is VenGrowth Private Equity Partners Inc.

Paine & Partners LLC, a San Francisco and New York-based private equity firm, has named Bjarni Armannsson and Frank O. Reite as operating directors. Armannsson and Reite will focus on opportunities in the Nordic region, with an emphasis on the seafood, energy and financial services industries. Armannsson works in Iceland, Reite in Norway.

Willkie Farr & Gallagher LLP., a New York-based law firm, has formed an Office of the Chairman, to be led by Chairman Jack H. Nusbaum. The Office of the Chairman will include two newly appointed Vice Chairmen—New York-based Corporate Partners Thomas M. Cerabino and Steven J. Gartner. Cerabino is co-chair of the M&A practice, and Gartner is co-chair of the private equity practice.

Industry Ventures LLC named Ken Wallace as a senior associate, focused on both secondary and direct investment opportunities. Wallace will support deal sourcing and due diligence efforts, evaluating both secondary and direct investment opportunities. He previously worked in the private equity funds group of Bessemer Trust.

Bryan Corbett has joined The Carlyle Group as a principal on the firm’s government and regulatory affairs team. He will be based in Washington DC, and will report to David Marchick. Corbett most recently served in the Bush Administration as a Special Assistant to the President for Economic Policy and as Senior Advisor to Deputy Secretary Robert Kimmitt at the Treasury Department.