PE Week Wire: Fri., Aug. 10, 2007

I was recently asked if the credit mess would force certain private equity firms out of business — like what’s happening in the hedge fund world. I responded negatively, because private equity firms typically don’t actually hold the leverage on their deals. That’s on the banks and anyone the bank was able to syndicate out to (i.e., the troubled hedgies). In fact, one could make a strong case that private equity was not really a “high-risk” asset class over the past 18 months.

But now some private equity firms are changing course, and buying up buyout-related loans from sponsor banks. I mentioned this briefly in yesterday’s Wire, and The Deal todaypaints a fuller picture.

Banks are pitching these swap facilitiesas a way for large private equity firms to disburse fund capital, at a time in which its very difficult to secure loan commitments for new transactions. And the aforementioned articlecites Apollo as a particularly active participant, having picked up a “large chunk” of the bonds related to Apax Partners and Omers Capital Partners’ $7.75 billion buyout of Thomson Learning.

This is all being done at steep discounts, of course, and requiresthe banks to swallow some serious pride. Imagine being forced by KKR to honor lousy debt commitments on one deal, and then begging KKR to buy discounted debt on another hung bridge at a deep loss. It’s like buying rounds for a bar full of guys sleeping with your wife.

So obviously an interesting trend, although I’m not sold that it will be as prevelant as The Deal suggests. First (as the article acknowledges), many PE firms will actually have to secure new leverage to close these deals. And since the dearth of new leverage is what’s causing cabin fever in the first place…

Second, these deals are also predicated on the notion that LBO firms are swimming in dry powder. It may be true for some firms, but not many. Blackstone this week acknowledged that it’s already committed two-thirds of its new fund, while other firms (Bain, KKR, Madison Dearborn, etc.) are running so low that they’re either raising new funds or securing extra commitments for existing funds. In other words, the demand might not be as severe as the banks hope it is. There’s also the question about how much LPs would appreciate their private equity funds buying up debt packages…

*** President Bush finally made a public statement on the proposed change to carried interest tax treatment. He’s against it (yeah, I know, big shock). The follow-up question, however, would be if he’d veto a bill that also included AMT relief…

In other carried interest news, The Washington Post published an editorial in favor of a change to ordinary income. It also notes that Chuck Schumer has shifted course. He originally seemed to be an opponent of such a change, but now says that he is a supporter so long as it applies evenly across multiple asset classes. That means he would sign on to the House bill, but not the Senate’s so-called Blackstone Bill.

*** The agenda for Buyouts West is set, and it once again includes The Great Debates. This time I’ll be a participant rather than the moderator, and will square off with Kelvin Davis of TPG, John Addler of the SEIU and Monte Brem of StepStone Group. Methinks that taxes could cause some fireworks… Full agenda and registration info can be found here, with an early-bird dicount now available.

Top Three

Pride International Inc. (NYSE: PDE) has agreed to sell its Latin American land drilling and E&P services businesses to Brazilian private equity firm GP Investimentos, for approximately $1 billion. The deal includes a $400 million equity tranche and $600 million in leveraged financing. Goldman Sachs is advising Pride. Inc., an Austin, Texas-based online destination for consumers to search, compare, and apply for credit cards, has filed for a $115 million IPO. It plans to trade on the Nasdaq, with Credit Suisse and Citi serving as co-lead underwriters. Austin Ventures sponsored a recap of last fall, and holds a 65.6% pre-IPO position. Also participating on the recap were American Capital Strategies (9.6%) and company founder Dan Smith (16.1%).

Nick Scheele, former Ford Motors president and COO, has joined Ripplewood Holdings as an advisor. He is expected to help the firm in its efforts to acquire the Jaguar and Land Rover brands from Ford, which means direct competition with former Ford CEO Jac Nasser, who works with rival bidder One Equity Partners. Others believed to be submitting bids include Cerberus Capital MAangement, TPG Capital and Tata Motors of India.

VC Deals

KFx Medical Corp., a San Diego-based developer of minimally-invasive percutaneous systems for rotator cuff repair, has raised $10 million in Series B funding. Alloy Ventures led the deal, and was joined by return backers Charter Life Sciences, Arboretum Ventures, Montreaux Equity Partners and MB Venture Partners.

Zafu Inc., an Emeryville, Calif.-based search engine for advice on designer jeans and bras, has raised $4.1 million in Series B funding, according to a regulatory filing. Backers include Carlyle Venture Partners and Wasserstein SBIC Ventures.

Heptares Therapeutics Ltd. has spun out of the MRC Laboratory of Molecular Biology in Cambridge, with an undisclosed amount of seed funding from MVM Life Science Partners. Heptares plans to apply structural knowledge of G-protein coupled receptors) to the design and development of its own drug molecules.

Buyout Deals

The Blackstone Group has agreed to invest $500 million for a minority position in Stiefel Laboratories Inc., a Coral Gables, Fla.-based skincare pharmaceutical company. The transaction is expected to close within the next week, with the Stiefel family to retain control and a majority ownership position.

Clarey Capital has acquired Health-Link Transportation Corp., California’s largest non-emergency medical transportation company. The seller was Tectrans Inc., a portfolio company of Huron Capital Partners. No financial terms were disclosed.

Gryphon Investors has sold Nursefinders to Goldman Sachs Urban Investment Group, Pharos Capital Group and Haas Wheat & Partners. No financial terms were disclosed, but an earlier LBO Wire report pegged the sale price at around $250 million, with GE Capital providing leveraged financing. Nursefinders is an Arlington, Texas-based nurse staffing company acquired by Gryphon in 2004 for approximately $50 million.

Helicon Cable Holdings LLC (a.k.a. JetBroadband), a Welch, West Va.-based provider of digital cable television and broadband Internet services, has raised $19 million in private equity and debt funding from Intermediate Capital Group. The infusion was made in conjunction with Helicon’s recent acquisition of Suddenlink’s Virginia cable television systems. DH Capital advised Helicon on the deal.

Quintana Capital Group has acquired a majority stake in Directional Drilling Co., a Conroe, Texas-based provider of unconventional drilling technologies for large oil and gas exploration and production companies. LBO Wire first reported the deal, and places the sale price at around $40 million ($15m in equity).

Universal Acceptance Corp., a Minneapolis-based provider of auto financing to the subprime market, has raised an undisclosed amount of private equity from Alpine Investors.

PE-Backed IPOs

EqualLogic Inc., a Nashua, N.H.-based provider of network storage solutions, has filed for a $125 million IPO. It plans to trade on the Nasdaq under ticker symbol EQLX, with Goldman Sachs and Credit Suisse serving as co-lead underwriters. EqualLogic has raised around $57 million in total VC funding since its 2001 inception, from firms like Charles River Ventures (30.1% pre-IPO stake), Sigma Partners (29.2%), TD Capital Technology Ventures (16.2%) and Focus Ventures (9.5%).

Horsehead Holding Corp., a Monaca, Pa.-based producer of specialty zinc and zinc-based products, raised around $87.6 million in its IPO. The company priced 4.86 million common shares at $18 per share ($18-$20 range), for an initial market cap of nearly $613 million. It will trade on the Nasdaq under ticker symbol ZINC, while Friedman Billings Ramsey served as lead underwriter. Shareholders include Sun Capital Partners.

Paragon Shipping Inc., an Athens, Greece-based dry-bulk shipping company, raised $164.8 million in its IPO. The company priced 10.3 million common shares at $16 per share ($16-$18 range), and will trade on the Nasdaq under ticker symbol PRGN. UBS and Morgan Stanley served as co-lead underwriters. Shareholders include Citigroup and Silver Point Capital.

PE Exits

EMC Corp. (NYSE: EMC) has agreed to acquire Tablus Inc., a San Mateo, Calif.-based provider of data loss prevention solutions. No financial terms were disclosed for the deal, which is being done via the RSA security division of EMC. Tablus has raised $23 million in VC funding since 2003, from Menlo Ventures and Trident Capital.

PAI Partners plans to put Yoplait on the block either later this year or early next year. The French private equity firm will seek more than €1 billion for Yoplait, which owns the Crème Fraîche and Yop brands. PAI owns a 50% stake, while French dairy cooperative Sodiaal owns the remainder.

Firms & Funds

Apax Partners has secured €11.2 billion in commitments for its latest European buyout fund, according to The Business. Some of the total includes soft circles, with a final close expected to occur within the next two months. The fund had originally been launched with a €10 billion target.

The Blackstone Group is raising up to $2.5 billion for a new distressed securities fund, according to regulatory filings.

The Los Angeles County Employees’ Retirement Association (LACERA) has hired Credit Suisse as its non-discretionary private equity consultant. Prior consultant Pathway Capital Management did not submit a bid, although Credit Suisse did beat out Altius Advisors, Cambridge Associates and Franklin Park Associates.

Human Resources

Wei Huang has agreed to join Sentry Insurance as head of alternative investments, effective next month. He has spent the past three years as a private equity investment officer with the Oregon State Treasury.

Joel Houck has joined American Capital Strategies as a senior vice president and managing director. He will be responsible for developing a new closed-end fund, which would be managed by an affiliate of American Capital. Houck previously was with Wachovia Securities, as a senior equity analyst covering the specialty finance sector.

Robert Moreland has joined Berchwood Partners as director of research. He previously was a vice president and senior consultant with Asset Consulting Group, where he worked with institutional clients and high net worth family offices. Berchwood is a private equity fund placement agent.

Friend Skolar & Co. has promoted Hunter McCrossin to vice president. He joined the firm as an associate in July 2005, after having been on the LP side with Duke Management Company.

Mark Fox has resigned as director of communications and public affairs for the British Private Equity and Venture Capital Association. He will become CEO of the Business Services Association, a lobbying group for the outsourcing industry.

Leslie Brun has been elected non-executive chairman of Automated Data Processing (NYSE: ADP), upon the retirement of Arthur Weinbach. Brun founded Hamilton Lane.