PE Week Wire: Fri., June 29, 2007

The sun is shining, the Blackstone IPO is looking like an aftermarket dud and my summer sabbatical begins in t-minus six hours. In other words, it’s time for Friday Feedback.

I have received hundreds of emails on the carried interest issue over the past two weeks, and am only including a few here. The rest can continue to be found at peHUB, both in front of and behind the firewall (paid subs required for peHUB content more than five days old).

VC Walter: “Tax policy is being discussed as if it was discovered on a stone tablet centuries ago and has remained unchanged. Tax policy has always been used to promote public policy such as saving, investment and farming. The treatment of carried interest is no different and this is not simply a debate about capital gains vs. ordinary income. Venture capital has done great things for the country over the last 40 years and it has done so by attracting some of the best minds in the world who are willing to take big risks. Tinker with the tax treatment that has been used over that period and things will change – that is simple cause and effect. If the elected officials are unhappy with the industry that has brought us Intel, Amgen, Apple, Genentech, Google and hundreds of thousands of jobs, then tinker away — but do not do so lightly.”

Greg: I run a very small later-stage fund that invests in growth and buyouts. As the length of time of exit in this segment has quadrupled in the last 4-5 years, and LPs successfully inserted preferred returns in most partnership agreements, I will not receive my carried interest until the fund is probably more than 7 years old (and possibly as long as 9 or 10). What is not ‘long term’ capital gain about that? Don’t penalize us all for the few that hit the headlines.”

LP Thomas: “I know they say, if founders equity blah, blah, blah… But so what? If I wasn’t fat and ugly, I would be pretty good looking too. I don’t see why the two issues should be linked. If some GP wants to go out and start a company than he should get cap gains treatment on his gains, otherwise its ordinary income, just like every other working stiff. These guys are sounding like Leona Helmsley who said that only the little people pay taxes, before she was carted off to jail for tax evasion… This is no different than the portfolio manager of the Fidelity Magellan Fund who gets a performance bonus when his fund outperforms the S&P 500. Or an LP like me who gets a performance bonus based on how well my portfolio does relative to the benchmark.”

Chris: “From the way some of these VCs and private equity guys are talking, you’d think they’re entitled to be wealthy just because they decided to become VCs and private equity guys. Don’t complain to me, the taxpayer, about how hard it is for you to earn significant carry. Maybe that just means you’re not that good at what you do.”

By the way, yesterday’s survey currently shows that 61% of you are opposed to changing the tax treatment of carried interest. A clear majority, but not as lopsided as I would have expected. If you haven’t voted, you can still do so here.

*** A few replies to my conversation with Rep. Sandy Levin. Drew: “I would have laughed out loud over your story relating to the overall ignorance of Senator [sic] Levin on this question if I didn’t take the future of my country so seriously. If my respect for government weren’t already at zero, I would have also been very surprised that a senator could have so little knowledge of his own legislation. If I were on a conference call and management said they would have to get back to me on an issue this important, I would have to ‘pass’ due to poor/unsophisticated management. I hope voters will ‘pass’ on this management in 2008.” (Quick note Drew, it’s Representative Levin, not Senator Levin – although they do both come from Michigan.)

VC George: “Levin again shows that the legislators are disconnected from reality and that they do not know how businesses or investing really work. One of the primary reasons for the Limited Partner, LLC structure is to insulate the passive investors (LPs) from the liabilities that come from high risk investing. We, the GPs who do all of the work, assume some of that liability and since we do all of the work for these passive investors, receive 20% of the gains (after return of 100% of principal) in return for this and other considerations. Given that it takes 5-7 years for realizations to develop in the early stage market, GP compensation here is clearly not earned currently, which was the original intent of this tax treatment. Whatever happens, net after tax, the LP’s will have to pay this 20% rate. If Levin wants to look at the tax law, he may want to see why he proposing a change that will in the short run hurt the tax exempt pension funds that are the bulk of the inv! estors in these vehicles.”

*** Finally, Chris asks the day’s most pressing question: “How are you coping with Danny Ainge’s latest disastrous trade? If basketball was like private equity, neither Pagliuca nor Grousbeck would be getting any carry for a long, long time.”

To preface, I’m no Danny Ainge fan, and the Jordan Bulls wouldn’t have even made the NBA Finals with Doc Rivers as head coach. But… I actually like this deal. We add a perennial All-Star (albeit an aging one), keep our most promising young players (Jefferson, Green & Rondo), hold on to Mr. Trade Chip (Ratliff) and keep Pierce content. Oh, and the young guys might actually get to experience a few wins, which should boost confidence. Plus, we drafted a fat basketball player. Do you know how rare that is? He might have a bigger built-in following than Yi Jianlian…

*** I’m off for the next two weeks, with various members of the Thomson editorial team filling in both here and at peHUB. Please send any relevant news items and press releases to Amanda at The email will continue to look like it comes from me, though, so no need to change your filters.

Be back on Monday July 16, although it’s possible I’ll do some blogging in the interim (my vacation destination is Kennebunkport, and then my couch). Oh, and check later today for a bunch of Q2 data…

Top Three

Bain Capital has won the auction for UK food distributor Brakes PLC, which was put on the block earlier this year by Clayton Dubilier & Rice. The deal is valued at approximately £1.3 billion, with Bain besting rival bidders like Sysco and former Asda chief Archie Norman. JPMorgan and Deutsche Bank ran the process.

Paracor Medical Inc., a Sunnyvale, Calif.-based developer of implantable medical devices to treat heart failure, has raised $44.35 million in Series D funding. Aberdare Ventures led the deal, and was joined by Montagu Newhall Associates and return backers Delphi Ventures, Pequot Ventures, InterWest Partners, Alta Partners, DeNovo Ventures, Saratoga Ventures and Palo Alto Investors. Paracor previously had raised $47.5 million in VC funding since 2001.

3i Growth Capital has invested $57 million into Fulcrum Ltd., a Bermuda-based hedge fund administrator. The deal will provide liquidity to existing Fulcrum shareholders, plus help grow the Fulcrum business.

VC Deals

TissueLink Medical Inc., a Dover, N.H.-based maker of medical devices that reduce blood loss during surgery, has raised $20 million in Series E funding, according to a regulatory filing. Return backers TLM Investors and RiverVest Venture Partners co-led the deal. TissueLink previously had raised around $67 million since 1999.

AccountNow Inc., a San Ramon, Calif.-based provider of Visa and Mastercard-branded prepaid cards for the “underbanked” consumer market, has raised $12.75 million in third-round funding. Trident Capital led the deal, and was joined by return backers Invesco Private Capital, Oak Hill Venture Partners, VSP Capital, Grayhawk Venture Partners, Granite Hill Capital ventures and CEO Ted Coltrell. It had previously raised $8.5 million since 2004.

ONI Medical Systems Inc., a Wilmington, Mass.-based maker of MRI systems, has raised $12.5 million in third-round funding. Ziegler Meditech Equity Partners led the deal, and was joined by return backers Galen Partners and Ivy Capital Partners.

Mobius Power Inc., a Lewes, Del.-based battery startup, has raised $4.3 million in first-round funding from Lightspeed Venture Partners, Sigma Partners and Walden International. A regulatory filing indicates that the company is raising upwards of $12.3 million.

iContact Corp., a Durham, N.C.-based provider of email and Web-based marketing solutions, has raised $5.35 million in second-round funding. Updata Partners led the deal, and was joined by seed backer IDEA Fund Partners.

Blue Cod Technologies, a Marlborough, Mass.-based provider of outsourcing services, software and consulting to the property and casualty insurance industry, has raised an undisclosed amount of VC funding from Edison Venture Fund.

Buyout Deals

3M (NYSE: MMM) has completed the sale of its Opticom Priority Control Systems and Canoga Traffic Detection businesses to TorQuest Partners, a Toronto-based private equity firm. No financial terms were disclosed. TorQuest formed a new combined company based in St. Paul, Minn., led by Rick Sachse, who previously ran the businesses for 3M.

American Capital Strategies has invested $548 million in the recapitalization of Exstream Software LLC, a Lexington, Ky.-based provider of enterprise software for the design and delivery of personalized communications. The deal includes a senior term loan, senior and junior subordinated notes and convertible preferred and common equity. American Capital is also providing a revolving credit facility. Exstream’s founders and other management are also making equity commitments alongside American Capital, retaining more than 40% ownership.

Genstar Capital and Boston Ventures have acquired a majority stake in 21st Services, a Minneapolis-based provider of life expectancy information used in the life settlement industry and the secondary life insurance market. No financial terms were disclosed.

Grafton-Fraser Inc., a Canadian menswear retailer, has raised an undisclosed amount of private equity funding from GB Merchant Partners, and affiliate of Gordon Brothers Group.

HM Capital Partners has agreed to acquire Phone Directories Co., an Orem, Utah-based independent provider of yellow page directories in North America. No financial terms were disclosed. This is HM’s first portfolio company in its new fund, which is in the process of being raised.

OnCap has completed its acquisition of pizza chain operator CiCi Enterprises from Levine Leichtman Capital Partners, according to LBO Wire. The deal was reported to be worth approximately $250 million, including $50 million of equity from OnCap. North Point Advisors managed the sale process.

Quintana Energy Partners has agreed to acquire AmerCable Inc. from Industrial Growth Partners for $212 million. AmerCable is an El Dorado, Ark.-based manufacturer of jacketed electrical cables used in extreme operating environments.

ServiceMaster Co. (NYSE: SVM) shareholders have approved a $5.5 billion buyout offer from Clayton Dubilier & Rice. Banc of America Capital Investments, Citigroup Private Equity and JPMorgan Chase have committed to provide additional equity financing, while leverage will come from Banc of America Securities, Citigroup Global Markets and JPMorgan. Morgan Stanley and Goldman Sachs served as financial advisors to ServiceMaster, which provides residential and commercial customers with such services as lawn care and landscape maintenance, termite and pest control, home warranties, disaster response and reconstruction, cleaning and disaster restoration, house cleaning, furniture repair and home inspection.

Sierra Nevada Partners has acquired HelioPower Inc., a Californian solar energy company. No financial terms were disclosed. Capital Advice LLC advised Sierra Nevada on the deal.

PE-Backed IPOs

Symetra Financial Corp., a Bellevue, Wash.-based life insurance company, has filed for a $750 million IPO. It plans to trade on the NYSE under ticker symbol SYA, with underwriters including Merrill Lynch, Goldman Sachs, JPMorgan and Lehman Brothers. Shareholders include Vestar Capital Partners, Och-Ziff Capital Management, Highfields Capital Management, Caxton Associates, White Mountains Insurance Group and Berkshire Hathaway.

Dolan Media Co., a Minneapolis-based provider of business information and professional services to the legal, financial and real estate markets, has increased its IPO target from $150 million to $172.5 million. It plans to trade on the NYSE under ticker symbol DM, with Goldman Sachs and Merrill Lynch serving as co-lead underwriters. Shareholders include Abry Partners, Caisse de depot et placement du Quebec and BG Media Investors.

PE Exits

Activa Capital has sold Delpharm, a French pharmaceutical contract manufacturer, to company management, which is being backed by Acto Mezzanine. No financial terms were disclosed. Rothschild & Cie ran the sale process. Activa originally invested in Delpharm in April 2004, as part of its spinout from Laboratories Aguettant.

Advent International and The Carlyle Group have put German plastics manufacturer HT Troplast on the auction block, according to The Financial Times Deutschland. Goldman Sachs and Lazard will manage the sale. HT Troplast had 2006 sales of €850 million.

CVC Capital Partners reportedly has retained Goldman Sachs to auction off Australian home healthcare company DCA Amity. The deal would be worth around Au$1 billion, with UK healthcare group BUPA expected to be a possible bidder.

Heely’s Inc. (Nasdaq: HLYS), a Carrollton, Texas-based maker of youth footwear with a removable wheel in the heel, withdrew registration for a secondary public offering of eight million shares. Sellers were to include Capital Southwest Venture Corp., which planned to offer 5.2 million of its 9.32 million shares.

PE-Backed M&A

The Spring Air Co. has acquired Tampa, Fla.-based mattress maker Consolidated Bedding Inc., a portfolio company of H.I.G. Capital. H.I.G. will hold an ownership position in the merged company.

Firms & Funds

Blue Tip Energy Partners has held a $149 million first close on its inaugural fund, which will focus on private equity opportunities in the energy sector. The fund has a $250 million target, and expects to hold a final close this fall.

ePlanet Ventures, a former affiliate of Draper Fisher Jurvetson, is out in market for its second fund, with plans to raise between $500 million and $550 million. PE Week first reported this news last October.

Thomas H. Lee Partners is forming a debt financing arm called THL Credit Corp., according to LBO Wire. The unit will be run by James Hunt, who previously was a managing director and co-founder of Bison Capital. He currently serves on the board of THL portfolio company Fidelity National Information Services Inc.

Human Resources

Cedric Latessa has joined UK-based Esprit Capital Partners as an investment manager. He previously was an associate with BIP Investment Partners in Luxembourg.