PE Week Wire: Fri., March 16, 2007

Last November, Bessemer Venture Partners and Insight Venture Partners agreed to acquire enterprise software company Netsmart Technologies Inc. (Nasdaq: NTST) for $115 million. It looked like a typical public-to-private buyout – save for the semi-oddity of venture capital firms doing the buying. No big deal (both literally and figuratively).

But certain Netsmart shareholders believed that the $16.50 per share price was too low, even though it represented a standard premium and was higher than the company had traded since 2004. So they sued, arguing that Netsmart and financial advisor William Blair & Co. had focused almost exclusively on finding a “private equity” buyer, instead of broadening their search to include potential strategic suitors. Netsmart, in its defense, asserted both that a special committee of independent directors had approved the deal, and also that the agreement included a go-shop provision. Again, nothing out of the ordinary – and public shareholders regularly clash and file suit over buyout share prices.

The reason I’m detailing the dispute here, however, is that a Delaware Chancery Court judge on Wednesday ruled in favor of the complaining shareholders. Judge Leo Strine Jr. ordered that the company delay an April 5 shareholder vote on the buyout, until Netsmart provides the court with supplemental information about how the agreement was reached. Included in the required information are financial projections underlying the discounted cash flow analysis by William Blair.

In his opinion, Strine wrote that the Netsmart board’s “failure to engage in any logical efforts to examine the universe of possible strategic buyers and to identify a select group for targeted sales overtures was unreasonable and a breach of their… duties.”

Netsmart, for its part, has spun the ruling like a ball of yarn. It issued a press release yesterday with the headline: “Delaware Court Permits Netsmart Shareholder Vote to Proceed.” The heading and copy indicates that Netsmart will provide the required information in short order, thus permitting the shareholder vote to proceed as planned on April 5. What it doesn’t do is allow for any possibility that Judge Strine will conclude that the information does not adequately support the defense position, at which point he’d likely delay the vote even further.

So far this is an isolated incident, and does not necessarily presage a trend. But there is at least one similar lawsuit sitting on the Chancery Court docket – $2.5 billion buyout of Adesa by Goldman Sachs, Kelso & Co., ValueAct Capital and Parthenon Capital – and I’d have to think that Strine’s initial ruling will increase the likelihood of other disgruntled shareholders to hook up with plaintiff attorneys. Certain law firms already have sent out client alerts on the matter, and we’ll be keeping an eye on any additional developments – including what happens with the Netsmart deal.

*** I’ve written a lot about the difficulties faced by first-time fund managers when raising inaugural funds, and spoke with two such managers yesterday. The gripes were familiar: “Most LPs would rather do follow-on funds with longtime general partners. Why don’t they want to take any risk?”

But a new secondary market study by Almeida Capital indicates that risk aversion may not be the primary reason for LP disinterest in first-time fund managers. Instead, it may be a more endemic aversion to any new general partners, due in part to time/staffing/etc. constraints. The Almeida study asked LPs for their motivations when selling partnership interests on the secondary market – and broke the respondents into two groups: Funds-of-funds and other LPs. Among the later category, 50% responded than a selling motivator was to “reduce the number of GP relationships.” In fact, it came in second only to the universal desire to dump poorly-performing funds. You can view the entire study here.

As an anecdotal addendum, I was at a conference recently and overheard a conversation between a major buyout pro whose firm was fundraising, and the head of alternatives for a major insurance company. It went something like this:

GP: We’d like to get a meeting with you.

LP: I’ll try to set it up, but we’re really just doing re-ups right now – and barely have enough time for that.

And this GP was from a brand-name firm. Imagine if he was a first-timer…

*** NVCA president Mark Heesen gave a speech in Colorado last month, in which he mentioned that New England was in danger of losing its traditional position as the #2 regional recipient of venture capital funding (behind perennial leader Silicon Valley). So I looked it up, and he’s right. If the first quarter were to end today, New England would rank just behind Southern California in terms of amount of capital raised (although it has more companies funded). One big reason: VCs are funding as many, if not more, big pharma deals in San Diego as they are in Cambridge/Boston. Final numbers in a few weeks…

*** A bit more info on Microsoft’s pending acquisition of voice application company Tellme: The final sale price will be just a hair below $800 million, and a number of the later-stage investors will basically some out break-even. Earlier backers like Barksdale Group, Benchmark Capital and Kleiner Perkins will make a decent cash-on-cash return, but nowhere near a grand slam like the sale price would typically indicate. Three basic explanations: (1) VCs pumped over $260 million into Tellme; (2) They did so at bubble-era inflated valuations and (3) The last VC infusion came in late 2000, which means that it’s been carried on the books for at least six years.

*** Over 650 of you participated in yesterday’s Presidential Poll. The results were that you are almost evenly-split between Democrats and Republicans (47%-45%), and 57% of you already have a favored candidate. Your candidates of choice go in the following order: Barrack Obama (25%), Rudy Giuliani (20%), John McCain (14%), Mitt Romney (12%), Bill Richardson (11%) and Hillary Clinton (10%). Please note that there was a tiny bit of gaming toward Richardson, because someone posted a link to the survey on a pro-Richardson website (albeit not one affiliated with the campaign). But that only seems to have generated about 12 votes. Assuming those people also skewed the pro-Democrat data, and via subtraction you get a party split of 46%-45%, and Richardson drops below Clinton with around 9 percent.

*** We’ve got over 600 people playing March Madness. Lots of them got all of yesterday’s games correct, so I’ll post the first set of standings on peHUB tomorrow…

Top Three

First Reserve president Ben Guill has resigned, as first reported yesterday at peHUB. The move takes effect in April, and comes just seven months after First Reserve closed its eleventh energy-focused fund with $7.8 billion. No successor has been named. Read more here.

Epiphany Biosciences, a San Francisco-based biotech company focused on discovering and developing anti-infective therapeutics, has raised $36 million in Series A funding. Wexford Capital led the deal, and was joined by Windsor Bay Capital, Global Trust Ventures Management, CDIB BioScience Venture Management and several angels.

Close Brothers Private Equity has sold United Transport International, a UK-based provider of global logistics for the movement of liquid and dry bulk materials, to Interbulk PLC for £80m. Please find attached a copy of the press release.

VC Deals

HyperActive Technologies, a Pittsburgh-based provider of intelligent robotics for the quick-service restaurant market, has raised $8.4 million in additional Series B funding from return backer Spencer Trask Ventures. The news was first reported by VentureWire. HyperActive raised $6.5 million in initial Series B funding last May.

Mobifusion, a Fremont, Calif.-based provider of mobile content applications for publishers, has raised $3.1 million in first-round funding. Participants included Ingram Digital Ventures, Emergic Ventures and Global Asia Partners and an undisclosed “major telecom company” in India.

Trampoline Systems Ltd., a London-based “enterprise 2.0” software startup, has raised £3 million in new funding from entities affiliated with the Tudor Group.

Axon Digital Design BV, a Dutch maker of broadcasting equipment, has raised an undisclosed amount of private funding from Potosi and Goldman Sachs. It also secured a new financing facility from Rabobank.

Sanarus Medical Inc., a Pleasanton, Calif.-based medical device company focused on minimally-invasive diagnosis and treatment of breast tumors, confirmed that it has raised $15 million in Series E funding. PE Week Wire first reported the deal in February. Easton Capital Partners and Mosaix Ventures co-led the deal, and were joined by return backers Alta Partners, Forward Ventures, Channel Medical Partners, Federated Kaufman Fund, Pequot Private Equity and U.S. Venture Partners. The company has raised around $72 million in total VC funding since its 1999 inception. Buyout Deals

MSD Capital has led a buyout of DentalCare Partners, a Mayfield Heights, Ohio–based dental practice management company, from Blue Point Capital. No financial terms were disclosed for the deal, which also included minority equity participation from North Peak Capital and Beecken Petty & O’Keefe.

Cobasys, a battery maker for hybrid vehicles, is considering strategic options that could include a sale of the company. It currently is co-owned by Energy Conversion Devices Inc. and Chevron Corp., with UBS representing ECD and Goldman Sachs representing Chevron.

PE-Backed IPOs

Tongjitang Chinese Medicines Co., a Chinese drug company focused on modernized versions of traditional Chinese medicine, has amended its proposed IPO terms. The company now plans to offer around 9.86 million American depository shares at between $12 and $14 per share, compared to an original plan to sell 8.85 million shares at between $15 and $17 per share. It plans to trade on the NYSE under ticker symbol TCM, with Merrill Lynch and UBS serving as co-lead underwriters. Shareholders include Merrill Lynch, whose private equity and VC funds hold an 8.8% pre-IPO position.

PE-Backed M&A

Scholz & Friends Group, a German advertising and marketing agency, has agreed to acquire gkk DialogGroup, a Frankfurt-based provider of communications services. No financial terms were disclosed. Scholz & Friends is a portfolio company of Cognetas.

PE Exits

Littlejohn & Co. has sold diamond-based materials producer Diamond Innovations to Sandvik for an undisclosed amount. Littlejohn acquired the company in early 2004 from GE.

NES Rentals Holdings Inc., a portfolio company of Diamond Castle Holdings, has sold Boston-based crane rental subsidiary Shaughnessy Crane Services to AmQuip Corp. No financial terms were disclosed. Diamond Castle took NES private last year for approximately $850 million.

Firms & Funds

Israel Cleantech Ventures has held a $20 million first close on its inaugural fund, according to VentureWire. The Ramat Hasharon -based firm is targeting $60 million to back early-stage cleantech companies in Israel.