PE Week Wire: Fri., March 7, 2008

A bunch of quick hits rattling around in my head, during yesterday’s drive back to Boston:

*** The buyouts market is actively courting a massive contradiction: One the one hand, you have a massive drop in deal volume, which is expected to be prolonged. On the other, you have a massive spike in fundraising, with firms raising their largest-ever funds (regardless of target market).

I discussed this with lots of people at Buyouts East, and most of them looked at me with condescending pity. “It’s just a return to more traditional investment periods of three to five years,” they said. “No one is worried about this.”

Kind of like no one was worried about how subprime would eventually slam the macro credit markets? Let me suggest that this is indeed a contradiction, but not yet mature enough for buyout firms to be grappling with. It is very reminiscent of early 2001, when venture capital firms continued raising record sums, despite noticeable economic troubles that would make it nearly impossible for all of that capital to be invested. The result there was LP pressure to cut fund sizes (which many firms did), but that didn’t really begin happening until 2003.

I’ve been told that buyout egos are too proud to follow a similar tact, but I really don’t see much ego difference between buyout pros of today and VCs of 2001. At some point, hubris always gives way to survival.

*** Speaking of pending buyout problems: I’ve been told not to worry too much about overpriced deals from 2006 and early 2007, because the lack of covenants will enable sponsors to keep plying the companies with additional debt. And, if debt is unavailable, the sponsors will just invest extra cash out of their aforementioned oversized funds.

Let’s just pretend for a moment that what I just mentioned is a good idea, kind of like I kept pretending it was a good idea to pay for repairs on the once-trusty Pontiac. At that point, there is still a giant question outstanding: What about the co-investors?

A large number of boomtime buyouts involved significant co-investments from limited partners, and it may be difficult to convince them to pony back up (even at lower valuations). At the same time, LPs may get angry to see themselves get ratcheted down (see: Connecticut v. Forstmann Little, although it’s not entirely apples to apples).

*** There have been reports that certain public pensions like Oregon have already hit up against their 2008 private equity allocations. Unless the public markets turn around, that may well mean that said pensions are heading toward over-allocation.

Here’s what I mean: Suppose you work for a $1 billion pension system, with a 5% private equity allocation. And imagine you actually hit the $200 million mark by the end of February. Well, say that 40% of the system’s assets are in public equities, and they may drop 10% by year-end. Ditto for a 20% allocation to public debt. At that point, your $1 billion system is actually a $940 million system, and your private equity allocation now stands at more than 5.3 percent.

It’s obviously a bit more complex than that – particularly now that LBO firms will be marking to market – but the rising public markets are why so many LPs were able to increase their hard dollar allocations to PE in the first place.

*** I hope to get the Carl Icahn interview video up on peHUB, before he appears on 60 Minutes Sunday night. Ditto for other videos – I have a lot of editing to do.

*** Quiz Time: Within the past year, I wrote about a well-known fund manager who was trying to raise an unusual type of vehicle. Seems he’s stopped trying. Hint: The effort stalled, just like the Ponatiac once did on the Pennsylvania Turnpike.

*** peHUB First Read.

*** Yesterday we discussed how Thomas H. Lee Partners had begun making capital calls for Clear Channel, and that the first ones were probably to individual investors. Well we later reported at peHUB that Bain has done the same, or at least with some of its many “feeder funds.” Commitments are due one week from today, which likely means that institutional LPs should be checking their mailboxes right about now.

*** Victor Fleischer was part of The Great Debates earlier this week, but we unfortunately ran out of time before discussing sovereign wealth funds. He believes that the key issue will become taxes, not regulations. Here are his initial thoughts.

*** Have a great weekend.

Top Three

Carlyle Capital Corp. said today that it is considering “all available options,” after its lenders have begun to liquidate securities held in its $21.7 billion portfolio. Carlyle Capital is a listed mortgage-backed securities fund managed by The Carlyle Group. It began receiving additional margin calls and default notices earlier this week, and now has had its shares suspended by Euronext Amsterdam.

KKR is in talks to sell specialty chemical company Rockwood Holdings to Altana AG, according to Germany’s Manager Magazine. The report says that the deal would be valued at approximately €4 billion. KKR holds an 80.3% stake in Rockwood, which it formed by merging several chemical businesses, including four former units of Dynamit Nobel AG.

Kleiner Perkins Caufield & Byers has launched a $100 million venture capital fund called iFund, which will invest in companies developing applications and services for Apple’s iPhone and iPod touch. KPCB partner Matt Murphy will lead the iFund effort, and be joined by partners John Doerr, Bill Joy, Randy Komisar, Ted Schlein and Chi-Hua Chien.

VC Deals

Cayenne Medical Inc., a Scottsdale, Ariz.-based sports medicine company focused on soft tissue reconstruction, has raised $15 million in Series C funding. Investor Growth Capital led the round, and was joined by return backer Split Rock Partners. The company had previously raised $13.8 million.
Snikiddy LLC, a Bethesda, Md.-based maker of organic snacks for children, has raised $15 million in equity funding from D.E. Shaw.

NanoBio Corp., an Ann Arbor, Mich.-based developer of anti-infective products and mucosal vaccines, has raised $10 million in new equity funding from Perseus LLC. This is the third and final tranche of a $30 million round, and was triggered by the completion of certain clinical milestones.

TriHealix, a Norwalk, Conn.-based developer of technology for streamlining healthcare payments and consumer account settlements, has raised $7 million in Series C funding. Lemhi Ventures led the round.

I-Therapeutix Inc., a Waltham, Mass.-based developer of situ formed hydrogel therapeutic products for ophthalmology, has raised $6 million in Series B funding, according to VentureWire. SV Life Sciences and Versant Ventures co-led the round.

Allegro Diagnostics, a Boston-based molecular diagnostics company focused on lung cancer, has raised $4 million in Series A funding. Kodiak Venture Partners led the round, and was joined by Catalyst Health Ventures and Boston University.

Buyout Deals

Altor Equity Partners has agreed to acquire paper and packaging retailer Papyrus from Stora Enso. No financial terms were disclosed. Sweden-based Papyrus reported 2007 sales of just over €2 billion. Debt financing was arranged by Handelsbankenm.

Cognetas and Englefield Capital have agreed to acquire Morrison Utility Services from UK water group Anglia. The deal is valued at £135 million.

KMC Mining Corp., an open-put miner in the Canadian oil sands, has raised an undisclosed amount of private equity funding from TriWest Capital Partners, Alberta Investment Management Corp., ATB Investment Management, Kensington Capital Partners and KMC management.

Pegasus Capital Advisors has acquired an undisclosed position in National Strategies Inc., a Washington, D.C.–based consultancy that helps businesses sell to local and state governments. No financial terms were disclosed.

PE Exits

Archer Capital has sold Australian biscuit and muesli bar maker Paradise Food Industries to Goodman Fielder, for approximately Au$80 million.

Kirtland Capital Partners has agreed to sell Essex Crane Rental Corp. to Hyde Park Acquisition Corp. for $210 million. Essex provides lattice-boom crawler cranes and attachments, and was acquired by Kirtland in May 2000. Hyde Park is a blank check acquisition company that will change its name to Essex Crane Rental Corp., and seek a Nasdaq listing.

nSpired Natural Foods Inc., a portfolio company of American Capital Strategies, has sold its MaraNatha and SunSpire brands to Hain Celestial Group Inc. (HAIN). The deal also includes nSpired’s nut butter manufacturing facility in Ashland, Oregon. No financial terms were disclosed.

Wind Point Partners has agreed to sell Nonni’s Food Company Inc. to Greek food group Vivartia, which is owned by Marfin Investment Group. The deal is valued at around $320 million, and is expected to close by April 1. Nonni makes branded food products like biscotti, bagel chips and pita chips. It recorded 2007 sales of $187 million, and $32 million in EBITDA.

PE-Backed M&A

Adconion Media Group, a Germany-based online advertising network, has acquired Frontline Direct, a Las Vegas-based provider of data management and direct marketing solutions. The deal is valued at $20 million in cash and stock, with KPMG Corporate Finance serving as advisor to Frontline Direct. Adconion last week announced that it has raised the equivalent of $80 million in Series C funding from Index Ventures and Wellington Partners.

Anodyne Health, a provider of business intelligence and revenue cycle software to healthcare providers, has acquired Charlotte, N.C.-based Piedmont Healthcare Management Group. No financial terms were disclosed. Anodyne has raised VC funding from such firms as Brooke Private Equity Advisors, Frontier Capital and the Small Enterprise Growth Fund.

Firms & Funds

New Mountain Capital, a New York-based firm focused on upper-middle-market buyouts, has closed its third fund with $5.1 billion in capital commitments. According to a recent article in Buyouts Magazine, Fund III was marketed with a $3 billion target, a 1.75% management fee, a 20% carry and an 8% preferred return. The general partner contributed $100 million. No limited partner information is yet available for Fund III, but Fund II investors included CalPERS, Florida State Board of Administration, Los Angeles Fire & Police Pension System, Ohio Public Employees’ Retirement System, Pennsylvania State Employees’ Retirement System and Oregon State Treasury.

W Capital Partners has closed its second fund with $700 million in capital commitments. Probitas Partners served as placement agent, while limited partners include CalPERS. W Capital acquired portfolios of direct private equity and venture capital investments in the secondary market.

Human Resources

First Reserve Corp. has promoted Jenny Zarrilli to managing director. She will retain her role as chief financial officer. Zarrilli joined First Reserve in 1998, after having been with Quadrant Management.

DBS Group, a Singapore-based lender, said that three of its senior professionals are leaving to join The Carlyle Group. They are: Edmund Koh, head of regional consumer banking; Raymond Ang, chief operating officer of consumer banking; and Chew Mun Yew, regional head of strategy.

Craig White has joined Zealous ATS as a managing director in the firm’s Private Funds Services Group, where he will manage secondary transfers of private funds. White previously was a senior vice president with NYPPEX.