The rain is falling, the beloved Red Sox are cruising and I’m running late due to a poorly-timed TV appearance this morning. In other words, it’s time for some Friday Feedback.
First up are two comments related to yesterday’s discussion of buyout-backed IPOs. Tom writes: “I haven’t done the empirical analysis, but it seems to me that more recent sponsor-backed IPOs (VC or PE) would tend to under-perform non-sponsor backed IPOs in the near term (6-12 months), as a result of sponsors seeking liquidity post180 day lock-up expiration. This additional stock supply — as well as short investors recognizing the opportunity– drives down the price.”
Jman adds: “This seems a bit misleading. If what we’re searching for here is the returns of LBO-backed IPOs to public investors, the returns are overstated since Thomson calculates these returns using the offer price as a baseline. If you use the closing price at the end of the first trading day, the returns aren’t quite as impressive.”
*** Moving on to the carried interest tax issue, including some comments made by former Labor Secretary Bob Reich during a recent radio program we were on together:
Zachary: “The idea that the work of the GP should justify capital gains tax treatment is exactly backwards. If the payment is made for the work of the GP, then it is compensation for services and is no different than the amount these same partners pay their maids and nannies for taking care of their house and children. Perhaps the maid should be allowed to put in 1% of the home’s value and then get capital gains treatment for the money received for cleaning it.”
Michelle: “I think it is clear that private equity GPs should pay regular income tax on their… ummm, income.It is outrageous to suggest they should pay capital gains tax on someone else’s capital gain (namely the LP).Once the GP charges the LP the fee, which happens to be a percentage of the cap gain, those dollars cease being capital gain and once transferred to the GP become good old, red-blooded income just like the rest of the folks in the US earn.I am as big a capitalist as anyone, but to be a pig is in no one’s best interest. The PE guys should thank their lucky stars they got away with a loophole as long as they did and happily pay their taxes.They, more than most, enjoy abundant gains that are made possible by the economic, legal, and market infrastructure that exists in this country.They should happily pay to maintain a system under ! which they have been so richly rewarded.”
Lawrence: “All participants in the debate are missing an important arithmetic effect of the tax code.Every income item creates a tax deduction for someone else. If carry is recharacterized as compensation income, then every limited partner will get a deduction for the expense paid. This will have no impact on tax-exempt investors, but every taxable investor in LBO funds will get a big deduction that is currently not available. If you assume that one-third of private equity investors are taxpayers, then the estimated incremental revenue is high by12% (one third of the lost revenue from a 35% tax deduction). In addition, to the extent that GP’s get paid more to offset the tax cost, that is really an indirect tax on tax-exempt organizations.”
Joe: “Is it just me, or has the financial world learned nothing from the cases against Milken and Quattrone? Oh sure, Quattrone won on appeal, but it didn’t come without cost and significant effort and damage to his reputation.And Milken has rebounded and is (perhaps) doing more good than he ever did on Wall Street. But the lesson is clear, ‘You make too much money and we will find something.’ Hubris has always gotten the attention of Washington, and various legal entities. I am reminded of Icarus.When people fly too high, bad things happen. It does not come down to a question of right or wrong, just the issue of making too much money and being arrogant about it (I am thinking multi-million $ birthday bashes for example).”
Tom: “Mathematically, carry is really a call option the GPs have to purchase a portion of the fund at a strike price equal to the LPs cost basis (plus fees in a full recovery fund). Therefore, the right way to tax it in harmony with other assets is to calculate a Black-Scholes value for the call option at the start of the fund and have that be income, everything else is truly a capital gain. (Yes it is true you have the problem of deciding on a volatility value but that hasn’t stopped GAAP from valuing options in other companies this way so why should a PE partnership be different).It is worth noting that I suspect trying to carve out any more onerous treatment for PE carry will simply cause funds to recast their partnership agreements in these call-option terms (which the LPs such be fine with since there is no economic effect) so no further increase to the treasury is likely.”
George: “Robert Reich proves Alan Abelson’s remark that economics is the only field where one can gain preeminence without ever being right.”
Mike: “Reich was a labor secretary and practically a socialist on many issues – nothing shocking there. I think there’s an et tu Brute aspect when a PE journalist espouses the same views.”
*** Finally, there Jim sent in the following yesterday: “Did you see that the Cow Bones publication led today with a story about how Curt Schilling is raising money for his video game company? They gave you no love at all, even though you broke that last month. Any thoughts?” Yes Jim. I sincerely thank you for the email.
Top Three
EnerNOC Inc., a Boston-based provider of demand response and energy management solutions, priced 3.75 million common shares at $26 per share, for an IPO take of approximately $97.5 million. It had originally planned to offer the shares between $21 and $23 each, but later raised the range the $23-$25. It will trade on the Nasdaq under ticker symbol ENOC, while Credit Suisse and Morgan Stanley served as co-lead underwriters. EnerNOC has raised around $28 million in VC funding, from firms like Foundation Capital, Draper Fisher Jurvetson, Braemar Energy Ventures and DFJ New England. www.enernoc.com
3M (NYSE: MMM) has agreed to sell 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 will form a new combined company based in St. Paul, Minn., which will be led by Rick Sachse, who previously ran the businesses for 3M. www.torquest.com
Institutional Venture Partners has closed its twelfth fund with $600 million in capital commitments. The firm has offices in San Francisco and New York, and focuses on later-stage venture capital opportunities in the communications/wireless, Internet/digital media and enterprise IT sectors. www.ivp.com
VC Deals
Fabrik Inc., a San Mateo, Calif.-based provider of online storage for large files, has secured $24.9 million of a $34.2 million Series D round, according to a regulatory filing. VentureBeat reports that 3i Group led the deal, with Fox Interactive Media chief Ross Levinsohn taking a board seat. Return backers include ComVentures and Intel Capital. www.fabrikinc.com
eStyle Inc., operator of maternity retailer BabyStyle, has raised $11 million in new VC funding, according to VentureWire. Oak Investment Partners and Global Retail Partners co-led the deal. www.estyle.com
Ecosorb SA, a Brazil-based environmental management company, has received $5 million in first-round from Stratus Group. www.stratusbr.com
Flatburger Inc., operator of an online software marketplace, has raised $5 million in Series A funding from seed backers Intersouth Partners and Amplifier Venture Partners. www.flatburger.com
Pudding Ltd., an Israel-based mobile ecommerce startup, has raised $3.5 million in first-round funding from firms like Opus Capital and BRM Capital.
Hingi Ltd., an Israel-based mobile applications startup, has raised $3.4 million in first-round funding led by Opus Capital. www.hingi.com
Buyout Deals
The Blackstone Group, KKR and Lion Capital, are believed to be preparing an Gbp8 billion offer for the US beverages arm of Cadbury Schweppes, which owns the Dr. Pepper and 7Up brands. The Daily Telegraph also reported that another rival consortium had been established, thought to include Bain Capital, TPG and Thomas H. Lee Partners.
Cerberus Capital Management is planning a bid for Bell Canada parent BCE, according to The Globe & Mail. Prior reports have suggested that BCE also will receive bids from the Canadian Pension Plan Investment Board and Ontario Teachers’ Pension Plan. Such a deal could be worth upwards of $45 billion.
Permira has offered to acquire all of Italian fashion house Valentino Fashion Group SpA, after previously having agreed to buy a minority position. The move came in response to a possible all-in bid from The Carlyle Group, which Dow Jones reports will not try to best the Permira offer of €35 per share. www.valentino.com
Ontario Teachers’ Pension Plan and Victorian Funds Management have agreed to acquire a 48% stake in the UK’s Birmingham International Airport. The deal is valued at approximately Gbp420 million, with sellers including Macquarie Bank and Dublin Airport Authority. Birmingham is the UK’s fifth-largest airport, in terms of number of passengers per year. www.bhx.co.uk
Doral Financial Corp. (NYSE: DRL) has agreed to sell $610 million in stock to a buyout consortium that will control 90% of the company. Bear Stearns Merchant Banking is leading the $0.63 per share recapitalization, with other participants including Marathon Asset Management, Perry Capital, D. E. Shaw, Tennenbaum Capital Partners, Eton Park Capital Management, Goldman Sachs, Canyon Capital Advisors and GE Asset Management. www.doralfinancial.com
One Equity Partners has completed its acquisition of the Emissions Technologies group of ArvinMeritor Inc. (NYSE: ARM) for approximately $310 million. The group primarily serves manufacturers of light and commercial vehicles. www.oneequity.com www.arvinmeritor.com
Milestone Partners has acquired Interconnect Devices Inc., a Kansas City-based designer and manufacturer of spring contact probes and electromechanical connection products. No financial terms were disclosed. www.milestonepartners.com www.idinet.com
Nexstar Broadcasting Group Inc. (Nasdaq: NXST) has retained Goldman Sachs to explore strategic alternatives, including a possible sale. The local television broadcaster’s stock rose around 22% on the news.
PE-Backed IPOs
Eurand NV, a Dutch drug company whose lead product treats exocrine pancreatic insufficiency, priced 7 million ordinary shares at $16 per share ($17-$19 range), for an IPO take of approximately $112 million. It began trading on the Nasdaq under ticker symbol EURX, and closed down $0.56 per share, or 3.5 percent. Deutsche Bank Securities and Lehman Brothers served as co-lead underwriters. Eurand was formed in 1999, when Warburg Pincus acquired the drug delivery business of American Hone Products Corp. (now Wyeth). It reported 2006 revenue of approximately $109 million. www.eurand.com
TriMas Corp., a Bloomfield Hills, Mich.-based manufacturer of engineered products, priced 11 million common shares at $11 per share ($11-$13 range), for an IPO take of approximately $121 million. It will trade on the NYSE under ticker symbol TRS, while Goldman Sachs and Merrill Lynch served as co-lead underwriters. TriMas operated as an independent company beginning in 1987, but was acquired in 1998 by Metaldyne Corp. (then known as MascoTech Inc.). In November 2000, Matladyne was acquired by an investor group led by Heartland Industrial Partners, which later spun the company out on its own. The pre-IPO shareholder structure included Heartland with a 72.7% stake, Masco Corp. with 11.82% and Credit Suisse with 5.71 percent. www.trimascorp.com
Amicus Therapeutics Inc., a Cranbury, N.J.-based drug company focused on genetic diseases like Fabry disease, has set its proposed IPO terms to five million common shares being offered at between $14 and $16 per share. It plans to trade on the Nasdaq under ticker symbol FOLD, with Morgan Stanley and Merrill Lynch serving as co-lead underwriters. The company has raised around $146 million in total VC funding, including a $60 million Series D infusion late last year. Backers include New Enterprise Associates (26.3% pre-IPO stake), Frazier Healthcare Ventures (15.2%), Prospect Venture Partners (13.2%), CHL Medical Partners (12.4%), Canaan Partners (12.1%), Quaker BioVentures (8.3%), Och-Ziff Capital Management, Palo Alto Investors and Radius Ventures. www.amicustherapeutics.com
PE-Backed M&A
ReAble Therapeutics Inc., a rehabilitation and orthopedic device company, has agreed to acquire Iomed Inc. (AMEX: IOX), a manufacturer of drug-delivery devices used primarily for the management of pain. Iomed shareholders would receive $2.75 per share in cash, for a total transaction value of approximately $22 million. ReAble was taken private last November by The Blackstone Group. www.iomed.com
Active Interest Media Inc., an El Segundo, Calif.-based enthusiast media company, has acquired Backpacker Magazine for an undisclosed amount. AIM was formed in 2003 by Wind Point Partners. www.aimmedia.com www.backpacker.com
Main Line Broadcasting, a portfolio company of Arlington Capital Partners, has agreed to acquire ten radio stations from Radio One Inc. No financial terms were disclosed for the deal, which includes stations in the Louisville, Kentucky and Dayton, Ohio markets. www.mlbroadcasting.com
PE Exits
Sonoco (NYSE: SON) has agreed to acquire Matrix Packaging from Tricor Pacific Capital and the company founders, for approximately US $210 million. The deal is expected to close by the end of June. Matrix Packaging is a Mississauga, Ontario-based manufacturer of custom-designed blow-molded rigid plastic containers and injected-molded products. It was advised on the sale by BMO Capital Markets. www.sonoco.com www.matrixpackaging.com
Firms & Funds
The Blackstone Group reportedly has received $3 billion from the investment arm of China’s central bank. It is unclear if the capital will be put toward Blackstone’s current fundraising efforts, or if it will be used for a separate vehicle. Neither Blackstone nor Central Huijin have returned requests for comment.
Bank of America plans to float a private equity fund-of-funds on the Amsterdam Euronext later this year, according to Dow Jones. The vehicle will be co-managed by Oak Hill Investment Management.
The Oregon state legislature has passed a bill codifying the type of information that the state treasury must disclose regarding its private equity investments. The disclosed data will include – as it currently does – name of firm/fund, amount committed and internal rate of return.
Jefferies & Company has formed a Corporate Equity Services group, which will provide equity services to corporations, financial sponsors and venture capital firms. It will be led by Peter Rosenthal, who previously was managing director and head of corporate services with Needham & Company. www.jefferies.com
Human Resources
Adele Cirone Oliva has agreed to join Quaker BioVentures as a partner, with a focus on life sciences opportunities in the Mid-Atlantic region. The move is effective next month, at which point Oliva will leave her post as co-head of U.S. healthcare for Apax Partners. www.QuakerBio.com
Ilya Levtov has joined Venrock as a vice president in the venture capital firm’s Menlo Park, Calif. office. Levtov will focus on digital media opportunities, and previously was in the business development team of Spot Runner. Venrock also announced that it has added Dave Beisel as a Cambridge, Mass.-based vice president focused on digital media. PE Week Wire had reported on the move last week.www.venrock.com
Donald Richards has joined middle-market I-bank Mirus Capital Advisors as a Boston-based partner. He previously was a partner with NorthShore Capital Advisors, a middle-market transaction advisory firm. www.merger.com
The Iowa Public Employees’ Retirement System has named Karl Koch as its new chief investment officer, following the December retirement of Kathy Comito. Koch previously was head of the IPERS private equity program. It remains unclear if the $23 billion system will name a new private equity chief, or if Koch will continue directly managing the assets. www.ipers.org
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