PE Week Wire: Friday, August 8, 2008

A tired greeting from the home office, as last night’s 7pm shuttle boarded on time, but did not arrive in Boston until 10:45pm. One of those times where the disappearance of mini-pretzels was particularly grating. Anyway, onto a bit of business:

*** I spent some time on the phone earlier this week with Luke Nosek of The Founders’ Fund, to discuss his firm’s $20 million investment in private space launch services provider SpaceX. The company is run by Elon Musk, who co-founded PayPal alongside the Founders Fund partners. A few questions and answers:

Dan: Founders Fund usually invests no more than a few million in a company. Why invest $20 million, when your fund is only $220 million?

Luke: We obviously have internal caps that we follow… What we do is look at how much a company needs, and invest that much. For example, we only invested $500,000 in Facebook, because that was how much it needed at the time. A lot of firms were offering more.

Dan: Most of the companies you back have some sort of Internet angle, which makes sense given your PayPal background. But what do you know about rocket science?

Luke: The most important aspect for us is the team. Remember, the PayPal founders didn’t have banking experience… Elon has put over $100 million of his own money into this company, and developed both the Kestrel and Merlin engines – which are the first new rocket engines developed in the U.S. in a very long time. When we did due diligence, we wanted to speak with other investors of successful new rockets, but they were all dead.

Dan: Your announcement of the funding came just days after SpaceX had yet another launch failure. Any worries?

Luke: No. There are obviously going to be some technical kinks, but they get amplified because rocket science is more binary than would be a technical kink with a website. Either the rocket gets into orbit, or it doesn’t. This team has some very smart people, and they’ll make it work.

*** Bit of an odd situation going on with 3i Group, the UK-based private equity firm that officially bailed on early-stage investing earlier this year. Multiple secondary market sources have told me that the firm has put its entire U.S. venture capital portfolio up for sale (books just went out), while another reliable source forcefully insists that it is only a small portion of the U.S. portfolio.

Might just be a question of semantics (i.e., what constitutes “venture capital”), but I tend to side with the latter source. Why? Because this current sale is designed to raise up to around $100 million, but 3i’s legacy venture portfolio in the U.S. should be several multiples higher than that. Globally, 3i still has around $1.5 billion in VC investments under management.

*** A big congratulations to Marni Payne, a principal with Berkshire Partners, who earlier this week gave birth to Dilan Elizabeth. Marni was literally my girl next door while growing up, and we were inseparable as kids. She also has never once contributed to a scoop in this space — a record she holds dear. Very happy for you…

*** Have a great weekend…

Top Three

Rackspace Inc., a San Antonio-based hosting company, raised $187.5 million in an IPO. It priced 15 million common shares at $12.50 per share ($12-$16 range), which gives it an initial market cap of approximately $1.44 billion. It will trade on the NYSE under ticker symbol RAX, while Goldman Sachs, Merrill Lynch and Credit Suisse served as co-lead underwriters. Rackspace had raised over $48 million in VC funding since 1999, from firms like Norwest Venture Partners (16.2% pre-IPO stake) and Sequoia Capital (11.6%). It had first filed for an IPO in early 2000, but pulled it later that year due to unfavorable market conditions.

TransAlta Corp., a Canadian wholesale power generator and marketer, has rejected a C$7.75 billion buyout offer from LS Power Equity Partners and Global Infrastructure Partners.

Garry Stein has joined Apollo Management as director of investor relations. It is a new position for Apollo. He previously served in a similar role for NYSE Euronext.

VC Deals

Ausra, a Palo Alto, Calif.–based developer of a utility-scale solar thermal power plant, has raised $25.4 million in Series C funding, according to a regulatory filing. Shareholders include Khosla Ventures, Kleiner Perkins Caufield & Byers and KERN Energy Partners Management.

ReCellular, a Dexter, Mich.-based cell phone recycling firm, has raised $15 million in Series A funding from Investor Growth Capital.

Nokeena Networks, a Menlo Park, Calif.-based video delivery startup, has raised $8.7 million in Series A funding. Clearstone Venture Partners and Trinity Ventures co-led the round, which was first reported by The Deal. Angel backers include B.V. Jagadeesh (CEO of 3Leaf Systems), Raj Singh (Redwood Venture Partners) and Rajeev Motwani (Stanford computer science professor).

HD Biosciences Inc., a Shanghai-based biology contract research group, has raised an undisclosed amount of Series A funding. Morningside Venture and Lilly Asian Ventures co-led the round, and were joined by Pfizer Venture Investments.

Buyout Deals

Gordon Brothers Group has acquired certain assets from Princeton, N.J.-based Clique Communications, including all of its webcam-related inventory and online domain assets. No financial terms were disclosed.

Lehman Brothers Merchant Banking has acquired an undisclosed stake in SRAM, a Chicago-based maker of bicycle components for OEMs and independent bike dealers.

Tenaska Capital Management has formed Voyager Midstream LLC, a Houston-based midstream natural gas company staffed Gulf Energy Development owner Tom Shaw. No financial terms were disclosed.

PE-Backed IPOs

Rhino Resources Inc., a Lexington, Ky.-based coal company backed by Wexford Capital, has reduced its IPO price range from $16-$18 per share to $11-$12 per share. It still plans to offer 10 million common shares, and trade on the NYSE. Morgan Stanley and Lehman Brothers are serving as co-lead underwriters.

PE Exits

Aureos Capital has sold its stake in Shelys Africa Ltd. to Aspen Pharmacare Holdings of South Africa for an undisclosed amount. Shelys is a maker and distributor of OTC pharma products in East and Central Africa.

Country Road Communications LLC, a telecom services company backed by Abry Partners, has agreed to sell three subsidiaries to Otelco Inc. (Nasdaq: OTT) for just over $101 million.

Reader’s Digest, a portfolio company of Ripplewood Holdings, has agreed to sell QSP Inc. to Time Inc. for $110 million in cash. QSP provides fundraising services for schools and youth groups.

PE-Backed M&A

NPC International Inc., a Lenexa, Kan.-based franchisee and operator of Pizza Hut franchises, has agreed to acquire 99 Pizza Hut units from Colonial Foods LLC for $35 million. NPC was acquired lin 2006 by Merrill Lynch Global Private Equity, and now operates 887 Pizza Hut restaurants and delivery/carryout units in 24 states.

Firms & Funds

Royal Bank of Scotland reported a first-half loss of £691 million, following a £5.9 billion write-down.

Human Resources

Jose Rivero has joined Symphony Technology Group as a managing director and operating partner. He previously was with Accenture, as global managing director of the firm’s Custom Business Process Outsourcing Services division.

Morid Kamshad has joined Duff Capital Advisors to lead a newly-formed financial services investment team. He previously was a portfolio manager with Pequot Capital Management. Also joining the team is Montserrat Farina, who previously was an I-banking associate within the financial institutions group of JPMorgan.