PE Week Wire: Friday, January 16, 2009

Dan is out today, I (Erin) am filling in. Direct any comments here.

***Further proof that the buyout bubble is mirroring the tech bubble: GPs and LPs are speaking in hushed tones about GP clawbacks. Meaning, some firms scored big returns via dividend recaps or regular exits in the early days of their fund and took carried interest on them. But now, the fund’s wheels have fallen off and the fund will break even or lose money. LPs have a right to that carried interest money, and depending on your limited partnership agreement, GPs must return it.

Will it happen? Probably not in the near term. We’ve heard rumors of one or two firms doing clawbacks, but most LPs don’t expect PE firms to cough up their carry for awhile. It does come out of pocket, after all. And technically, a firm could wait eight or nine years until they’re required to give money back, or they could read the writing on the wall and score a refreshing LP relations coupe by offering it back preemptively. Several LPs I talked to laughed out loud at the preposterous suggestion that GPs would be so generous, but stranger things have happened. I mean, Battery Ventures did it in 2002. People said PE firms wouldn’t shrink their fund sizes and that’s happened almost across the board. People said they wouldn’t allow LPs to shrink their commitments, and TPG has started the party on that. For a firm with a very clear zero, it isn’t completely out of the question.

One LP told me, “We’ve discussed the possibility of our funds doing that, but if I got a pre-solicited offer to settle the problem, that means it is much, much worse than we thought, since they know their portfolio better than we do.”

The next question this raises, of course, is the case of a secondary owner. Say the carry was taken on a deal while it was under the ownership of one LP, who then sold it to a secondary buyer. Who would get the clawback money—the LP that owned it during the liquidity event, or the secondary buyer who currently holds the crappy fund? From what I’ve heard it can vary and is negotiated with each secondary transaction, but generally the clawback goes to the current holder, the secondary buyer. Buyers and sellers on the secondary market have been more aware of this possibility and are negotiating clawback terms more carefully than before, one secondary buyer told me.

***You may remember last month’s mention of an informal survey by Semaphore, a PE advising firm. The survey asked some unusual questions, like “Are you confident in your firm’s CEO?” and peHUB got a preliminary look at the results. The official results are in and Semaphore was kind enough to give us an exclusive look at them. The questions, which addressed perceptions of everything from your boss and your competitors to compensation and deal flow, have produced some interesting results. The best highlight was from an “additional comment,” which stated:

“PE is dead and I wish my boss were too”

Yikes. Anyways, here are a few other notable results:

Deal size in 2009: 38.5% of survey respondents expect their first deal in 2009 to be between $1 million and $5 million. This is only notable because only 29% of those surveyed were VC firms. The rest were PE, LPs or lawyer/banker types. 55% said they expect to work on one to three deals for the year.

Confidence: 47% were confident or somewhat confident in their own business. Only 36% were confident in their industry and 14% in their competitors. An overwhelming 88% had little or no confidence in the national and international economies.

33% of survey-takers expressed confidence in their CEO or MD but only 22.9% in their immediate boss. Meanwhile 62.5% have confidence in the Obama’s economic team, compared to 8.3% that expressed confidence in that of President Bush. Only 10% have confidence in Congress.

Compensation: 51% expected income to increase in 2009. I’m confused by this. Even if deals slowly come back to the table, no one is expecting liquidity events to really happen, or at least not at extremely profitable levels. And hey, who knows, the Obama administration might even manage to change carried interest tax laws (though I’m sure it’s low on the priority list nowadays). Are fee increases in store?

You can see the entire survey later today at Semaphore’s web site.

***The Star-Tribune filed for Chapter 11 today. The company has been a bruise on Avista Capital’s portfolio almost since firm plunked down $530 million for it two years ago. peHUB has covered the development, or rather, deterioration, of the investment pretty extensively here, here, here and here. For non-subscrib! ers, the gist of the coverage is that the deal was both a failed investment thesis and foolish capital structure. Avista entered a declining industry with vague plans for improvement and futile attempts to replace revenues lost from the most profitable parts of the newspapar—the classified ads. No matter how great Minneapolis’ demographics look (above average income, high literacy rates, high homeownership, growing population), no daily metro paper can magically avoid the macro-economic headwinds and service a sizeable debt load to boot.

Not to dismiss the magnitude of the mess, but this isn’t a mistake Avista is likely to make again. The firm’s other media holdings don’t look anything like The Star Tribune, which is good news as the firm markets its second fund. The vehicle seeks $3 billion and held a first close on around $1 billion last month. One last thing on Avista: For a good Friday chuckle, check out this gem of a school newspaper story I stumbled upon called “Avista Capital Partners is the devil,” in which a student journalist concludes that owning a company in Wyoming, and basically anything related to the energy industry is akin to “festive picnics in Hades with Lucifer.” He then quot! es John Lennon and declares a boycott on purchasing the paper. But he’ll read the online version. What?

And lastly, a few plugs for you:

***Deal of the Year Awards: Nominate your firms for Buyouts Deal of the Year awards. There are just two weeks until the Jan. 30 deadline. Visit the Buyouts web site for more information or send a note to Buyouts editor David Toll for an application.

***Act Now! Today is your last chance to get the early-bird rate on our next Webinar, “Buyout Shops: Profiting From Debt Repurchases in 2009.” Tickets are going fast. Here’s more info.

Top Three

Minnesota Star-Tribune, backed by Avista Capital Partners, has filed for Chapter 11 bankruptcy protection.

TPG is considering taking a stake in HeidelbergCement jointly with Goldman Sachs, according to news reports. Bain Capital was also weighing involvement in the bid for a stake, together with Goldman Sachs and TPG. HeidelbergCement is a German cement maker controlled by the family of the late Adolf Merckle.

Black Angus Steakhouse, a restaurant chain backed by Versa Capital Management, has filed for Chapter 11 bankruptcy protection. .

VC Deals

Sharpcast Inc, a San Mateo, Calif.-based provider of online data services, received $10 million in Series AA financing from Sigma Partners, Draper Fisher Jurvetson and Selby Ventures.

Open Kernel Labs, a Chicago software provider, raised $7.6 million in venture funding from Chrysalis Ventures, Neo Technology Ventures and Citrix® Systems, Inc to fund global expansion of its research and development and business channels.

ZEO Inc, a Boston-based sleep education and coaching start-up, received $8.3 million in a Series C financing by Trident Capital and iD Ventures America.

7TM Pharma, a UK pharmaceutical developer, has raised approximately $15 million from its current investors, and divested its early stage assets to OSI Pharmaceuticals.

Hydra Biosciences, a Cambridge, Mass.-based developer of novel ion channel drugs, raised $22 million in Series D financing led by MedImmune Ventures. Prior investors contributing follow-on commitments include Advanced Technology Ventures, Abingworth, Polaris, BioVenture Investors, Biogen-Idec Ventures, and Lilly Ventures in the Series D round. Hydra Biosciences has raised $47 million in previous rounds of financing.

Kewego, an internet video company based in Paris, raised $6.2 million (4.7 million Euros) from Banexi Venture Partners and CDC Entreprises.

ConSentry Networks, a Milipitas, Calif.-based IT developer, announced $9.4 million in venture funding. Accel Partners led the round and was joined by existing investors DAG Ventures, Invesco Private Capital, Northgate Capital, Translink Capital, and Vedanta Capital.

Buyout Deals

Blackstone Group has seen the dismissal of Alliance Data Systems Corp’s lawsuit against the firm over the breakup fee on the two’s collapsed $6.76 billion buyout. The deal fell apart in April of last year.

Golden Gate Capital has emerged as one of three bidders in the auction for retailer Circuit City Stores, which filed for bankruptcy protection in November, the Wall Street Journal reported.

Roberto Cavalli, an Italian fashion house, is reportedly in talks to sell a minority stake in itself to Clessidra Capital Partners, a private equity firm based in Italy, with the intentions of going public in three to four years.

Kohlberg & Company reached a settlement in its litigation with Centerplate, Inc., a Stamford, Conn.-based cooncessions company the firm had agreed to acquire.

Main Street Capital, a buyout firm based in Houston, Texas, has purchased trucking company Smokey Point Distributing alongside Dallas investor Don R. Daseke and Smokey Point CEO Dan Wrikkala, for $34 million. Allegiance Capital advised the sell side.

Edmonds Capital, a buyout firm located in Arlington, Va., purchased two Atlanta, Ga.-based restaurant chains from franchiser Raving Brands: Shane’s Rib Shack and Planet Smoothie. No deal terms were disclosed.

PE-Backed M&A

Asmodee Group, a Paris-based distributer and publisher of collectible cards and games, has made three strategic acquisitions: Hodin, a Belgian-based game distributer, Cromola, a Spanish business, and Proludo gmbh, a German company that the Asmodee Group its stake in. Asmodee Group is backed by Montefiore Investment, a French private equity firm.

Tangoe, an Orange, Conn.-based entprise communications software services company, acquired InterNoded, a Waltham, Mass.-based provider of mobile device services. Tangoe has raised capital from Edison Venture Funds, Sevin Rosen Funds, North Atlantic Capital, and Axiom Venture Funds.

PE Exits

CMS Small-Cap Private Equity Fund, a Philadelphia investment firm that invests in micro- and small-cap companies, has sold Med-DISPENSE to Emerson for an undisclosed amount. Med-DISPENSE makes medical supplies for small hospitals and specialty healthcare facilities. Cobblestone Advisors advised the sell side.

Emerging Capital Partners, a Washington, D.C.-based buyout firm that invests in African companies, has sold its minority stake in SOMDIAA SA, a producer of sugar, flour and animal feed in Central Africa, for $26 million. The firm’s investment, made in 2003, earned it a 2x return.

Firms & Funds

WaterScience Technologies Inc., a Chicago-based water treatment startup, has raised $255,000 in funding from Matrix Partners, according to a regulatory filing. Matrix’s Rob Soni has joined the WaterScience board of directors. WaterScience does not have a working website.

HS LifeSciences, a Swiss independent advisory group, has launched a new fund callde QureInvest AG to invest in start-up biotech companies. The fund has collected CHF27.5 million ($24.5 million) in commitments to date.

Sun Hung Kai Financial, a Hong Kong based on-bank financial institution, is partnering with Paulson & Co, a U.S. investment manager, to raise $100 million to invest in distressed assets of financial companies.

TPG Capital has cut a $6 billion fund that invests in the financial services industry by 25%., according to LBO Wire.

Human Resources

Mizuho Corporate Bank, part of Mizuho Financial Group cut 27 jobs across its global leveraged business.

Gold Hill Capital has promoted Kathryn Marshall to controller. Ms. Marshall joined the firm in 2005 from PricewaterhouseCoopers. Gold Hill is a provider of growth capital financing for venture-backed technology and life science companies.

Mark Stevens, a partner at venture firm Sequoia Capital, is leaving the firm to work, in part, on nonprofit interests. Stevens joined the firm in 1989.

Dominick Petrosino, former Head of Leveraged Finance Capital Markets for Bear Stearns, has joined Moelis & Company as a Managing Director based in New York.

Vestar Capital Partners, a private equity firm based in New York, has promoted three of its principals to managing director: Chris A. Durbin, Brian J. Modesitt and Kristian M. Whalen.