It’s my last day compiling PE Week Wire, since Dan returns from vacation Monday. Thanks for all your feedback, and keep it coming at peHub.com, where I’m now writing full time. Today’s column covers last night’s Tax Loophole Protest (in front of KKR’s New York Headquarters), which I peeled myself from my air-conditioned cubicle to attend.
The Service Employees International Union has expressed a number of complaints about private equity firms: they aren’t socially responsible, they deplete a company’s cash reserves, and they take on too much risk, to name a few. But for this event, the SEIU kept it simple: Change carried interest tax law, or in the words of a rally poster, “No Tax Breaks For Buyout CEOS.”
One thing I noticed about SEIU’s message during “The Great Debates” panel at Buyouts East is that it’s simple and catchy, but doesn’t always examine the nuances of a situation; it doesn’t always “get it.” And that’s what a lot of the crowd looked like at this protest. Other than 40 or so people in the front, most of the rally’s attendants looked hot, unengaged, and content to chat among themselves. I can’t blame them. Private equity is complicated, difficult to understand, and even a little bit boring (admit it, nothing kills a conversation like leveraged lending).
But here is where I take issue. It is one thing to simplify a message in order to get people behind it. But vilifying the entire industry isn’t going to win me over. (There were accusations of “secret shareholder meetings.”). The message seemed to be that private equity, along with Henry Kravis, money, suits and big business, is evil. The rallying cry called for health care for all workers, which I agree is necessary, but the protesters would have me believe it’s as simple as “taking our money back.”
First of all, a carried interest tax hike—if passed—would be used to replace existing revenue from the outdated AMT tax. No new money for health care here. Secondly, the carried interest income lining Henry Kravis’s pockets isn’t being stripped from the companies he owns or their employees, it’s generated when a company that his firm improved is sold for more than it was bought for. Why would someone pay a higher price for a business if it wasn’t more valuable? Which brings me to my point. Despite my ribbing of the corporate phrase “value creation,” I do believe private equity firms create value. Revisit last week’s Ernst & Young PE study, which concludes that, for the third year in a row, private equity has outperformed public benchmarks in both growth and enterprise value. (Studies on job growth haven’t excl! uded synthetic growth through add-on acquisitions, so I’m leaving that issue out of this.)
Private equity has its place. Perhaps it got bigger than it needed to be (rising tide, anyone?) and perhaps some firms make all their money on leverage and carried interest. But if we’re going to point the finger of evil, let’s keep in mind that public companies cut costs and health care, too. And think of all the once-struggling but now-thriving businesses that wouldn’t be around if not for turnaround shops.
But enough cheerleading, because I happen to agree that carried interest should be taxed as ordinary income. Plenty of alternative investment professionals I’ve talked to agree, too. Look at the testimony of InterMedia Partners’s Leo J. Hindery for further proof. It’s even been said that no matter who gets elected this fall, the carried interest jig is probably up. Obama will certainly approve of a hike; with McCain it’s less clear. A number of firms are planning for the change in their LP agreements.
But I ask you, SEIU, is it so hard to make that point without attacking the business of private equity? For me, the rallying cry of the SEIU and its partner, the Working Families Party, doesn’t add up. Sure, if the tax loophole gets closed, returns will surely take a hit, and Henry Kravis may take home a little less money. But that won’t make private equity disappear, or knock businesspeople down a whole tax bracket. And even more importantly, it won’t stop public pensions and institutional investors from earning returns from the best players in the asset class.
Top Three
EStyle Inc, a VC-backed baby and maternity wear retailer, received approval from the U.S. Bankruptcy Court in Los Angeles to sell its assets to PE firm Hancock Park Capital II LP for around $6.4 million. The company had raised as much as $146 million in venture funding since its inception in the late 1990s.
Kelso & Co., a New York-based private equity fund, closed its eighth investment fund at $5.1 billion in commitments. The firm’s principals are the largest collective investor in the fund, named Kelso Investment Associates VIII LP.
Silicon Alley Media, an online publisher, received an undisclosed amount of angel funding led by Kohlberg Ventures. Co-investors included Kenneth Lerer of the Huffington post, Dave Morgan of Tacoda and 24/7 Real Media, Gordon Crovitz formerly of the Wall Street Journal, Howard Lindzon of Wallstrip, About.com founder Scott Kurnit, former AOL Time Warner SVP Richard Hanlon, and venture firms Pilot Group and IA Capital. The business is part of AlleyCorp.
VC Deals
Soma Networks, a San Francisco broadband services business, secured $51 million in equity with investments from Daiwa Securities Group Inc.; Daiwa Securities SMBC Principal Investments Co. Ltd.; Ridgeway Capital Partners Ltd.; and India Knowledge Fund, a private equity fund of Japan-based SBI Holdings Inc. and SBICAPS.
Silicon Alley Media, an online publisher, received an undisclosed amount of angel funding led by Kohlberg Ventures. Co-investors included Kenneth Lerer of the Huffington post, Dave Morgan of Tacoda and 24/7 Real Media, Gordon Crovitz formerly of the Wall Street Journal, Howard Lindzon of Wallstrip, About.com founder Scott Kurnit, former AOL Time Warner SVP Richard Hanlon, and venture firms Pilot Group and IA Capital. The business is part of AlleyCorp.
Vertos Medical, a San Jose, Calif.-based medical device maker, closed a sSeries C financing worth $12 million. Lead investors CHL Medical Partners and Foundation Medical Partners were joined in the round by previous investors Aweida Venture Partners and DFJ Mercury.
Elemental Technologies Inc, a Portland-Oregon massively parallel video processing software provider, secured its first round of funding, worth $7.1 million, from General Catalyst Partners of Boston, Mass. and Voyager Capital of Seattle, Wash.
Austin Logistics, a software maker focusing on financial services, secured a third round of funding, with commitments from Baird Venture Partners, Apex Venture Partners, Total Technology Ventures and North Hill Ventures.
Buyout Deals
EStyle Inc, a VC-backed baby and maternity wear retailer, received approval from the U.S. Bankruptcy Court in Los Angeles to sell its assets to PE firm Hancock Park Capital II LP for around $6.4 million. The company had raised as much as $146 million in venture funding since its inception in the late 1990s.
Hexion Specialty Chemicals, the Apollo Management-backed business in a battle over its proposed takeover of Huntsman Corp, is being sued by a Huntsman shareholder who claims that Hexion should have disclosed its concerns about Huntsman’s performance. Apollo and Hexion tried to back out of the agreed $10.6 billion merger based on those concerns; the companies filed suit against each other.
AMP LTD, an Australian bank, is selling Jeminex Group, its private equity arm, and could be worth as much as A$400 million ($388 million), Reuters reported. The business is being advised by Caliburn Partnership on its sale.
Pritzker Group, a Chicago and Los Angeles-based investment firm for the Pritzker family, acquired Signicast, a Hartford, Wis.-based custom metal component maker, for an undisclosed amount.
Lion Capital, a UK private equity firm, acquired Mora, a Benelux frozen snacks business for an undisclosed price.
AP Capital Partners acquired eServices, an energy management company based in Richmond, Va. The Orlando, Fla.-based private equity firm took on mezzanine financing from SPP Mezzanine, Patriot Capital, Spring Capital, and Plexus Capital.
Olympus Partners, a Stamford, Conn.-based private equity firm, acquired Snyder Industries, a Lincoln, Neb.-based customer container maker, from Cortec Group. Deal terms were not disclosed.
Equinox, a Luxembourg-based private equity firm, and the holding company Miro Radici Finance confirmed joint interest in struggling Italian airline Alitalia.
Blue Capital, a holding company controlled by Bernard Arnault and Colony Capital, as increase its stake in French retailer Carrefour Group to 12.9%. Blue Capital controls 12% of the company’s voting rights.
PE IPOS
Rexnord Holdings, an Apollo Management-backed power transmission and water management company based in Milwakee, Wis., filed to go public for up to $750 million. Apollo purchased the business in 2006 for $1.85 billion.
Brand Energy & Infrastructure Services, a Kennesaw, Georgia-based energy services company, filed to float $300 million worth of shares. Brand Energy is backed by First Reserve Corporation. Goldman Sachs & Co, UBS Investment Bank, and Morgan Stanley will underwrite the IPO.
PE-Backed M&A
The Riverside Company acquired MetroTeknik, which it will add-on to its portfolio company, Keycast Group. MetroTeknik is based in Halmstad, Sweden, and makes steel components that are required for severe environments.
Dynamic Offshore Resources, a Houston-based oil producing property acquisition business backed by Riverstone Holdings, purchased Northstar Exploration and Production Inc for $235 million. Riverstone invested $500 million in Dynamic Offshore in January of this year.
Dynova Laboratories, a Parsippany, N.J.-based, Aisling Capital-backed natural consumer health company, purchased SiCap Industries for an undisclosed price. SiCap makes OTC allergy and headache medicine under the brand Sinus Buster.
Prospect Partners recapitalized Linkage Inc, a Burlington, Mass.-based education service provider for executives and senior management, for an undisclosed amount. The company’s management participated in the deal.
Supply Chain Partners, a Cleveland, Ohio-based distribution-focused private equity firm, acquired Solon, Ohio-based Cone Industries, a catalog imaging supplies and accessories distributor.
Arbel Medical, an Israeli cryotherapy development start-up, completed a $4.5 million second round of fundraising led by Giza Venture Capital. Giza invested $1 million, with prior investors Ofer High Tech, Bridge Investment Fund, TRD and Fattal making up the difference.
Tigermed Consulting Co, a Shanghai-based contract research company, has closed a Series A round of fundraising for an undisclosed amount from Qiming Venture Partners.
thePlatform, a broadband and mobile services company owned by Comcast, has acquired Chirp Interactive, a San Francisco-based social media application maker, for an undisclosed amount. Chirp has received venture funding from Greylock Partners, SoftTech VC, Reid Hoffman, and investors Jay Adelson of Digg Inc. and Dave Samuel of Spinner.com.
ConnectEDU Inc, operator of a Boston-based Web site geared toward college students, educators and employers, has acquired Prep HeadQuarters, a college planning Web service. ConnectEDU is backed by angel investors and received $9 million in funding this year.
Medical Present Value, a medical group consulting service, has acquired Plymouth, Mass.-based TeraHealth, as insurance and benefits verification software and service company. Medical Present Value is backed by Care Capital, CenterPoint Ventures, Rho Capital Partners, Star Ventures, Sevin Rosen Funds and Techxas Ventures.
PE-Backed Exits
ECO International has acquired AuctionDrop, a Menlo Park-based, VC-backed liquidation company. AuctionDrop had received backing from Mobius Venture Capial, Draper Associates and G-51 Capital Management.
Firms and Funds
Egeria Capital Management, a Dutch mid-market buyout firm, closed its third fund with commitments totaling €500 million ($790 million). The firm had an initial target of €400m.
Kelso & Co., a New York-based private equity fund, closed its eighth investment fund at $5.1 billion in commitments. The firm’s principals are the largest collective investor in the fund, named Kelso Investment Associates VIII LP.
DN Capital, a European venture capital firm focusing on software and digital media, will open an office in Palo Alto, Calif. The firm is currently fundraising for its second effort.
Human Resources
Raj Pai joined Global Environment Fund as a managing director for the Chevy Chase, Md.-based private equity firm’s India and South Asia investments. A former CID Capital managing director, Pai will be based in Mumbai.
William J. “Butch” Cullen and Janet A. Barbiere joined law firm Kaye Scholer’s structured finance group as partners. Cullen and Barbiere will be located in New York. They hail from Thacher Proffitt & Wood LLP.
Boxwood Partners, a Richmond, Va.-based mid-market investment bank, hired Bryan Burden, formerly of Wachovia Securites, as a VP.
Matrix Capital Markets Group, a mid-market investment bank based in Richmond, Va., hired John Cudzik, formerly of Ferguson Enterprises, as a Director to head its Building Products practice. The firm also hired Kevin White, formerly in corporate development for Circuit City, as a vice president. The firm also hired Kim Wagner as an Analyst in its energy and multi-site retail group, and Cara Crealis ! in marketing. The firm promoted David Shoulders and Chris Menasco to Associate.
Crowell & Moring hired Michael Blumenthal, the formerly at Thelen Reid Brown Raysman & Steiner, as well as Bruce J. Zabarauskas, also joining from Thelen, and Steven Eichel, joining from Skadden, Arps, Slate, Meagher & Flom. The attorneys join the firm’s financial services group.
Avista Capital Partners retained John Huff, Chairman of the Board of Oceaneering International, Inc., as an industry advisor. Huff was previously president and CEO of Oceaneering, and before that a managing director at Falcon Partners.
Hudson Clean Energy Partners hired photovoltaic industry veteran Terry Jester as an Entepreneur-In-Residence.
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