PE Week Wire, Jan. 24, 2007

The sun is shining, the State of our Union depends on who you ask and KKR was apparently jealous of Blackstone doing that Deutsche Telekom PIPE last year. In other words, it’s time for some Wednesday Warblings…

First up are some responses to yesterday’s column, which suggested that the private equity party might be approaching last call. Joe kicks it off with: “One thing to consider Dan is the cost of SOX compliance. This is NOT a synergy (or at least not a strong one) for strategics. However, for going private, the cost savings can be significant.Of course, any private that is thinking about returning to the public sector will prudently maintain some SOX frameworks remain in place.” So considered Joe, but you are correct in saying that any mega take-private must keep a lot of compliance mechanisms in place for subsequent re-entry into the public markets. I’d say a bigger concern is senior executive compensation, which often rises in take-privates because there won’t be any analyst/shareholder/media complaints.

Michael: Interesting editorial, but I think you’ve missed the mark… PE returns are getting lower, but let’s be honest, the pools of capital (i.e. dumb LP money) have to put it to work somewhere, just like the GPs do. The returns for GPs are so much greater than returns for LPs that there is no reason that the GPs will stop. Second, large LBOs are less risky than small ones (think of US Treasury’s compared with a something issued by a third-world nation) so the returns should be lower anyway, and you can probably get to a risk appropriate return even with heavy financial engineering, which may be lower than the historically experienced IRRs.”

Stu: I agree that the ‘bubble’ in LBOs will come to a different end than the VC bubble in 2000 – if for no other reason that the LBO folks invest in companies with assets and revenues rather than eyeballs and hoopla. But won’t the sheer volume of capital inevitably drive down the returns? Both because of the competitive pressures that you described yesterday, but also because the exit volume isn’t there? If you look at the volume of capital now up for deployment and make some assessment about the returns that would make LPs happy and run the math forward… where are the exits? I don’t think there’s going to be a “crash” here but I worry that a lot of funds will be holding large private or public positions that they can’t liquidate – that will tie up the funds of their investors for a long time – probably 5-7 years and result in a much lower set of returns.”

*** An anonymous reader summed up the responses to Tim Draper’s musical performance last week at Wharton: “Tim trotted out the same song at the HBS VC/PE conference in 2005. Sorry to hear that he’s continuing to inflict it on hapless, wide-eyed conference attendees.”

*** Some responses to last Tuesday’s column about knowledge process outsourcing, related to Adventity raising $20 million from Norwest Venture Partners. Manish writes: “One of the dirty little secrets of the great “Indian growth story” is the lack of true quality people. Being on the ground in India, I see if everywhere.Yes, many Indians have great book knowledge, but practical application is another issue.I’m sure the first few KPOs will do well, but it will quickly lose its great IRR numbers once everyone piles into the space.”

Zakeer: “Your comment – ‘Wall Street analysts beware: Your jobs could soon be outsourced’ exaggerates the truth. Outsourcing is not going to replace the job of an analyst; there is a limit to what an analyst can do, sitting far away from the market which he/she needs to track. The real insights in to the company come from speaking and meeting with the management of the company, suppliers, buyers/users etc and this is what an outsourced analyst will not be able to do. The outsourced analyst can help in building and updating the models, write the reports and do all the secondary research. The real threat is to the junior analysts and here also they can not replace them completely. However this trend of outsourcing certainly opens up new opportunities for both parties. On one end the I-Bank analyst gets the cost advantage, 24/7 support and new ideas which are not influenced by Wall Street hype. On the other end the guy sitting in India gets to work with the best brains in the world and the job pays well compared to Indian standards.

*** Matt was one of many variations on the same theme: “No mention of the Pats? I heard they finished second on Sunday…” They lost? No Matt, you must be mistaken. They were winning with just a few minutes to go…

Top Three

Cylene Pharmaceuticals Inc., a San Diego-based oncology drug discovery and development company, has raised $44 million in Series C funding. HBM BioVentures and Lilly Ventures co-led the deal, and were joined by Sanderling Ventures, Novartis BioVenture Fund, BioVentures Investors, Research Corp. Technologies, Mitsui & Co. Venture Partners and Celgene Corporation.

Sun Microsystems Inc. (Nasdaq: SUNW) has received a $700 million PIPE infusion from KKR Private Equity Investors, the Amsterdam-listed fund of Kohlberg, Kravis Roberts & Co. The deal includes $350 million of convertible senior notes due in 2012 and $350 million of convertible senior notes due in 2014. KKR also will receive a seat on the Sun board of directors.

Silver Lake Partners has held a $3.5 billion first close on its third fund, according to a regulatory filing. The vehicle is being marketed with a $10 billion cap, with Merrill Lynch serving as placement agent.

VC Deals

SARcode Corp., a San Francisco-based developer of LFA-1 inhibitors to treat inflammatory diseases, has raised $25 million in Series A funding co-led by Alta Partners and Clarus Ventures. The company had called down $5 million of the deal as of January 2, according to a regulatory filing.

Zing Systems Inc., a Mountain View, Calif.-based developer of a mobile entertainment platform, has secured $12.5 million of a $13.41 million third-round funding, according to a regulatory filing. IDG Ventures Boston was joined by return backer Redpoint Ventures.

BridgePoint Medical Inc., a Minneapolis-based developer of a device for crossing coronary and peripheral chronic total occlusions, has raised $10 million in second-round funding. Foundation Medical Partners led the deal, and was joined by return backers Michael Berman, New Enterprise Associates and Polaris Venture Partners.

Day4 Energy Inc., a Burnaby, British Columbia-based photovoltaic panel developer, has raised Cdn$11 million in new VC funding. No additional information was disclosed, although VentureWire reports that the deal was led by Goodwood Capital Fund. GMP Securities served as placement agent.

Sermo, a Cambridge, Mass.-based online community created for physicians, has raised $9.5 million in Series B funding. SoftBank Capital led the deal and was joined by return backer Longworth Venture Partners.

Loadstar Sensors Inc., a Mountain View, Calif.-based maker of capacitive load sensors, has raised $7 million in Series B funding. AIG SunAmerica Ventures led the deal, and was joined by Dali Hook Partners and Needham Capital Partners.

Ciclon Semiconductor Device Corp., a Bethlehem, Pa.-based developer of high-frequency power semiconductor solutions, has secured $6.05 million of a $14.05 million Series B round, according to a regulatory filing. Return backers include TL Ventures and Venrock Associates.

Ripple, an El Segundo, Calif.-based developer, distributor and programmer of out-of-home digital networks, has raised $5 million in Series A funding from Trinity Ventures and Draper Fisher Jurveston.

Wikio, a Luxembourg-based operator of personalized Web information pages, has raised $5.3 million in Series A funding. Lightspeed Venture Partners led the deal, and was joined by Gemini Israel Funds.

Procore Technologies, a Santa Barbara, Calif.-based provider of an online tool for construction project management, has raised $4 million in Series B funding led by Great Pacific Capital.

RPM Communications Inc. (a.k.a. Foonz), a Sudbury, Mass.–based provider of free conference call and group calling solutions, has raised $1.08 million in Series A funding from Morgenthaler Ventures.

Flexicath Ltd., an Israel-based catheter developer, has raised $754,000 from The Zitelman Group of Washington D.C.

LFH Brand Identity, a UK-based print and design management agency, has raised Gbp250,000 in venture funding from The Capital Fund.

SmartDrive Systems Inc., a San Diego-based provider of driver risk management systems and services, has raised an undisclosed amount of Series C funding. Oak Investment Partners led the deal, and was joined by return backers Revolution Ventures, the Founders Fund and Western Technology Investments.

Buyout Deals

Goldman Sachs and Morgan Stanley are part of a consortium that may bid $15 billion for the oil and gas assets of utility Dominion Resources Inc. (NYSE: D), according to The Wall Street Journal. The group also includes Carlyle/Riverstone, First Reserve, Madison Dearborn Partners and Warburg Pincus. A competing consortium includes Blackstone Group, KKR and Texas Pacific Group.

Cornell Corrections Inc. (NYSE: CRN) shareholders have rejected an $18.25 per share buyout offer from Veritas Capital, which would have valued the Houston, Texas-based prison operator at around $518.6 million (including $273.6 million of assumed debt).

The Carlyle Group and Providence Equity Partners have completed their $38 per share acquisition of Open Solutions Inc. (Nasdaq: OPEN), a Glastonbury, Conn.–based provider of enabling technologies for financial institutions, for $38 per share. The total deal is valued at over $1.3 billion, including the assumption of debt.

The Yankee Candle Company Inc. (NYSE: YCC) shareholders have approved a $34.75 per share buyout offer from Madison Dearborn Partners. The total deal is valued at around $1.7 billion, including $300 million in assumed debt. It is expected to close next month.

H.I.G. Capital has completed its acquisition of PetroCom LLC, a New Orleans-based cellular carrier in the Gulf of Mexico and a full-service telecom solutions provider for the offshore industry. No financial terms were disclosed. H.I.G. has subsequently merged PetroCom with Sola Communications, which it acquired last year.

American Capital Strategies has completed a $411 million one-stop-buyout of WIS International, a San Diego–based provider of outsourced inventory management services.

Goldman Sachs reportedly is selling its control stake in Japanese lender Sanyo Electric Credit Co. for approximately $350 million. Bidders include GE Capital and Shinsei Bank.

CVC Capital Partners and KKR have agreed to buy Dutch waste management company Van Gansewinkel. No financial terms were disclosed. The firms then would merge Van Ganswwinkel with joint portfolio company AVR, which they acquired last year.

Newbridge Capital has agreed to acquire a control stake in Taiwan-based Union Insurance Co. from Rebar Asia Pacific Group, according to Reuters. The deal is valued at $100 million.

PE-Backed IPOs

Rosetta Genomics Ltd., an Israel-based drug company focused on microRNAs, has amdned its IPO terms to 3.75 million ordinary shares being offered at between $7.50 and $8.50 per share. It previously filed to sell 3 million shares at between $11 and $13 per share. It still plans to trade on the Nasdaq under ticker symbol RSOG, with C.E. Unterberg Towbin serving as lead underwriter. Backers include Insight Capital and Kadima Hi-Tech Ltd.

PE-Backed M&A

Appleseed’s Topco Inc., a portfolio company of Golden Gate Capital, has agreed to acquire Blair Corp. (AMEX: BL) for $42.50 per share in cash. The total transaction is valued at approximately $173.6 million. Blair Corp. is a Warren, Pa.-based catalog and multi-channel direct marketer of women’s and men’s apparel and home products.

Questex, a B2B media acquisition platform of Audax Group, has acquired UK-based McLean Events, according to LBO Wire.

PE Exits

Bioscrypt Inc. (TSX: BYT) has agreed to acquire A4Vision Inc., a Sunnyvale, Calif.-based provider of identification systems using 3D facial imaging and recognition technology. No financial terms were disclosed. A4Vision had raised over $25 million in VC funding since its 2001 inception, from firms like MyQube, Hanna Ventures, In-Q-Tel, Motorola Ventures, Menlo Ventures, Stanford University and Sunrise Capital.

The Riverside Company has sold Hungarian glassmaker Salgglas Üvegipari Rt. to CEE Industrial Holdings Ltd. No financial terms were disclosed. Riverside was advised by Brown Gibbons Lang & Co. and Invescom Corporate Finance.

Blackstreet Capital Management has sold ThermoView Industries Inc., a manufacturer and marketer of home improvement products and services, to company management. No financial terms were disclosed. Blackstreet originally purchased ThermoView while it was reorganizing under chapter 11 in September 2005.

Firms & Funds

The Carlyle Group is raising around $5.93 billion for its third European buyout fund, according to a regulatory filing. It already has secured nearly $3.1 billion.

Englefield Capital has closed its second European mid-market fund with Euro 1.06 billion in capital commitments.

Tailwind Capital held a $320 million first close on its first fund since spinning off from Thomas Weisel Partners last January, according to Private Equity Insider. The overall target is $750 million, with Atlantic-Pacific Capital serving as placement agent.

Radius Ventures of New York is raising $200 million for its third fund, according to a regulatory filing. It already has secured around $46.84 million.

New York Life Investment Management has closed its second mezzanine fund with around $260 million in capital commitments, according to a regulatory filing.

Giuliani Partners is planning to sell its boutique I-banking unit Giuliani Capital Advisors, according to The New York Times. The move is being made in preparation of firm founder Rudy Giuliani’s expected presidential campaign.

Human Resources

Roger Holstein has joined Vestar Capital Partners as a managing director. He previously was CEO of WebMD Corp.

Richard Whitney has joined New Enterprise Associates as a venture partner in the firm’s Menlo Park, Calif. office. He previously served as founder and managing member of Whitney Capital, a private equity firm focused on the healthcare services and products space. Before that, he was executive chairman of Specialty Labs and CFO of DaVita Inc.

Betty Hung has joined Vista Equity Partners as operating vice president. She previously was with Garnett & Helfirch Capital as vice president of portfolio company operations.

Jonathan Noble has joined Montgomery Law Group as a partner in the firm’s corporate and securities practice. He previously founded by Noble Law Group in Palo Alto, and before that was an attorney with Gunderson Dettmer.

Berkshire Partners has promoted Michael Ascione to the position of managing director. He joined the firm in 2001, and had been serving as a principal.

Alvarez & Marsal Transaction Advisory Group has staffed up with the following hires: Geoff Weber, formerly of KPMG, as a Chicago-based director; Andrew Henoch, formerly of PricewaterhouseCoopers, as a Chicago-based senior associate; Alexander Chan, formerly of Deloitte & Touche, as a San Francisco-based director and; Brad Goldsmith, formerly of Ernst & Young, as a New York-based senior associate.