PE Week Wire, Jan. 30, 2007

The last time I discussed VC industry guidelines was in 2004, when a group proposed standardized portfolio valuation/performance metrics and best practices. It was a well-meaning effort, but ultimately toothless because not even its designers – both GPs and LPs – would commit to adoption.

So it was with a healthy dose of skepticism yesterday that I spoke with venture capitalist Pascal Levensohn, chair of a group that today released a whitepaper about the basic responsibilities of VC-backed company directors (read it here). The paper’s basic premise is that VC-backed boards are particularly prone to dysfunction, due to: (1) Conflicting interests; (2) The regular addition of new board members following financing rounds; and (3) The likely presence of inexperienced members like first-time entrepreneurs, junior VCs or independent directors with strong domain knowledge but no background on VC-backed boards. Moreover, what happens if one high-profile VC is on a board with a bunch of lower-profile VCs. Does the high-profile guy always get his way, because the others don’t ! want to lose out on the opportunity to continue co-investing?

The whitepaper addresses these issues in broad strokes, with the understanding that each company is different (it also acknowledges that its recommendations are most applicable for expansion-to-later stage companies). But the general guidelines are as follows: First, the board should designate a member responsible for educating new and existing directors about their responsibilities and for implementing the guidelines. This can be a VC or someone else. Those general responsibilities are detailed in the whitepaper (basics like attendance, confidentiality, not using PDAs, etc.), and should be distributed to new directors before their initial board meeting.

The next two strokes are more interesting, because they both involve evaluation. The first evaluation is a self-review, where board members should annually fill out answers to a set of questions set out in the white paper (should be a formal board agenda item). Examples of questions include: “Consistently read the material in advance of the meeting?” and “Communicated with fellow directors as needed regarding alignment of interests?” A review of the prior year’s self-review also is recommended. Next, the board is encouraged to engage in a thorough peer review process, which also is laid out in the whitepaper. The idea here is to generate feedback and to possibly provide a safe forum for the airing of grievances.

All in all, a good framework. But back to my initial skepticism. Is anyone actually going to implement them?

The preliminary answer, thankfully, seems to be “yes.” Every firm represented on the board is actively advocating that their expansion-to-later-stage portfolio company boards adopt the guidelines, with some already having done so. Levensohn, for example, says that portfolio company ReconNext already has approved the measures, while both Veraz Networks and Ubicom will vote on them in upcoming meetings (Veraz approval is a sure bet, given that its board also includes working group members Kleiner Perkins and Norwest Venture Partners).

The paper also has been endorsed by the Western Association of Venture Capitalists, the Israel Venture Association and the Women’s Technology Cluster. The NVCA has been actively observing the initiative – and “wholeheartedly supported its formation – but with withhold endorsement until seeing what happens when the guidelines are actually implemented.

New at

• Merger Mondays might seem slow, but 2007 buyout volume is outpacing 2006.

• nLine Systems Inc., VC-backed semiconductor equipment maker, is done. Check out the story and bankruptcy filing.

• Crosslink Capital is raising a combo fund.

And, as always, news an analysis updated throughout the day… Also, if you’d like to advertise at either peHUB or PE Week Wire, just send me an email and I’ll forward you on to the right people.

Top Three

Ception Therapeutics Inc., a Malvern, Pa.-based drug company whose lead candidates are anti-inflammatories, has raised $63 million in Series C funding. Essex Woodlands Health Ventures led the deal, and was joined by Investor Growth Capital, MDS Life Sciences, New Science Ventures and Aperture Venture Partners.

ServiceSource International LLC, a San Francisco-based provider of global outsourcing for hardware, software and healthcare companies, has received a $66 million minority investment from General Atlantic. ServiceSource clients include Sun Microsystems, AT&T, Hitachi Data Systems and Computer Associates. Existing shareholders include Benchmark Capital and Housatonic Partners.

Pacific Equity Partners and Merrill Lynch Global Private Equity have offered to acquire Veda Advantage Ltd. (f.k.a. Baycorp Advantage), a listed credit-checking giant in Australia and New Zealand. The offer is Au$3.61 per share, which would value Veda at approximately Au$823 million.

VC Deals

InnerPulse Inc., a Research Triangle Park, N.C.–based developer of implantable defibrillators, has raised $50 million in Series C funding. Participants include Johnson & Johnson Development Corp., Medtronic, Synergy Life Science Partners, Ascent Biomedical Ventures, Delphi Ventures and Frazier Heathcare Ventures. Both Boston Scientific and Greatbatch remain significant shareholders.

Lehigh Technologies Inc., a Naples, Fla.-based manufacturer of engineered rubber powder, has raised $18 million in new funding led by NGP Energy Technology Partners.

Nujira, a Cambridge, UK-based provider of power amplifier technology for the wireless industry, has raised $9.8 million in Series B funding. 3i Group and Amadeus Capital Partners co-led the round, and were joined by fellow return backers Cambridge Gateway Fund, Cambridge Capital Group and the Cambridge Angels.

Optosecurity Inc., a Quebec City-based developer of products for checkpoint security systems and screeners, has raised Cdn$10.54 million in second round funding. Backers include BDC Capital, Desjardins Capital regional et cooperatif, Fondaction CSN and Innovatech Quebec. The company also secured a Cdn$4.85 Million banking facility from National Bank of Canada.

Enerkem Technologies Inc., a Montreal-based provider of synthetic gass and other alternative fuels, has raised Cdn$8.6 million in new VC funding. Rho Ventures and Braemar Energy Ventures co-led the deal, and were joined by return backers Solidarity Fund QFL and Innovatech Sud du Quebec.

iPharro, a Germany-based developer of software that can identity videos faster than in real-time (particularly for copyright infringement applications), has raised Euro 4 million in startup funding from Triangle Venture Capital. The round helps iPharro spin out of the Fraunhofer Institute for Computer Graphics and launch as an independent company.

Navx, a France-based developer of software for GPS navigation devices, has raised Euro 3 million in Series A funding from Innoven Partenaires.

Osprey Pharmaceuticals Ltd., a Montreal-based drug company focused on chronic diseases, has raised US$9 million in new funding. The deal includes $6 million in tranched convertible notes from GeneChem Therapeutics Venture Fund, Desjardins Capital Regional et Cooperatif, BDC Venture Capital and Western Technology Seed Investment Fund. It also included $3 million in venture debt from MMV Capital.

iCardiac Technologies Inc., a Rochester, N.Y.-based commercializer of cardiac safety technologies developed at the University of Rochester Medical Center, has raised an undisclosed amount of private equity funding from Pfizer Inc., as part of a larger strategic agreement. iCardiac raised $4 million in Series A funding late last year from Advantage Capital Partners and Stonehenge Capital.

Whisher, a Spain-based social networking startup powered by a Wi-Fi network, has raised an undisclosed amount of VC funding from Benchmark Capital Europe.

Buyout Deals

Cypress Semiconductor Corp. (NYSE:CY) has agreed to sell its Silicon Valley Technology Center business to Oak Hill Capital Partners and Tallwood Venture Capital for approximately $53 million in cash. The transaction is expected to close by early March. SVTC gives startups and established companies the opportunity to develop and characterize novel silicon-based technologies cost effectively using a shared R&D environment.

Texas Pacific Group confirmed that it is among the several bidders for Italian airline Alitalia SpA. The ultimate sale price could top $2 billion.

Warburg Pincus reportedly has agreed to acquire a 25% position in Shanghai ZK Real Estate for an undisclosed amount

Riverside Partners has teamed with company management to acquire J-Pac LLC, a Somersworth, N.H.-–based contract manufacturer and equipment maker for medical device and biopharmaceutical OEMs. No financial terms were disclosed.

Silver Point Capital has agreed to acquire Sage Telecom Inc., an Allen, Texas–based CLEC focused on residential and small business customers in suburban and rural communities. No financial terms were disclosed.

Spell Capital Partners has acquired Rotonics Manufacturing Inc. (AMEX: RMI), a Gardena, Calif.-based rotational molding company, for $3 per share. Rotonics will delist later today. The total deal is valued at approximately $31 million, including $21 million in leverage arranged by Wells Fargo.

Sun Capital Partners has acquired certain assets of Elliston, Va.-based Rowe Furniture Inc., a bankrupt manufacturer of custom upholstered furniture. No financial terms were disclosed.,

Wind Point Partners has acquired Santa Maria Foods, a Toronto-based manufacturer, marketer and distributor of Italian-style deli meats, primarily under the San Daniele and Mastro brands. No financial terms were disclosed. In related news, former Dare Foods president Fred Jaques has been named CEO of Santa Maria Foods.

American Capital Strategies has acquired a 6.8% equity interest in Explorer Pipeline Co. from Citgo Petroleum Corp. Explorer Pipeline owns and operates the second-largest refined liquid petroleum products pipeline in the United States.

PE-Backed IPOs

Opnext Inc., an Eatontown, N.J.-based optical components maker, has set its proposed IPO terms to around 16.91 million common shares being offered at between $13 and $15 per share. It plans to trade on the Nasdaq under ticker symbol OPXT, with Goldman Sachs serving as lead underwriter. Hitachi is the company’s primary shareholder, while others include Clarity Partners and Cross-Atlantic Capital Partners.

This week’s remaining IPO calendar includes expected pricings from: Renaissance Acquisition Corp., Converted Organics Inc., HFF Inc., Animal Health International Inc., Dekania Corp., Information Services Group Inc., Union Street Acquisition Corp. and Employers Holdings Inc.

PE Exits

HgCapital has agreed to sell German provider of industrial automation and networking equipment Hirschmann Automation and Control GmbH to Belden CDT for $260 million in cash (plus the assumption of $60 million in liabilities).

Xantrex Technology Inc. (TSX: XTX) has agreed to acquire Elgar Electronics Corp. from J.F. Lehman & Co. for $108 million in cash. Elgar is a San Diego-based provider of programmable power products and systems.

Champlain Capital Partners has sold its stake in Totowa N.J.-based luggage manufacturer Badanco Enterprises Inc. to Randa Corp. for $63 million.

Fox Interactive Corp. is in talks to acquire Strategic Data Corp., a Santa Monica, Calif.-based company that helps online publishers optimize online advertising revenue, according to GigaOm. Strategic Data Corp. raised $6.25 million in 2000, including a $5 million infusion at a $25 million post-money valuation. Backers include Constellation Ventures, JNet Ventures and Smart Technology Ventures.

IBM (NYSE: IBM) has agreed to acquire Softek Storage Solutions Corp., a Vienna, Va.-based provider of data migration, data replication and disaster recovery software. No financial terms were disclosed. Softek was acquired in a management-led buyout from Fujitsu in March 2004, with equity sponsors including Investcorp Technology Partners, Columbia Capital, Needham Capital Partners and Updata Partners.

PE-Backed M&A

Select Medical Corp., a Mechanicsburgh, Pa.-based portfolio company of Welsh Carson Anderson & Stowe and Thoma Cressey Equity Partners, has agreed to acquire HealthSouth Corp.’s Outpatient Rehabilitation division for approximately $245 million in cash. The division includes approximately 600 facilities in 35 states that provide rehab for general orthopedic and sports injuries.

Firms & Funds

Black Diamond Capital Management of Greenwich, Conn. has closed its second distressed debt fund with $982 million in capital commitments. C.P. Eaton served as placement agent. The original distressed fund closed in September 2003 with $416 million.

Providence Equity Partners has secured $12 billion in capital commitments for its sixth buyout fund, according to Bloomberg.

Human Resources

Diane Smith has been named director of capital markets for Grameen Foundation, where she will source new financing opportunities for poverty-focused microfinance institutions (MFIs) by facilitating linkages between MFIs and international and local capital markets. She previously was a managing director and senior portfolio manager at Electra Investment Trust PLC, where she focused on the UK-based firm’s U.S. private equity portfolio and an expansion into South America.

J. Stanley Pepper has joined Lake Capital as an executive advisor. He is former CEO of Pepper Construction Co. and is a managing partner with Green Products, a company that develops and manufactures products for the green building market. He also runs Pepper Research and Consulting Services.

Carmen Carpenter has joined GE Commercial Finance-Global Media and Communications as a vice president focused on film finance. She previously was a vice president in Comerica Bank’s entertainment group.

First Reserve Corp. has promoted Glenn Payne to director and Anne Gold to chief administrative officer. Payne joined the firm in March 2004 as a vice president, while Gold joined in February 2005 as general counsel. The firm also has promoted Rahman D’Argenio, Brian Lee, Tim O’Keeffe, Jeff Quake and Josh Weiner to vice president; and Kristin Custar to director of investor relations.

Key Principal Partners has made four promotions: Cindy Babitt to partner; Beth Laschinger and Sean Mooney were to vice president; and Dan Kessler to senior associate.

Ventures West has promoted Robin Axon to partner. He joined the firm in 2001, and sits on the boards of portfolio companies AudienceView Software and Instrumar Ltd.

The Watermill Group has promoted Robert Held to the position of partner, and said that he will be responsible for the firm’s advisory practice.

Peter Stanton has joined executive recruiter Glocap Search as managing director of a new wealth management practice. Stanton previously was a senior vice president and director of banking strategy at UBS Wealth Management.