PE Week Wire: Mon., Aug 13, 2007

The Service Employees International Union has become one of private equity’s sharpest critics, but nonetheless continues to invest in the asset class. It is hypocritical? Yup. Is it in the best interests of its members? Yup.

Oh, and it’s also kind of confusing. When SEIU launched its Behind the Buyouts campaign earlier this year, a reporter asked if the union invested in private equity. The answer – as I reported at the time – was that SEIU did not invest, but many of its members did via smaller unions or corporate pension funds. That statement is technically correct, in the sense that SEIU itself only invests a very small amount of cash in anything (all short-term), save for its real estate. But SEIU also oversees three major Taft-Hartley pension funds, and each of them invest in private equity. It’s the semantic equivalent of Harvard University not investing in private equity, while the Harvard Management Co. does.

In fact, the largest SEIU pension fund has been investing in private equity for nearly seven years. That would be the 1199 fund, an $8 billion pool that represents healthcare workers in New York City. It has a 5% allocation to private equity. Also investing in the asset class has been the SEIU Pension Plans Master Trust, which is actually is a $1.7 billion umbrella for three smaller funds.

The last of SEIU’s three funds to invest is the Building Service 32BJ Pension Fund, a $1.6 billion pool that represents janitors and other service workers. It joined the Master Trust in committing to a new $500 million fund-of-funds being raised by Hamilton Lane Advisors. The vehicle will be solely backed by union LPs, and will be return-driven with a non-exclusive emphasis on domestic fund opportunities. It will not pay attention to SEIU or other union policy matters when making its investment decisions. Other unions investing in the fund – called Hamilton Lane Capital Opportunities Fund – include the Southern Nevada Culinary & Bartenders Pension Trust, and the Electrical Workers Pension Fund, Local 103.

I spoke a bit with John Adler, SEIU’s director of private equity. He said: “We don’t view our critique of private equity as saying that the asset class can’t generate strong returns. In fact, we suggest that unions invest in private equity, as part of a risk-adjusted strategy. However, we also speak up when a particular deal could be bad for our members.”

Adler also added that SEIU has never asked any pension funds to abstain from investing in a particular private equity fund.

The closest it came was a recent SEIU Washington State Council request that Washington State Investment Board neither participate in the KKR IPO or alternatively buy a minority ownership stake in KKR. You can read those letters at peHUB.

*** Last week I asked you some quiz questions. Here is an answer key:

• Can you name the West Coast buyout firm that just raised its fundraising target to $5 billion? Hint: It doesn’t do cleantech, but you would be forgiven for thinking that it did.

The answer is Golden Gate Capital, which previously had been considering a $2.5 billion target. The clue relates to the fund’s evergreen structure (as previously reported in this space). This would be Golden Gate’s third general fund (and will include an overage fund), following a $1.8 billion second fund that was supplemented by a $614 million annex vehicle earlier in the year.

• Can you name the latest cleantech company to be funded by Kleiner Perkins and Khosla Ventures? Hint: It’s very earthy.

The answer is Altarock Energy Inc., a Seattle-based company that is developing advanced geothermal technologies. It’s still in deep stealth mode (thus the vague description), but has raised $4 million in Series A funding from KP, Khosla and seed backer Aaron Mandell (GreatPoint Energy). The company is run by veteran geothermal consultant Susan Petty.

*** Andrew Ross Sorkin had a good read in yesterday’s NY Times, sorting through what he referred to as the buyout freezeout. One quick piggyback notes: (1) Sorkin notes that LBO firms may be willing to suffer the reputational damage caused by backing out of troubled deals (e.g. Sallie Mae). The bigger issue, however, is whether or not banks are willing to run the same risk.

*** Tom Lee and his ex-partners get sued by Refco’s bankruptcy trustee. peHUB has the complaint for your perusal.

*** Regular respondent Sanket Patel is our latest Vox Populi blogger. He asks if Blackstone’s new $21.7 billion fund is the PE market’s equivalent of Barry Bonds’ 756th homerun…

Top Three

Midwest Airlines (AMEX: MEH) has agreed to pursue a $16 per share buyout offer from TPG Capital. The move comes after rival bidder AirTran Holdings (NYSE: AAI) said that its best and final offer would be $15.75 per share in AirTran stock. Midwest and TPG are expected to execute a definitive merger agreement by Wednesday, with TPG’s package to include a passive investment from Northwest Airlines.

Restoration Robotics Inc., a Mountain View, Calif.-based developer of robotic technologies for aesthetic surgeries, has raised $25 million in Series B funding, according to a regulatory filing. InterWest Partners led the deal, and was joined by return backers Alloy Ventures and Sutter Hill Ventures.

Michael Marks has been named interim CEO of electric car maker Tesla Motors, with current CEO Martin Eberhard becoming the company’s president of technology. Tesla is already searching for a fulltime replacement. Marks is the former CEO of Flextronics, who joined KKR in early 2006 and was an early Tesla investor. He will remain with KKR. Tesla has raised around $100 million in total VC funding from firms like Draper Fisher Jurvetson, Technology Partners, JPMorgan Partners, Valor Equity Partners and VantagePoint Venture Partners.

VC Deals

Opthotech Corp., a Princeton, N.J.-based drug company focused on back-of-the-eye diseases, has raised $36 million in Series A funding. SV Life Sciences led the deal, and was joined by HBM BioVentures and Novo AS.

Batanga, a Coral Gables, Fla.-based online media and entertainment company for Latinos, has raised $30 million in Series C funding. Tudor Ventures led the round, and was joined by return backer H.I.G. Ventures. Batanga was advised on the deal by Thomas Weisel Partners.

Pevion Biotech Ltd., a Swiss developer of prophylactic and therapeutic vaccines, has raised CHF 35 million ($29.16m) in “Series A” funding. BZ Bank Aktiengesellschaft led the deal, and was joined by BB Biotech Ventures, CC Private Equity Partners and return backer Bachem Holding AG. Pevion has now raised a total of CHF 55 million., a China-based provider of an online shopping platform with 3C authentication, has raised $10 million in VC funding from Capital Today.

PacketMotion Inc., a San Jose, Calif.–based provider of enterprise security and compliance solutions for the Fortune 2000, has raised $7.5 million in third-round funding. Return backers include Intel Capital, Onset Ventures and Mohr, Davidow Ventures. The company has now raised $34.5 million in total VC funding since 2004.

Sonicbids, a Boston-based operator of an online music community, has raised $4.5 million from Edison Venture Fund. Sonicbids software enables music talent buyers to review band submissions online.

Paymentus Corp., a Markham, Ontario-based provider of electronic bill payment solutions, has raised Cnd$3.6 million in VC funding. JLA Ventures led the deal, and was joined by Growthworks Canadian Fund and GrowthWorks Commercialization Fund.

Collinear Corp., a Santa Clara, Calif.-based provider of solid-state RGB light sources, has raised $3.1 million in Series B funding. Backers include Tallwood Venture Capital and Allegis Capital.

Pinpoint Selling Inc., a Kanata, Ontario–based provider of an automated 1-to-1 customer engagement solution, has raised Cnd$2.5 million from the GrowthWorks Canadian Fund.

Glide Pharma, a UK-based developer of a needle-less durg delivery system, has raised £2.3 million in third-round funding. Oxford Capital Partners was joined by return backers Oxford Technology 4 VCT. Gilde previously had raised a total of £2.6 million.

Buyout Deals

Macquarie reportedly has approached UK airport operator BAA about acquiring at least one airport in Southeast England. BAA was acquired last year by Spain’s Grupo Ferrovial, which British regulators may force to sell Heathrow, Gatwick and/or Stansted airport.

CDW Corp. (Nasdaq: CDWC) shareholders have okayed a $7.3 billion buyout of the company by Madison Dearborn Partners and Providence Equity Partners. The deal values CDW at $87.75 per share, and is expected to close by early Q4. CDW is a Vernon Hills, Ill.-based technology retailer.

Community Bank Investors of America has agreed to acquire a 9.9% equity stake in Silvergate Capital Corp., parent of Silvergate Bank. No financial terms were disclosed. As part of the deal, CBIA will apply for regulatory approval to increase its ownership to as much as 24.9%, which would make it a controlling shareholder.

DRI Corp. (Nasdaq: TBUS) has retained Morgan Joseph & Co. to advise on strategic options to help increase shareholder value. The Dallas-based company provides digital communications technology to the public transportation and transit security sectors. Its current market cap is just under $25 million.

PE-Backed IPOs

Reliant Pharmaceuticals Inc., a Liberty Corner, N.J.-based cardiovascular drug company, has filed for a $400 million IPO. It plans to trade on the NYSE under ticker symbol RRX, with Goldman Sachs and Merrill Lynch serving as co-lead underwriters. This is the company’s second swing for the IPO fences, having filed for a $300 million offering in early 2005, only to pull it several months later due to “unfavorable market conditions.” It has not raised any private funding since then, but previously had raised over $500 million from firms like Alkermes Inc., Bay City Capital, Invermed Associates, Morgan Stanley Private Equity, Goldman Sachs, Versant Ventures. Its final infusion came with an $864 million post-money valuation

DLI Holding Corp., a Uniondale, N.Y.-based maker of cosmetics and over-the-counter pharmaceuticals, has filed for a $200 million IPO. It plans to trade on the Nasdaq under ticker symbol DLIH, with JP Morgan and Bear Stearns serving as co-lead underwriters. DLI is owned by private equity firm Kelso & Company.

Ellora Energy Inc., a Boulder, Colo.-based oil and gas company, has raised the number of shares it plans to sell in its IPO from five million to eight million. It has not yet disclosed a price range, but has bumped up its original $86.25 million IPO target to $147.2 million. Ellora plans to trade on the Nasdaq under ticker symbol LORA, with AG Edwards and Friedman Billings Ramsey serving as co-lead underwriters. Ellora is a portfolio company of Yorktown Energy Partners.

PE Exits

Roche has completed its $272.5 million acquisition of Nimblegen Systems Inc., a Madison, Wis.-based maker of microarrays for the life sciences market. The deal came shortly after Nimblegen had filed for a $75 million IPO, and represented more immediate liquidity for shareholders like Skyline Ventures (14.04%), Cargill Ventures (13.37%), Schott AG (12.71%), Brookside Capital Partners (7.77%), Venture Investors LLC (6.55%), the State of Wisconsin Investment Board and Baird Venture Partners. Nimblegen had raised around $66 million in VC funding since 2000.

Marchex Inc. (Nasdaq: MCHX) has agreed to acquire VoiceStar Inc., a Philadelphia-based provider call-based advertising services. The deal is valued at $20 million, including around $12.9 million in cash and $7.1 million in restricted stock. Marchex also is committing to invest an additional $8 million into VoiceStar. VoiceStar had raised just over $1 million in VC funding from firms like First Round Capital and Ben Franklin Technology Partners.

AIG has agreed to buy German insurer Wurttembergische und Badische Versicherungs AG from J.C. Flowers & Company. No financial terms were disclosed.

Bain Capital has withdrawn plans to sell five million shares of chemical maker Innophos Holdings Inc. (Nasdaq: IPHS), via a secondary public offering. The deal would have reduced Bain’s ownership position from 48.5% to 24.5 percent. Bain acquired Innophos in 2004 from Rhodia for $550 million, and brought it public last fall.

PE-Backed M&A

Wire Rope Corp. of America, a St. Joseph Mo.-based producer and marketer of specialty wire ropes, has agreed to buy German wire rope maker CASAR Drahtseilwerk Saar GmbH. No financial terms were disclosed. Fox Paine bought WRCA last year from KPS Capital Partners.

Human Resources

Michael Marks has been named interim CEO of electric car maker Tesla Motors, with current CEO Martin Eberhard becoming the company’s president of technology. The company is already searching for a fulltime replacement. Marks is the former CEO of Flextronics, who joined KKR in early 2006 and was an early Tesla investor. He will remain with KKR. Tesla has raised nearly $100 million in VC funding from firms like Draper Fisher Jurvetson, Technology Partners, JPMorgan Partners, Valor Equity Partners and VantagePoint Venture Partners.

Harry Kraemer has joined the advisory board of executive career consulting firm Shields Meneley Partners. Kraemer is an executive partner with Madison Dearborn Partners and, before that, was CEO of Baxter International.