PE Week Wire: Mon., June 25, 2007

There was a lot made last Friday of how Steve Schwarzman kept an unusually low profile, even though his firm priced the largest IPO in five years. No stock exchange bell-ringing, celebratory public outing, etc. Some think he was just watching QVC and waiting for an item worth $7 billion. Or perhaps flipping through his autographed copy of Holly Peterson’s The Manny.

But I have an alternate theory for why Schwarzman kept his head down: He didn’t want to get pelted with eggs by all of the venture capitalists, buyout pros and hedge fund managers who are angry with him.

In less than 12 hours, Schwarzman went from prince to piñata – as a number of people blamed him and his firm for the carried interest legislation that could raise taxes from the capital gains rate of 15% to the ordinary income rate of around 35 percent. I received a couple dozen emails saying something of the sort, and have seen it bandied about the blogosphere. So now to the important question: Is Blackstone to blame?

Rep. Sanders Levin (D-MI), lead sponsor of the carried interest tax bill, says no. He told CNBC that he began examining the issue before Blackstone filed for its IPO. Same answer from Mark Heesen, president of the National Venture Capital Association. He first heard rumblings of such a bill at least four or five months back.

But the manicured masses are up in arms for a reason. Blackstone was the spark that lit what had previously been idle talk – moving it from the hallways to the conference rooms. Not just the IPO, but also the way in which Schwarzman carried himself. The lavish birthday party, the public churlishness and the $300 stone crabs (not the crabs per se, but letting a WSJ reporter know about them). I even wrote a column back in February about how Schwarzman should tone down the birthday party, because such ostentatious displays would make life difficult for the industry at large. Suffice to say, my advice was not heeded.

Blackstone and Schwarzman became grist for nearly everyone’s mill. Journalists. Labor leaders. Legislators. Etcetera. They experienced great success, and then had to let everybody know about it via regulatory disclosures. Just another reason why private equity firms are wary of added transparency (and perhaps why they should think twice before going public themselves)…

Someone close to Blackstone complained to me that it just isn’t fair that the firm is being blamed for possible tax changes. It has produced extraordinary returns for its investors – state treasuries, corporate pension funds, university endowments, charitable foundations, etc. – and why shouldn’t Schwarzman be allowed to spend his dough the way he sees fit?

And he’s right to complain. The blame isn’t really fair. But neither is politics, and Blackstone should have seen this coming.

*** I’m beginning to wonder if this carried interest debate is a bit like steroids in baseball. A number of industry people seem to support a tax change, but don’t want to speak publicly about it (for fear of ostracism). So kudos to venture capitalist Fred Wilson, for writing the following:

I strongly believe that long term capital gains should be taxed differently than short term capital gains. And I also strongly believe that capital gains should be taxed differently than ordinary income. The counter argument is that the economic incentives to take risk with your capital should be enough and you don’t need additional tax incentives. I don’t buy that. Human nature being what it is, most people are going to want to be conservative with their capital. Taking a risk with your capital, particularly on new business initiatives (whether it’s a new restaurant in the neighborhood or a cure for cancer), is something we need to encourage. And many of the developed countries in the world agree. In some countries, capital gains are not taxed at all. I don’t think we need to take the economic incentives that far.

But, and this is a big but that will annoy most if not all of my colleagues in the VC and private equity businesses, if you are generating those gains with other people’s money (OPM), then that is a fee you are being paid and it should be taxed as ordinary income. I really don’t see how anyone can argue otherwise with a straight face.

If Congress is successful in taxing carried interest as ordinary income, it will massively increase the amount of taxes I pay. So be it. Someone has to pay the taxes to keep our troops equipped, our borders secured, our schools modernized, and our children healthy. It might as well be me and my wife.

I’ve heard this from lots of other PE Week Wire readers, but all of them have included the postscript: “Please don’t use my name.” The vast majority of you, of course, supports a continuation of existing tax policy, and have put forth dozens of strong arguments in support of your case (see here and here). But some small cracks are beginning to show in the solidarity.

*** Last Friday, I asked every single presidential campaign if their candidate: (A) Would support or oppose the so-called Blackstone Bill introduced on June 14 in the Senate, and (B) Would support or oppose the “carried interest” bill introduced last Friday in the House. Romney is opposed on both counts, as is former Virginia Gov. Jim Gilmore. Tom Tancredo wants to wait until hearings before making up his mind. Those were the only respondents. An ABC World News report – in which I appeared briefly – also suggested that no one else is yet willing to take a stand (and ABC has far better access than me).

*** I’m not in San Francisco. Still in Boston, as the conference to which I referred last week is in late July. A bit of late-week light-headedness…

*** Finally, Buyouts Magazine has begun a series of articles on why there are so few women and minorities at work in the buyouts industry. The effort begins here.

Top Three

Jones Apparel Group Inc. has agreed to sell high-end fashion retailer Barneys New York, synonymous with high New York fashion to Dubai-based Istithmar for $825 million. Jones acquired Barneys New York for $400 million in 2004, marking its first foray into the growing luxury market. Barneys competes with other retailers such as Saks Inc. and Neiman Marcus Group Inc. The sale is expected to close next quarter.

Ripplewood Holdings has agreed to sell Supresta LLC, an Ardsley, N.Y.–based producer of phosphorus-based flame retardants, to Israel Chemicals Ltd. for $352 million. Supresta was formed in July 2004, when Akzo Nobel sold its phosphorus chemicals flame retardant business to Ripplewood.

Argolyn Bioscience Inc., a Charleston, S.C.-based drug company focused on psychosis and pain, has raised $15.8 million in first-round funding. Intersouth Partners and Quaker BioVentures co-led the deal, and were joined by Amgen Ventures.

VC Deals

Ortiva Wireless, a La Jolla, Calif.-based mobile content delivery company, has raised $15 million in Series B funding. Comcast Interactive Capital led the deal, and was joined by return backers Artiman Ventures, Mission Ventures, and Avalon Ventures.

Hammerhead Systems Inc., a Mountain View, Calif.-based data communications equipment vendor, has secured $10 million of an $18 million Series D round, according to a regulatory filing. Return backers include Enterprise Partners Venture Capital, Foundation Capital, Mayfield Fund, Pequot Capital Management. It previously raised around $83 million in total VC funding since its 2002 inception.

MicuRx Pharmaceuticals Inc., a Union City, Calif.-based developer of anti-infective drugs, has raised $10 million in Series A funding from Morningside Group.

Rivermine Software Inc., a Fairfax, Va.-based provider of telecom management software, has raised $8.7 million in Series C funding. SoftBank Capital led the deal, and was joined by return backers Columbia Capital, Longworth Venture Partners and Valhalla Partners.

Revision3, a San Francisco-based Internet television network, has raised $8 million in Series B funding led by Greylock Partners.

SeatWave Inc. (f.k.a. Stockholm Interactive), a London-based online ticket marketplace, has raised $8 million in Series B funding, according to a regulatory filing. Mangrove Capital Partners led the deal, and was joined by return backer Atlas Venture.

Tempo Payments Inc., a San Mateo, Calif.-based interoperable retail payment network that clears PIN debit transactions through the ACH payment system, has raised $4.8 million in Series B-1 funding, according to a regulatory filing. Backers include Cardinal Venture Capital, Selby Venture Partners and Household Corporation.

Adventenna Inc., a Santa Clara, Calif.-based satellite antenna startup, has raised $4.56 million in Series A funding, according to a regulatory filing. Backers include Sevin Rosen Funds, ATA Ventures, and ORR Partners.

Evoke Pharma Inc., a San Diego-based startup that will acquire and develop drugs for the treatment of gastrointestinal diseases, has raised $3.29 million in Series A funding, according to a regulatory filing. Backers include Domain Associates and Latterrell Venture Partners.

T2 Systems Inc., an Indianapolis-based provider of tech-based products and services for parking management, has raised $3 million from Petra Capital Partners.

Ultizen Games Ltd., a Shanghai-based game publisher, has raised $1.5 million in first-round funding from Dragonvest Partners.

Buyout Deals

TA Associates has sponsored a $102.5 million recapitalization of Twin Med LLC, a Santa Fe Springs, Calif.-based medical supplies distributor serving long-term care facilities throughout the United States. JMP Securities advised Twin Med on the deal, which was done in partnership with company co-founders Steve and Shlomo Rechnitz.

Macquarie Group has acquired St Louis-based America’s Water Heater Rentals LLC from Angelo Gordon & Co. and FTR Capital Partners for $95 million. AWHR is the largest home water heater rental business in the United States with a portfolio of 125,000 rented appliances.It was formed by Angelo Gordon and FTL in 2003, following the buyout of American Electric Power Co.’s waterheater rental business unit.

Summit Partners has completed its acquisition of an 85% stake in Life of the South Corp., a Jacksonville, Fla.-based provider and administrator of payment protection products. Senior company management retained approximately 15% of the company. The deal was valued at more than $100 million.

The Caisse de dépôt et placement du Québec has acquired a 25% equity interest in Interconnector (UK) Ltd., a UK gas transporter that owns and operates a bi-directional pipeline linking the UK and Belgium. The Caisse acquired the position from BG Group for £165 million.

Dobson Communications Corp. (Nasdaq: DCEL) has retained Morgan Stanley to help it explore strategic options, including a possible sale, according to The Wall Street Journal. The Oklahoma City-based wireless services provider has a current market cap of around $1.73 billion and another $2.67 billion in debt.

Macy’s (NYSE: M) stock surged on Friday, on rumors that it could be acquired for around $52 per share by KKR and Goldman Sachs. That price would value the company – previously known as Federated Department Stores – at $23.9 billion.

PE-Backed IPOs

AthenaHealth Inc., a Watertown, Mass.-based provider of online business services for physician practices, has filed for an $86.25 million IPO. It plans to trade on the Nasdaq under ticker symbol ATHN, with Goldman Sachs and Merrill Lynch serving as co-lead underwriters. AthenaHealth has raised around $34 million in venture capital funding since its 1997 inception, from firms like Oak Investment Partners (19.5% pre-IPO stake), Venrock Associates (16.7%), Draper Fisher Jurvetson (15%) and Cardinal Partners (14.3%).

SandRidge Energy Inc. (f.k.a. Riata Energy), an Oklahoma City-based oil and gas exploration and production company, has filed for a $690 million IPO. It plans to trade on the NYSE under ticker symbol SD, with Lehman Brothers serving as lead underwriter. Ares Management holds a 12.3% ownership stake, based on a $250 million common stock investment it made earlier this year. SandRidge filed for a $276 million IPO last year, but later withdrew its registration.

PE Exits

Meggitt PLC (LSE: MGGT.L) has completed its $27 per share acquisition of aerospace parts maker K&F Industries Holdings Inc. (NYSE: KFI). The $1.8 billion deal represents an exit for Aurora Capital Group, which acquired K&F in 2004 and which still held 36% of K&F’s outstanding shares (along with certain of its cosponsors).

PE-Backed M&A

TravelClick Inc., a Schaumburg, Ill.-based provider of hotel e-marketing solutions, has acquired Blue Square Studios, a Phoenix–based provider of Internet business solutions for the hospitality industry. No financial terms were disclosed. TravelClick has raised over $25 million from firms like Bain Capital Ventures.

Interactive Technology Solutions LLC of Gaithersburg, Md. has agreed to acquire ITEQ Integrated Technologies Inc., a Silver Springs, Md.-based provider of IT services to the U.S. federal government. No financial terms were disclosed. IT Solutions counts Edgewater Funds among its minority shareholders.

Firms & Funds

Alinda Capital Partners and The Shaw Group Inc. (NYSE: SGR) have formed Shaw Infrastructure Investments, via which they will “jointly pursue development of certain yet to be identified energy, transportation, infrastructure, water, wastewater, and related projects.” No financial terms were disclosed. Alinda is an infrastructure-focused private equity firm, while Shaw provides engineering services.

Battelle Ventures of Princeton, N.J. has raised $70 million in new fund commitments from sole limited partner Battelle Memorial Institute. The capital will be added to Battelle’s inaugural fund, which originally closed with $150 million in 2003.

DLJ Investment Partners, an affiliate of Credit Suisse, is marketing both a mezzanine fund and a South American buyout/growth equity fund, according to LBO Wire. The mezz vehicle has secured at least $1.3 billion, although no target or cap was reported. The South American fund is targeting $200 million, and will focus on Argentina, Brazil and Chile.

MatlinPatterson is raising up to $4.5 billion for its third fund, according to a regulatory filing. It already had over $1.55 billion in commitments through June 8. The New York-based private equity firm focuses on distressed and special situation opportunities. Its second fund closed on $2 billion in 2003.

Human Resources

Joseph Blum has joined Global Infrastructure Partners as a partner and general council. He will remain based in London, where he previously was with Latham & Watkins as a partner and head of the London project development and finance group.

Stewart Homler has joined AIG Global Investment Group as managing director of alternative investments in Japan. He will be based in Tokyo, and previously was head of the Asia-Pacific private equity group at Deutsche Asset Management.

Douglas Zingale has joined Foley Hoag as a partner in the firm’s corporate, M&A and private equity practices. He previously was with the Boston office of Greenberg Traurig, where he was principal shareholder in its M&A and private equity practices.