PE Week Wire: Mon., Oct. 1, 2007

Avy Stein says that his firm will raise another fund. It’s a sincere pledge, from a Chicagoan who has been in the private equity business for nearly two decades. It may also be wishful thinking.

Stein is one of two names on the door of Willis Stein & Partners, a mid-market buyout firm formed back in 1995. Its debut fund was capped at just under $350 million, and is considered to be a strong performer. Its second fund came in at $840 million three years later and is, in the identical words of two limited partners, “a disaster.” The firm also managed to raise a $1.8 billion third fund in 2000, which began making some decent deals after doing some cross-investing and shared investing with Fund II.

But that was seven years ago, and there is not yet a fourth fund – a fact which has caused some of the firm’s professionals to abandon ship, and some of its LPs to question whether a fourth fund is even possible.

To understand what happened to Willis Stein, one must return to the “disaster” fund. It was a classic case of style drift, where the profitability principle was scrapped for the bubbly excitement of tech and telecom. Within just a three-week span in 2001, for example, Willis Stein invested in a pair of companies that would quietly go out of business (One Inc. and Orius Corp.). It also made the monumental mistake of pumping a whopping $420 million into Ziff Davis Media, which was compounded by using capital from both Funds II and III.

“Ziff Davis is the biggest investment the firm has ever made,” says a Willis Stein insider. “And it’s probably not going to turn out too good… We’ve made a lot of mistakes.”

Those errors culminated in early 2005, when Willis Stein began looking to raise its fourth fund with a $1.25 billion target and $1.8 billion cap. The looking quickly turned to longing, as limited partners refused to bite. Willis Stein suspended fundraising in order to generate additional liquidity from its current portfolio. Some younger professionals chafed at the lack of new deals, but stuck in hopes that certain deals could still strike it rich.

The most notable was a $225 million investment in Roundy’s Supermarkets, which Willis Stein put on the market earlier this year with a pricetag of around $2 billion. The sale was expected to occur in late summer, which was to coincide with resumed fundraising activities. But then came the credit crunch, which slashed Roundy’s bids so deep that Willis Stein pulled it off the block.

Soon after, managing partner Dan Blumenthal informed Stein and John Willis that he was leaving to form his own firm, along with CFO Todd Smith and principals Bradley Shisler and Roy Jain. The new shop is called Blue River Partners, and later this year is expected to begin marketing a $150 million-targeted fund dedicated to the lower middle markets.

But Blue River is going to have the same troubled track record that Willis Stein has. In fact, it could be even tougher, considering that Roundy’s – still believed to be Willis Stein’s best chance for a homerun – was not done by Blumenthal or his new partners. I’m not saying it can’t be done, but Blumenthal will have to explain why his new firm will be superior to the shop he just left. The likely answer is the lack of style drift, but you can’t justify a troubled track record by only looking forward to track that has not yet been laid.

As for Willis Stein, the jury is really still out. Stein and company seem adequately humbled, but LPs may not offer up a second chance amidst the flood of other mid-market fund offerings.

“They do have some strong companies in their active portfolio, and will need to have some big exits in addition to Roundy’s,” says a Willis Stein investor. “I wish them luck and can certainly forgive past transgressions… but I have other things to focus on in the meantime.”

Top Three

Silver Lake Partners and ValueAct Capital have terminated their $3 billion acquisition of Acxiom Corp. (Nasdaq: ACXM). The original agreement included a $110 million termination fee, but the two sides agreed to reduce it to just $65 million. Acxiom is a Little Rock, Ark.-based provider of customer and information management solutions to large companies.

Konarka Technologies Inc., a Lowell, Mass.-based developer of a plastic-like photovoltaic material, has raised $45 million in Series F funding. Mackenzie Financial Corp. and return backer Good Energies co-led the deal. Pegasus Capital also participated, alongside existing shareholders Draper Fisher Jurvetson, Asenqua Ventures, New Enterprise Associates, 3i Group, Vanguard Ventures, Chevron, Massachusetts Green Energy Fund, NGEN Partners and Angeleno Group. Lehman Brothers served as placement agent for the deal, which brings Konarka’s total venture capitalization to around $100 million.

AT&T has agreed to acquire Interwise Inc., a Cambridge, Mass.-based provider of voice, online and video conferencing technologies. The deal is valued at approximately $121 million in cash. Interwise has raised nearly $90 million in total VC funding since 2000, from firms like Lazard Technology Partners, Wall Street Technology Partners, Leeds Equity, GIMV and STI Ventures.

VC Deals

Light Blue Optics, a Cambridge, England-based developer of holographic laser projection technology, has raised $26 million in Series A funding. Earlybird Venture Capital and Capital-E co-led the deal, and were joined by seed backers 3i Group and NESTA. The company previously raised a $3.5 million seed round, and expects that the new capital will help it accelerate its product development and high-volume commercialization of miniature projection systems.

Authoria Inc., a Waltham, Mass.-based provider of talent management solutions, has raised $22.5 million in a private equity and debt round. Horizon Technology Finance and Velocity Financial Group were joined by return backers Menlo Ventures, Norwest Venture Partners, Austin Ventures, Van Wagoner Capital Management and CIBC Capital Partners. The company previously had raised around $120 million in VC funding since 1998.

Xoom Corp., a San Francisco-based provider of online-to-offline international money transfer services, has raised $20.29 million in Series E funding, according to a regulatory filing. DAG Ventures led the deal, and was joined by return backers like Fidelity Ventures, New Enterprise Associates and Sequoia Capital. Xoom had raised a $15 million Series D round back in mid-2006, and has now raised over $50 million in total funding.

WMR Biomedical Inc., a Cambridge, Mass.-based developer of medical devices for the cardiology and ophthalmology markets, has raised $13.1 million in Series B funding, according to a regulatory filing. Backers include Intersouth Partners, North Bridge Venture Partners and Polaris Venture Partners.

Mantara Inc., a Jersey City, N.J.-based developer of messaging software, has secured $7 million of a $12.5 million Series B round, according to a regulatory filing. Participants included Mohr Davidow Ventures and Australian firms CM Capital and Southern Cross Venture Partners.

VoluBill, a France–based provider of mobile data charging and control solutions, has raised €10.5 million in fifth-round funding. XAnge Private Equity led the deal, and was joined by return backers Sofinnova Partners, Sofinnova Ventures, Seventure, DVCG and Argo Capital.

LedEngin Inc., a Santa Clara, Calif.-based provider of LED components and light-source modules, has raised $11 million in Series C funding. Partech International led the deal, and was joined by WK Technology Fund and Dr. Keh-Shu Lew, president and CEO of Diodes Inc.

GalleryPlayer Inc., a Seattle-based provider of high-res image content, has secured $2.5 million of a $7.79 million Series C round, according to a regulatory filing. Return backers include Menlo Ventures. The company transfers paintings, photography and other forms of fine art to high-definition, plasma and flat-screen TVs.

Diffusion Pharmaceuticals LLC, a Charlottesville, Va.-based developer of a drug candidate for enhancing oxygen diffusion, has raised $4.5 million from undisclosed angels.

Guardian Analytics Inc., a Los Altos, Calif.-based provider of fraud prevention solutions for online channels, has raised $4.5 million in Series B funding from Foundation Capital.

ZeroPoint Clean Tech Inc., a Potsdam, N.Y.-based developer of gasification technologies, has raised around $3.12 million in Series B funding, according to a regulatory filing. No investors were listed, although the company’s website identifies Golden Technology Management as a seed backer back in 2005.

Accelovation Inc., a Mountain View, Calif.-based provider of market discovery software, has secured $3 million of a $4 million Series B round, according to a regulatory filing. Backers include Altos Venture Partners and Thomvest.

First Tracks Publishing, an Incline Village, N.Y. publisher of magazines focused on mountain resorts, has raised $450,000 in Series A-1 funding, according to a regulatory filing. DCA Capital Partners is listed as a shareholder.

Buyout Deals

Arcapita has agreed to acquire Varel Holdings Inc., a maker of drill bits for the oil & gas and mining industries, from KRG Capital Partners. The news was first reported by LBO Wire, which values the transaction at $369 million. KRG Capital bought Varel from 3i Group and UTIMCO in June 2005. It has since made several add-on acquisitions.

Avaya Inc. (NYSE: AV) shareholders on Friday approved a $17.50 per share buyout offer from Silver Lake Partners and TPG. The total deal would be valued at around $8.2 billion, and is expected to close by the end of October.

Creo Capital Partners has acquired Filet of Chicken, a Forest Park, Ga.-based processor and distributor of chicken products. No financial terms were disclosed for the deal, which will not result in any significant management or operational changes. Wachovia Capital Finance and Fifth Street Capital provided leveraged financing.

GIMV has acquired a 90% stake in Le Cobourg, a Belgian producer of “traditional salad spreads.” No financial terms were disclosed for the deal, which is being transacted as a management buy-in. The new management team will hold the remaining 10% position.

FL Partners has purchased the Racing Post from Trinity Mirror PLC for £170 million. The deal includes the Racing Post newspaper, its website, a number of weekly and annual racing publications and some betting industry publications. Alan Byrne, former editor of the Racing Post, has been named CEO and editor-in-chief.

Onex Corp. has agreed to acquire Husky Injection Molding Systems Ltd. (TSX: HKY) for C$8.18 per share, which gives the deal a total equity value of approximately C$960 million. Husky is a supplier of injection molding equipment and services to the plastics industry.

OMERS Capital Partners has completed its acquisition of the golf retailer Golf Town LP, which had traded as a Canadian income fund. The deal was valued at approximately C$240 million.

PE-Backed IPOs

Memsic Inc., an Andover, Mass.-based developer of semiconductor sensor and system solutions based on MEMS technology and mixed-signal circuit design, has filed for a $100 million IPO. It plans to trade on the Nasdaq under ticker symbol MEMS, with Citi serving as lead underwriter. The company has raised over $24 million in VC funding since 1999, from firms like Celtic House Venture Partners (16.84% pre-IPO stake), The Still River Fund (16.43% pre-IPO stake), InveStar Capital (14.31%), CID Group (5.28%) and Ironside Ventures.

PE Exits

RoundTable Healthcare Partners has completed its sale of MedAssist Holding Inc. to an affiliate of Firstsource Solutions Ltd., a listed business process outsourcing company based in Mumbai, India. The deal was valued at $330 million in cash. MedAssist is a Louisville, Ky.-based provider of outsourced revenue cycle management services to the healthcare industry, including eligibility services, receivable management services, and collections services.RoundTable acquired a majority stake in 2004, and supported subsequent acquisitions of Argent Healthcare Financial Services, Twin Medical Transaction Services and Capstone Solutions LLC.

PE-Backed M&A

The Step2 Company LLC, a Streetsboro, Ohio.-based maker of toys for toddlers, has acquired Infantino LLC, a San Diego-based maker of infant toys and accessories. No financial terms were disclosed. Step2 is majority owned by Liberty Partners.

Firms & Funds

Bay Partners and Bessemer Venture Partners have launched a program to fund companies building applications on’s platform. It plans to invest around $25 million over the next three years, with minimum infusions of $500,000.

KPMG Corporate Finance as acquired substantially all of the assets of Keen, a Long Island-based private real estate firm that advises and sells excess assets, real estate and lease portfolios. Keen also provides real estate financing and sale leaseback services for both healthy and distressed companies. No financial terms were disclosed. Keen president Harold Bordwin and Keen executive vice president Matthew Bordwin will lead the new group within KPMG, as managing directors.

Peninsula Equity Partners has closed on approximately $57 million for its $150 million-targeted second fund, according to a regulatory filing. Limited partners include Procific, while Cazenave & Co. is serving as placement agent. The Menlo Park, Calif.-based firm’s first fund focused on both IT and life sciences opportunities, but VentureWire reports that Fund II will drop the life sciences piece, save for managing existing portfolio companies.

Sunrock Ventures is raising $100 million for its inaugural fund, which will focus on venture capital opportunities in the Southeastern U.S. It has offices in Miami and Tampa, Fla., and is managed by general partners Tate Garrett (formerly with Advantage Capital Partners), Matthew Shaw (Crossbow Ventures) and Jeffrey Wolf (Seed-One Ventures).

Thomas Weisel Partners has agreed to acquire Westwind Partners, an independent I-bank focused on the energy and mining sectors.

Yes Bank of India plans to launch four private equity funds within the next two years, according to Reuters. The initiative will include an infrastructure fund ($550m-$750m), a real estate fund ($250m-$350m), a distressed asset fund ($250m-$350m) and a fund for socially-responsible investments ($150m).

Human Resources

General Atlantic has promoted four professionals to managing director: Raul Rai and Sunish Sharma in Mumbai, Oliver Thum in Düsseldorf and Sean Tong in Hong Kong. It also has made six promotions to principal: Gabriel Caillaux and Jan Hammer in London; Jan-Daniel Neumann in Düsseldorf; and Alexander Chulack, Adrianna Ma and Brett Rochkind in the United States.

Gary Matthews has joined Morgan Stanley Private Equity as a managing director and operating partner. He is a longtime executive with such companies as Simmons Bedding Co., Sleep Innovations, Bristol-Myers Squibb and Derby Cycle Corp.

Brian Siebenburgen has joined Marlin & Associates. He previously was with the financial due diligence group of PricewaterhouseCoopers.

The International Monetary Fund selected France’s Dominique Strauss-Kahn as its new leader. He is a former Socialist finance minister.