PE Week Wire: Monday, November 10, 2008

Ethanol has been a disaster for private equity. VeraSun is bankrupt, Aventine Renewables is trading at less than $2 per share and Hawkeye Holdings wasn’t even able to price its IPO. And there continue to be those pesky – and disputed – reports that a gallon of ethanol takes more power to produce than it actually creates (particularly when shipped from the Midwest to the coasts).

So you might blink a few times when you read this: Paladin Capital Group today will announce that it is leading the formation of a new ethanol production and infrastructure platform, called Vital Renewable Energy Co. The firm isn’t disclosing dollar amounts, but a regulatory filing says that the effort has already called down $257 million of a $400 million total capitalization. Other participants include Leaf Clean Energy Company, Petercam Asset Management and PCG Clean Energy & Technology Fund.

The catch here is that VREC is avoiding two major characteristics shared by VeraSun, Aventine and Hawkeye: The United States and corn. Instead, the company will focus exclusively on the Brazilian market, which is almost entirely based on sugarcane.

The Brazilian ethanol market is booming, due to both the cost-effectiveness of sugarcane and a national adoption of ethanol as the power source of choice. Ninety percent of new cars sold in Brazil are flex-fuel, and new plants keep popping up to satisfy demand. VREC will focus on building new production plants, which will include co-generation facilities that can sell gas byproduct into the Brazilian power grid.

Its initial plant is about 90 minutes outside of San Paulo, and is being built in partnership with sugarcane and ethanol company Grupo Farias. VREC is not required to team with Grupo Farias on future projects, but it does have right of first refusal on any other opportunities that Grupo Farias is interested in pursuing.

“We’ve run all our models based on selling all of the ethanol internally into Brazil, but we’re not going to limit ourselves,” says Ken Pentimonti, a principal with Paladin. “We think there will be other opportunities down the road – particularly on the Western border – and we’re going to sell at the highest price.”

What Pentimonti could not explain, however, was why so few other U.S. private equity firms have ventured into the Brazilian ethanol space. The only other large deal I could find was Carlyle/Riverstone’s acquisition of CNAA, which came in at $240 million (if you know of others, please email me).

So I asked a few U.S. alt energy investors, who all told me the same thing: (1) Brazilian ethanol is a great macro growth story; (2) Finding project finance is very difficult; (3) Few U.S. firms have Portuguese-speakers on staff; and (4) The U.S. ethanol experience, while characteristically distinct from Brazil, has scared off a bunch of would-be investors.

In other words, a large and open opportunity with lots of execution risk. In other words, a place that private equity should be playing.

*** CalPERS is the granddaddy of PE performance disclosure, originally by accident and later by an out-of-court settlement with those muckrakers over at the San Jose Mercury News. But it’s one of those issues that has fallen from the limelight, which is perhaps why CalPERS hasn’t updated its online data for the past few quarters.

The system’s most recent fund-specific figures are only through the end of 2007, even though it should be through Q2 of 2008. A CalPERS spokeswoman acknowledged that the data should be more current, and that someone dropped the ball entirely on data through Q1. Expect a revised version within the next two weeks, she said.

Also worth noting that CalPERS does not disclose the values of its general partnership stakes in firms like Apollo Management, Carlyle Group or Silver Lake Partners. This wasn’t really an issue at the time of the Merc lawsuit, in part because of timing and in part because the Merc mostly cared about VC data. But I can’t think of any good reason why the top-line figures shouldn’t be public… Can you?

*** Please take 5 minutes to fill out the Year-End 2008: ACG-Thomson Reuters DealMakers Survey

*** Rob Hamwee has quietly joined New Mountain Capital, the New York-based private equity firm currently investing out of a $5.1 billion generalist fund. He’s a onetime Blackstone Group pro, who joined Greenwich Street Capital Partners (GSC Partners) in 1994. He would become the firm’s president, and chairman of its specialty finance affiliate GSC Capital Corp. (which tried to list a REIT, but failed to do so).

He currently has active voicemails at both New Mountain and GSC…

Top Three

AT&T has agreed to buy rural phone company Centennial Communications Corp. (Nasdaq: CYCL) for $944 million in cash. Centennial shareholders would receive $8.50 per share, which is more than double the company’s closing price on Friday of $3.84 per share. Welsh Carson Anderson & Stowe is Centennial’s largest shareholder, and has agreed to support the deal.

Hexion Specialty Chemicals and Huntsman Corp. have begun talks about reducing the price of their $6.5 billion merger, according to The NY Times. The current price is $28 per Huntsman share, and the report says Huntsman is unwilling to go lower than $25.25 per share, which is the price former suitor Basell offered in 2007. Hexion is a portfolio company of Apollo Management.

SB China Venture Capital is raising its first yuan-denominated fund, with a ¥2 billion target ($293m). The firm focuses on high-tech opportunities in China, with a particular focus on Shanghai’s Pudong New Area.

VC Deals

Valeritas Inc., a Parsippany, N.J.-based developer of drug delivery systems for the diabetes market , has secured $50 million of an $87 million round. The called amount includes the conversion of convertible debt and “non-cash considerations.” Shareholders include Abingworth Management, Advanced Technology Ventures, Biovalve Technologies, HLM Venture Partners, MPM Capital, Onset Ventures, Pitango Venture Capital and U.S. Venture Partners. Valeritas is a unit of VC-backed Biovalve, which in 2006 agreed to go public via a reverse merger that was ultimately scrapped.

Solexant Corp., a San Jose, Calif.-based developer of low-cost photovoltaic cells, has raised $18.17 million in Series B funding, according to a regulatory filing. Backers include Trident Capital, Firelake Capital, Medley Partnersand X/Seed Capital. It had previously raised $4.3

ImageShack, an online image sharing portal, has raised $15 million from Sequoia Capital, according to VentureBeat.

Evolution Robotics Inc., a Pasadena, Calif.-based robotics technology company, has raised $13.88 million in Series B funding. CMEA Ventures led the round, and was joined by return backers Idealab and Quercus Trust.

Molecular Biometrics Inc. has raised $12 million in Series A funding. Safeguard Scientifics and Oxford Bioscience Partners co-led the round. The Chester, N.J.-based company is developing a diagnostic procedure designed to help identify the most viable embryos with the greatest reproductive potential for in vitro fertilization. It will relocate to the Boston area early next year.

Convergin Inc., a Herzliya, Israel-based provider of service interaction and service mediation solutions, has raised $9 million in Series B funding, according to a regulatory filing. Backers include Pitango Venture Capital and Rich Investment Ltd.

One True Media Inc., a Redwood City, Calif.-based provider of online editing and sharing tools for videos and photos, has called down $8 million of a $10 million Series B round (including $2 million in called convertible notes), according to a regulatory filing. DAG Ventures was joined by return backer Kleiner Perkins Caufield & Byers.

Psyadon Pharmaceuticals Inc. (fka Ruxton Pharma), a Germantown, Md.-based CNS drug developer, has raised $8 million in Series A-1 funding from return backer New Enterprise Associates.

AdMeld Inc., a New York-based provider of online advertising optimization and integration, has raised around $7 million in Series A funding from Foundry Group and Spark Capital. It also has hired Michael Barrett as CEO. Barrett previously was with Fox Interactive Media as executive VP and chief revenue officer.

D.light Design, an India-based provider of affordable lighting solutions for families living without adequate electricity, has raised $6 million in Series A funding. Nexus India Capital led the round, and was joined by Draper Fisher Jurvetson, Garage Technology Ventures, the Mahindra Group, Acumen Fund and Gray Matters Capital.

Second Rotation, a Boston-based operator of online “recommerce” site Gazelle, has raised $6 million in Series B funding. RockPort Capital Partners led the round, and was joined by return backers Venrock Associates, Austin Ligon and Henry Vogel.

Buyout Deals

BTWW Retail LP, a Western and workwear retailer with 124 outlets in 19 states, has filed for chapter 11 bankruptcy protection. It is a portfolio company of Sage Capital and Luther King Capital. BTWW has retained Clear Thinking Group to assist in the sale of its assets, and recently sold 22 stores to Boot Barn Holding Corp., a portfolio company of Marwit Capital.

HealthEdge, a private equity firm focused on the healthcare market, has acquired Intra-Op Monitoring Services Inc., a Covington, La.–based provider of intra-operative neurophysiological monitoring solutions. No financial terms were disclosed. Intra-Op was advised on the deal by McGladrey Capital Markets.

Just Retirement, a listed UK retirement specialist, confirmed that it has received a takeover approach. Reports suggest that the suitor is Cinven.

Providence Equity Partners and Ayala Corp. has offered to acquire eTelecare Global Solutions Inc. (Nasdaq: ETEL), a provider of business process outsourcing solutions. The eTelecare board has voted to recommend the offer to shareholders, who would receive $9 per common share or ADS.

Sun Capital Partners has offered to take audio products company LOUD Technologies Inc. (Nasdaq: LTEC) private, by acquiring the 24% stake that Sun does not already hold. The offer is at $1.45 per share, or approximately $7.1 million.

TDR Capital is in talks to acquire a stake in UK homebuilder Taylor Wimpey (LSE: TW), according to The Sunday Mail.

PE-Backed IPOs

Grand Canyon Education Inc., a Phoenix-based provider of online post-secondary education services, has scheduled its IPO for November 19. The company plans to offer 10.5 million shares at between $16 and $18 per share, with Credit Suisse and Merrill Lynch serving as co-lead underwriters. Shareholders include ! Endeavour Capital (32.6% pre-IPO stake).

PE Exits

Hyundai Motor Co. has held talks with Chrysler owner Cerberus Capital Management, about a potential acquisition of Chrysler’s Jeep brand and other assets. The news comes after GM broke off merger talks with Chrysler.

Firms & Funds

3i Group announced that it will close its Menlo Park, Calif. office at year-end, “in light of its move away from new venture capital early stage technology investing.”

Lehman Brothers Private Equity, an Amsterdam-listed vehicle, said its net asset value fell 6.7% for the first ten months of 2008, including a 3.2% drop in October.

Onset Ventures is raising upwards of $250 million for its sixth fund, according to a regulatory filing. It already has secured more than $182 million in capital commitments, from limited partners like ATP Private Equity Partners, the Delaware Public Employees’ Retirement System, RHM Pension Trust and Barclays Bank. The Menlo Park, Calif.-based firm closed its fifth fund in 2005 with around $200 million.

The Chinese government has given approval for local insurers to buy equity in non-listed private equity firms.

Human Resources

Manuel Rosso has joined Austin Ventures as an entrepreneur-in-residence, with a focus on Internet marketing opportunities. He previously was VP of marketing for IMVU Inc., a B2C social media startup.

Richard Barker has joined RBC Capital Markets as head of Australian investment banking. He previously ran M&A for NM Rothschild & Sons (Australia) Ltd.