PE Week Wire: Monday, October 20, 2008

The sun is shining, the markets are rising and the sadness is now 10 hours long. In other words, it’s time for some Monday Mouth Off. No overriding theme today, but rather a sweet-smelling potpourri.

NN on Henry Kravis’ comments in Dubai: “I was almost in shock when I saw the story regarding Kravis’ speech. A few things to consider here: There is some talk already among GPs and LPs as to whether he was right to offer a mea culpa on behalf of his entire industry. Most GPs would tell you they haven’t done anything they regret. Is Henry saying his firm lost its way for a bit? Was it asset accumulation to go public? KKR has offered its public KPE shareholders access to what they thought would be the best of KKR, with its aggressive new move to go public is it sort of saying: OK, I didn’t really give you my best the first time, so to make it up to you now I am going to give you my best (meaning a piece of the firm)?”

Anon on VC returns: “I think you’re missing the broader picture in your narrow comment about VC returns relative to the last downturn. The dotcom/tech implosion was the center of the last catastrophe. It is not this time. There are major issues that that industry and company models had back then that are no longer true today. Sure they’ll be hurt by a rancid macro economy and delayed exit environment. But there’s always a backlog of great VC-backed companies that make it public when the IPO window recovers (and it will). Just having been to a number of recent VC annual meetings – I can attest to some major winners emerging and a number of companies that are now later stage and tracking very well. VC will certainly be impacted by the environment today – but I think it is very shortsighted to assume that their world is now analogous to the aftermath of the bubble.”

Dennis on my analysis of the study of PE’s role in the capital markets: “You said, ‘Private equity changed in character after 2004, and therefore so did its potential impact on the economy at large.’ True enough, but your point is only valid if we assume that private equity portfolio companies are equally at risk. Private equity firms invest in companies across different sectors and industries and diversify within their funds. The only argument that supports your point is that leverage increases the threat of a substantial number of portfolio companies across firms failing at the same time. What we’re likely to see instead is an increase in defaults among private equity portfolio companies (which means the PE investors lose their money, but doesn’t necessarily mean the company goes away), but not much above what we’ll see across the economy at large.

Bill adds: I don’t think PE poses a systemic risk to the financial system as they are not financial counter parties or intermediaries in a strict sense… That said, I think if you look at the current stock prices of closed end leveraged loan/senior loan funds, things look pretty bleak for private equity. These funds are chock full of senior loans from PE-backed buyouts and most of them are trading at unprecedented discounts to par at this point. It’s not uncommon for these the NAV’s of these funds at a 30% discount to cost and the market price of the fund at a further 30% discount to NAV. Part of that is due to leverage in these funds (usually up to 1/3), but the implied recovery rates on these supposedly senior loans is now way, way below par, as in 65 or 70 cents on the dollar. If that’s right, the equity investments by PE funds are going to get completely wiped out in a huge cross section deals. PE may not present a systemic risk, but for LPs in 06 or! 07 funds, they are looking at huge non-systemic risks at this point and potential losses that will make 99 VC funds look like great performers.

Mike: “SWFs – Funniest acronym used in your editorial ever. I know what you meant for it to mean, but [many] will assume that the class of single white females is really growing in importance to the PE industry.”

Sam asks: “Dan, did you get my Facebook friend request?” Yes Sam I did, which makes this a good time to quickly restate my policy: I try to only accept Facebook requests of people I actually know. If we haven’t had some sort of conversation, chances are I’m going to ignore you. However, I accept all comers over at LinkedIn. And there’s also a peHUB group at Facebook…

And finally, Quiz Time: Can you name the twenty-something celeb whose entourage recently rented out space in San Francisco, in order to begin exploring early-stage investments in digital media startups? Hint: This person has guest-hosted SNL, and done it hilariously.

Top Three

The Carlyle Group has sued Russian steelmaker Novolipetsk Steel (LSE: NLMK) to enforce an agreement whereby NLMK would buy U.S. steel pipe and tube manufacturer John Maneely Co. for $3.53 billion. Since the deal was originally announced in August, NLMK’s share price has fallen nearly 80%, making the Maneely sale price worth approximately two-thirds of its market cap.

Cardiac Concepts Inc. has raised $21 million in Series B funding. The Minnetonka, Minn.-based company makes an implantable device to treat central sleep apnea, in order to improve outcomes of congestive heart failure. Polaris Venture Partners, Versant Ventures and RK Ventures were joined by return backers Accuitive Medical Ventures, Affinity Capital Management and Three Arch Partners. The company had previously raised $5.5 million.

The BlackBerry Partners Fund, a $150 million VC vehicle focused on applications and services for the BlackBerry platform, has launched its “Jump Start Financing Initiative.” The effort will provide capital infusions of up to $250,000 in the form of a convertible debenture.

VC Deals

S*BIO Pte Ltd., a Singapore-based cancer therapeutics company, has raised $26 million in Series B funding. Aravis Capital and return backer Bio*One Capital co-led the round, and were joined by existing investors like Zurcher Kantonalbank and the Lacuna Apo BioTech Fund. The company has two lead compounds in Phase 1 clinical trials: One is an HDAC inhibitor, while the other is a JAK 2 inhibitor., a Shanghai-based online television company, has raised $20 million in third-round funding. LB Investment, an affiliate of LG Electronics, led the round, and was joined by return backers Ceyuan Ventures and Qiming Venture Partners.

Chemclin, a Beijing-based medical diagnostics company, has raised $16.5 million in Series B funding. China Healthcare Partnership (managed by MC China) led the round, and was joined by return backers WI Harper, Siemens Venture Capital and Softbank China Venture Capital. China eCapital served as placement agent. The company had previously raised $5 million.

Movidia, an Ireland-based mobile video processor company, has raised $14 million in Series A funding. Celtic House Venture Partners and Capital-E co-led the round, and were joined by Emertec Gestion, AIB Seed Capital Fund and Enterprise Ireland.

ClearCount Medical Solutions, a Pittsburgh-based developer of RFID-enabled solutions for the prevention of retained surgical sponges, has raised $4.1 million in Series A funding led by Draper Triangle Ventures.

AMEE Inc., a platform for aggregating energy consumption data, has raised $1 million in Series A funding from O’Reilly AlphaTech Ventures, according to a regulatory filing.

Buyout Deals

ARKequity LLC has acquired a minority stake in Integrity Health, a Princeton, N.J.-based health benefits management company. No financial terms were disclosed.

CVC Capital Partners has teamed with Swiss Re to bid for a majority stake in Royal Bank of Scotland’s UK insurance assets. The offer is expected to be worth more than £3 billion, for a 51% stake.

General Growth Properties Inc. (NYSE: GGP), the second-largest U.S. shopping mall owner, is seeking to sell up to $2 billion in preferred shares to private equity and other investors, according to The Wall Street Journal. Goldman Sachs is running the process.

Masonite International Corp., a door manufacturer owned by KKR, missed a $42 million interest payment of subordinated notes due last Wednesday, partially prompting S&P to lower its corporate rating from CC to D. Moody’s followed by lowering its corporate rating to Caa3 from Caa1, and its probability of default rating to Ca from Caa2. KKR acquired Masonite in 2004 for C$3.1 billion, and holds some of its debt via KKR Financial.

Mervyn’s Holdings LLC will hold liquidation sales during the holiday shopping season, and then shutter its remaining 149 locations. The department store operator filed for Chapter 11 bankruptcy protection earlier this year, after having been purchased in 2004 by a group of investors including Cerberus Capital Management and Sun Capital Partners.

Veritas Capital has sold Continental Electronics Corp. to Lone Star CRA Fund, for an undisclosed amount. CEC provides digital and analog RF transmitter systems, and was advised on the sale by Houlihan Lokey Howard & Zukin.

Firms & Funds

Easton Capital Investment Group, a New York-based venture capital firm, is targeting $200 million for its fourth fund, according to VentureWire.

Electra Partners is investing €45 million in Steadfast Capital, a private equity firm that focuses on mid-market opportunities in German-speaking and Dutch markets. London-based Electra already had partnerships in France, Italy and Spain.

Guggenheim Aviation Partners has launched an office in Singapore, and hired Stephen Barnes as director of marketing in Asia. Barnes previously was treasurer of Singapore Airlines.

Hermes Focus Asset Management, the public equities arm of UK-based fund manager Hermes, is looking to launch a new “cross over” fund. The new effort would be headquartered in Germany, and would target large minority PIPE deals and take-private bids of public companies.

Intermediate Capital Group, a UK-based listed mezzanine and leveraged loan firm, has closed its second Asia-Pacific fund with $1 billion in capital commitments.

Keytone Ventures has secured $104 million in capital commitments for its debut fund, according to a regulatory filing. The firm was founded earlier this year by Joe Zhou, who previously led Chinese investment activities for Kleiner Perkins Caufield & Byers.