PE Week Wire: Monday, October 6, 2008

A handful of quick hits, as I wipe the Sox-related sleep from my eyes:

*** Online secondaries marketplace NYPPEX has issued an interesting piece of client research, on how the recent Huntsman/Hexion ruling could impact secondary market prices for buyout fund stakes. For the uninitiated, Delaware Chancery Court found last Monday that chemicals company Huntsman did not suffer a material adverse event as claimed by Apollo-backed Hexion. The result was a judicial order that Hexion comply with its merger agreement obligations, and try to complete its acquisition of Huntsman.

NYPPEX’s take is that the ruling will have two repercussions: (1) Secondary bids for stakes in Apollo Funds IV-VI will decline “12% to 20% over the next six months.” (2) Other buyout funds vintage 2005-2007 could be vulnerable to similar value drops on the secondary markets, “to the extent such buyout funds have relied on material adverse event provisions to cancel proposed acquisitions.” In other words, NYPPEX believes that the ruling could possibly cause a review of past deal terminations that came after PE firms claimed MAE.

*** The bailout bill passed last Friday by the House included some provisions related to mark-to-market accounting, but don’t expect it to have much (if any) impact on private equity reporting requirements. In other words, limited partners are still going to see the ugliness.

There had been some GOP pressure to include an immediate suspension of the rules, but the final bill only said that the SEC could suspend the rule if it saw fit, and that the SEC must produce a study of mark-to-market accounting – and its role in recent bank failures — within 90 days.

The SEC and FASB also issued a clarification to the rule, in cases where no active market for a given security exits. In those cases, management may estimate value based on market expectations of future cash flows (including appropriate risk premiums).

*** Just got some survey results from Syzegy Consulting Group, which finds that private company boards (often VCs) are reducing CEO pay and total employee ownership. Syzegy CEO David Broman said the following in a press release: “Board members, which are mostly investors and other venture capital firms, are pulling back excessive salaries and reducing overall stock option grants until they see real gains in revenue, profits and a clear path to shareholder returns.”

This includes a median CEO cash compensation decrease of 8.7% in 2008, including an 11.5% drop in the software sector and a 10.6% drop in the life sciences sector. CEOs also saw their stock option holds drop by 4.2 percent. Aggregate employee ownership fell 9% to 15.14% of outstanding common share equivalents.

*** In 2004, we commissioned a pair of columns about why electing Bush/Kerry would be best for the venture capital industry. We’re doing it again, and will publish closer to the election (I only think of it today because the pro-McCain column just dropped into my inbox).

*** Last month I sent an email to John Cook, who for years has run a VC-centric blog for the Seattle P-I. My hope was to generate some local buzz for our peHUB Shindig, but I never heard back. I figured my note had simply gotten lost, but it turns out he had just left the P-I to launch a new site for the Pugent Sound Business Journal. He’s being joined by Todd Bishop, who had run a Microsoft-focused blog for the P-I. Something to look forward to…

*** Quiz Time: Can you name the Boston-area VC firm that just closed on its debut fund? Hint: It’s the firm’s first fund in name only.

Top Three

eBay has agreed to acquire Bill Me Later, a Timonium, Md.-based provider of online payment solutions. The deal is valued at approximately $945 million, including $820 million in cash and around $125 million worth of outstanding options. Bill Me Later had raised around $200 million in VC funding since 2000, from Crosspoint Venture Partners, Azure Capital Partners and GRP Partners.

Biolex Inc., a Pittsboro, N.C.-based drug company whose lead candidate focuses on hepatitis C, has raised $60 million in Series D funding. Clarus Ventures led the round, and was joined by OrbiMed Advisors and return backers included Intersouth Partners, Quaker BioVentures, Johnson & Johnson Development Corporation, Investor Growth Capital, Polaris Ventures, Mitsui & Co., The Dow Chemical Co., JP Morgan Securities and the North Carolina Economic Development Fund. Biolex has now raised nearly $160 million in total VC funding, and earlier this year canceled a planned $80 million IPO.

The Blackstone Group has completed its acquisition of a 20% stake in Chinese specialty chemical maker China National BlueStar Group Corp., a wholly-owned subsidiary of ChemChina. The deal was originally announced one year ago, and is valued at up to $600 million.

VC Deals

Proteus Biomedical Inc., a Redwood City, Calif.-based developer of MEMS for treating congestive heart failure, has raised over $30 million in the first tranche of its Series D funding round. Pacesetter Inc. was joined by return backers including Adams Street Partners, Carlyle Group, Essex Woodlands Health Ventures and Spring Ridge Ventures. The report did not specify an overall round target. Proteus had previously raised around $56 million since 2003.

BlackArrow, a New York-based ad-management systems for viewer-controlled video, has raised $20 million in Series B funding. Return backers include Cisco Systems, Inc., Comcast Interactive Capital, Intel Capital, Mayfield Fund and Polaris Venture Partners. The company previously raised $18 million in a tranched-out Series A round.

Crocus Technology, a France-based developer of magnetic random access memory (MRAM), has raised €11.5 million in second-round funding. OSEO (€3m) was joined by return backers AGF Private Equity, CDC Innovation, NanoDimension, Sofinnova and Ventech.

Inspirational Stores, a Paris-based provider of online marketing solutions for high-end and niche consumer brands, has raised €10 million in second-round funding. Atlas Venture led the deal, and was joined by return backer OTC Asset Management.

Crisp Wireless Inc., a New York-based provider of mobile entertainment and content management solutions, has raised $5.02 million in a Series B round led by return backer Meritage Private Equity Funds, according to a regulatory filing., a Santa Barbara, Calif.-based provider of online coupons and discount codes has raised around $4 million in Series B funding led by U.S. Venture Partners, according to a regulatory filing.

Proteus Biomedical Inc., a Redwood City, Calif.-based developer of MEMS for treating congestive heart failure, has raised over $30 million in the first tranche of its Series D funding round. Pacesetter Inc. was joined by return backers including Adams Street Partners, Carlyle Group, Essex Woodlands Health Ventures and Spring Ridge Ventures. The report did not specify an overall round target. Proteus had previously raised around $56 million since 2003.

Cognisafe, an Israel-based provider of anti-cheating software for online games, has raised an undisclosed amount of seed funding from 21Ventures.

Mzinga Inc., a Burlington, Mass.-based provider of white-label social networks, is looking to raise around $25 million in new private equity and debt funding, according to VentureWire. Earlier this year, the company raised $32.5 million ($15m in equity) from W Capital Partners, Bluecrest Capital Finance, GE Equity, Knowledge Industries and company management. Part of the proceeds were used to acquire Littleton, Mass.-based competitor Prospero Technologies.

Buyout Deals

Apax Partners, The Blackstone Group and Providence Equity Partners are among the firms that may bid for a majority stake in Indian business process outsourcing company Firstsource Solutions. The deal is expected to be worth around $400 million.

Argos Soditic has acquired a majority stake in LEXSI, a French information systems security consulting firm. No financial terms were disclosed for the deal, which was structured as a management buyout.

Colony Capital and Eurazeo have sold French restaurant chain Buffalo Grill to Abenex Capital, iXEN Partners and N.I. Partners. No financial terms were disclosed.

Elan Corp. has delayed the auction of its drug delivery unit, due to market conditions. The company originally planned to secure second-round bids from private equity bidders by mid-September, but has dropped the deadline due to bidder difficulties in securing financing. Talks still continue.

PE-Backed M&A

CPI Card Group, a Littleton, Colo.-based manufacturer of financial payment cards, has expanded into Canada by acquiring a facility formerly known as Metaca. No financial terms were disclosed. CPI is a portfolio company of Tricor Pacific Capital.

TSI Inc., a measurement technology company owned by Churchill Capital Partners, has acquired both Adams Instruments and Facility Monitoring Systems Ltd. No financial terms were disclosed. Adams Instruments makes remote optical particle sensor technology, while FMS provides contamination monitoring solutions.

Firms & Funds

Healthpoint Capital is raising up to $700 million for its third fund, according to a regulatory filing. It has already secured more than $410 million in capital commitments. The New York-based firm focuses on private equity opportunities in the musculoskeletal sector — specifically orthopedics and dental. It closed its second fund in early 2007 with $420 million.

Gordon Brothers Group has formed GB Investment Management Group, an umbrella group to manage all of the firm’s funds and legacy investments.

Human Resources

Neel Kashkari is expected to be named interim head of the U.S. Treasury’s new Office of Financial Stability (a.k.a. The Bailout Office), according to The Wall Street Journal. Kashkari currently is Treasury assistant secretary for international affairs, and previously ran Goldman Sachs’ IT security investment banking practice in San Francisco.

Richard Swann has agreed to join Inflexion Private Equity as an investment director, after previously having been with rival UK mid-market buyout firm LDC.

Laura Morse has retired from Atlas Venture, where she had been a human capital partner since 1999.

Malcolm Scovil is leaving Summit Partners, where he has spent the past three years as a senior associate in the firm’s London office. In an email, he said he would pursue his “own entrepreneurial path.”

Cooley Godward Kronish LLP has added 15 partners from Heller Ehrman, which recently voted to disband its partnership. This includes 10 partners in Silicon Valley, four in Seattle (where Cooley will open a new office) and one in Washington, D.C.