PE Week Wire, Oct. 10, 2006

At 4:18 yesterday afternoon, I was on CNBC to discuss public-to-private buyouts (based, in part, on the proposed Cablevision deal). Just as I was saying that LBO heavyweights are disingenuous when complaining about inflated valuations, our segment got interrupted. Seems Google had picked that moment to confirm that it will purchase YouTube for $1.65 billion in stock.

No complaints from me, of course, since the GooTube news is huge for Web 2.0 startups, Google shareholders, venture capitalists, copyright infringement attorneys, copright infringers and amateur videographers. In retrospect, however, I wish that CNBC had come back to me after the break.

Why? Because the next question would have been something like: “Do you expect regulators to begin taking a look at the private equity market?” My answer would have been affirmative, since with great visibility comes great scrutiny. And then I would have looked like a sage, because today’s Wall Street Journal reports that the U.S. Justice Department has launched an inquiry into anticompetitive practices among private equity firms.

WSJ says that firms like KKR and Silver Lake Partners have received letters that “asked for a range of information and documents related to deals and business practices.”

The DOJ investigation so far looks like a fishing expedition, as the letters do not allege any wrongdoing ror do they even disclose the probe’s subject (if any). Many people, however, suspect that the waters may be well-stocked. Some of this popular distrust can be dismissed as ignorance about how private equity firms work, but some of it actually comes from the exact opposite position.

As to the ignorant: There is a perception that LBO firms preempt competition by forming buying consortia, but that charge rarely holds up. Firms need large buying groups to complete multi-billion deals, in order to reduce risk and diversify portfolios. Moreover, plenty of mega-auctions this include competing groups. And the year’s biggest deal to date – HCA – specifically prevented other LBO firms from joining the consortium, for the explicit purpose of attracting competing bids.

But there is another issue here, which may not yet have received major DOJ consideration. As a private equity LP wrote in an email this morning: “Once these things start rolling, it’s hard to know where they go.If the Feds start looking into possible collusion, it may be that the information they collect has them more even concerned by the fees that are charged. Remember Warren Buffet’s words to his managers about the five most dangerous words: “Everyone else is doing it.’” Amen.

*** Google/YouTube: I don’t really have many insights here, except that the deal continues to validate Sequoia Capital’s standing as the world’s leading VC firm. Also worth noting that a hedge fund called Artis Capital Management invested alongside Sequoia in YouTube’s $8 million Series B round earlier this year. As for the next major Web 2.0 deal, my money is on Yahoo-Facebook.

*** Last month, I reported that Draper Atlantic Ventures seemed to have lost its Draper. But it seems that was only half the story.

Draper Atlantic Ventures has, indeed, renamed itself New Atlantic Ventures – and is in the market with a $200 million fund. Not only does it include the former Draper Atlantic partners (minus Jim Lynch), but it also includes the partners of Boston-based DFJ New England. This is a merger of sorts, with each firm expected to manage their legacy funds while simultaneously marketing the new vehicle.

I spoke on Friday with partners John Backus and Thanasis Delistathis – both of whom declined to discuss fundraising – and was told that the decision should not be construed as dissatisfaction with DFJ. Backus actually is a former fraternity brother of Tim Draper, while Delitsathis went to high school with Andreas Stacropolous and business school with Jennifer Fonstad. Instead, they simply felt that the firm was old enough to move away from home.

“We were the first affiliate fund to use the Draper name,” Backus explained. “But we felt that the time had come for us to go out and build our own brand.”

It also probably didn’t hurt that Draper Atlantic recently had a big hit with the sale of Mobile360, which will return around $44 million to the firm after an initial investment of just $1.5 million (plus a small amount of follow-on cash). It also has an anticipated IPO in the pipeline with DivX. You can read more about this news in Monday’s edition of PE Week.

Top Three

Google Inc. (Nasdaq: GOOG) has agreed to acquire online video-sharing company YouTube Inc. for approximately $1.65 billion in stock. YouTube had raised $11.5 million over two rounds of VC funding, from Sequoia Captial and hedge fund Artis Capital Management.

Cellfish Media LLC, a New York–based developer and distributor of content for mobile phones, has raised $50 million in VC funding from Trio Capital, Telecom Media Fund (Caisse de depot et placement du Quebec) and an affiliate of Desjardins Venture Capital. Cellfish is a subsidiary of France-based Lagardere group.

Partners Group of Switzerland has held a €1.1 billion final close for its latest secondary fund.

VC Deals

Ripe Digital Entertainment, a Los Angeles-based provider of video-on-demand digital entertainment, has raised $32 million in Series B funding. Backers include Hearst-Argyle, Time Warner Inv*stments, Columbia Capital and Rho Ventures.

MTM Laboratories AG, a Heidelberg, Germany-based developer of in vitro diagnostic test systems for the early detection and diagnosis of cancer, has raised €22 million in Series C funding. HBM BioVentures and HBM BioCapital co-led the deal, and were joined by fellow returns backers Heidelberg Innovation and Wellington Partners. New participants include Nexus Medical Partners and SwissFirst Bank.

Ruckus Wireless Inc., a Sunnyvale, Calif.-based home networking company, has raised $16 million in Series D funding. Motorola Ventures led the deal, and was joined by T-Online Venture Fund, Firelake Capital Management and return backers Sequoia Capital, Sutter Hill Ventures, Investor AB and WK Technology Fund.

3VR Security Inc., a San Francisco-based developer of video management systems for surveillance, has raised $15 million in Series C funding. DAG Ventures led the deal, and was joined by return backers Kleiner Perkins Caufield & Byers, VantagePoint Venture Partners and In-Q-Tel., a San Francisco-based provider of software for automating online marketing relevancy, has raised $14 million in Series C funding. VantagePoint Venture Partners led the deal, while return backers include Generation Partners and Transcosmos.

Chronicity Inc., a Dallas–based provider of integrative treatment for ADHD and related disorders, has raised $12.5 million in Series A funding led by Chrysalis Ventures.

InforSense Ltd., a London-based provider of enterprise real-time analytics, has raised $10 million in new VC funding. Existing shareholders Fleming Family & Partners Private Equity and Imperial Innovations Group co-led the deal.

Intelliworks Inc., a Rockville, Md.-based provider of CRM solutions for higher education, has raised $10 million in Series B funding. RedShift Ventures was joined by return backers Columbia Capital and Novak Biddle Venture Partners.

Makani Power LLC, an Emeryville, Calif.-based alternative energy effort from Squid Labs, has raised $10 million in Series A funding from Google, according to a regulatory filing.

Agiliance Inc., a Mountain View, Calif.-based provider of security risk and compliance management solutions, has raised $6.5 million in Series B funding. Walden International led the deal, and was joined by Red Rock Ventures.

AGI Dermatics, a Freeport, N.Y.-based drug company focused on skin cancer and anti-aging products, has raised $5.5 million in Series A funding. Trevi Health Ventures led the deal, and was joined by WHI Group and undisclosed angels.

MedVentive Inc., a Cambridge, Mass.–based provider of medical cost containment solutions, has raised $4 million in Series A funding from HLM Venture Partners and Long River Ventures.

Smalltown, a San Francisco-based user-generated content site for local communities, has raised $3 million in Series A funding from Formative Ventures.

CambridgeSoft Corp., a Cambridge, Mass.-based provider of enterprise solutions for the life sciences market has raised $2 million in second-round funding from existing shareholder Edison Venture Fund. Proceeds were used to repurchase stock from company founders.

LeadPoint Inc., a Los Angeles-based online leads exchange marketplace, has raised $2 million in Series A funding from the European Founders Fund. The company previously had raised around $5 million from Redpoint Ventures.

Wilson TurboPower Inc., a Woburn, Mass.-based developer of ceramic thermal regenerators, has secured around $2 million of a $3.92 million Series A round, according to a regulatory filing. Backers include Ignite Technology Ventures.

Vysr Inc., a Palo Alto, Calif.-based provider of “online communications Web services,” has raised $1.5 million in Series A funding led by Sand Hill Group, according to a regulatory filing. The company is being run by Tetlier co-founder Guda Venkatesh.

CSIdentity Corp., an Austin, Texas-based company focused on preventing identity theft, has secured around $1.13 million of a $2.5 million Series A round, according to a regulatory filing. Backers include Mandelbrot Ventures, BF Private Capital and the Five H Fund.

Digi Sense Inc., a Belmont, Calif.-based developer of technology to improve speaker sound quality, has secured $570,000 of a $1 million Series A round led by vSpring, according to a regulatory filing.

Celiro Inc. (a.k.a. Phonezoo), a Sunnyvale, Calif.-based provider of ringtone software, has raised $560,000 in Series A funding, according to a regulatory filing. Backers include Continental Capital Corp.

EnhanceScape Corp., a Grand Prairie, Texas-based provider of landscape installation services, has raised $1.6 million in Series A funding, according to a regulatory filing. Backers include Oak One Capital Partners and

Haskell Jewels Ltd., a New York-based costume jewelry company, has raised an undisclosed amount of private equity funding from Holding Capital of Bridgeport, Connecticut.

Buyout Deals

ClubCorp Inc. has agreed to sell its portfolio of nearly 170 golf clubs and three resorts to KSL Capital Partners. It also has agreed to sell Pinehurst to the Robert Dedman family. The two transactions are worth a combined $1.8 billion.

W.L. Ross & Co. is in talks to acquire additional automotive components companies for portfolio platform International Automotive Components Group, according to Bloomberg. No specifics were disclosed.

PE-Backed IPOs

SHG Holding Solutions Inc. (Skilled Healthcare), a Foothill Ranch, Calif.-based provider of nursing facilities and rehabilitation therapy centers, has filed for a $175 million IPO. It plans to trade on the NYSE under ticker symbol SKH, with Credit Suisse serving as lead underwriter. Onex Partners bought the company from Heritage Partners last year for around $640 million.

PE-Backed M&A

Avista Capital Partners has agreed to purchase up to €125 million of common stock in Danish drug company Nycomed AS. The capital will be used to help finance Nycomed’s proposed €4.5 billion acquisition of Altana AG’s pharmaceuticals business. Nycomed currently is 51%-owned by Nordic Capital, with others shareholders including Alpinvest, Blackstone Group and DLJ Merchant Banking Partners.

PE Exits

Equifax Inc. (NYSE: EFX) has acquired Austin-Tetra, an Irving, Texas-based provider of B2B data management solutions for Fortune 1000 companies and government agencies. No pricing terms of the all-cash deal were disclosed. Austin-Tetra had raised $3.5 million in private funding from Southwest Mezzanine Inv*stments.

Firms & Funds

GIMV has begun fundraising for the Eagle Russia Fund, which is a successor to the Eagle Venture Partners funds. It has a target capitalization of between $60 million and $100 million, with GIMV expected to contribute a maximum of $20 million. The fund will focus on private equity opportunities in Russia.

Alta Partners has closed its eighth fund with $500 million in capital commitments.

Kearny Venture Partners has held an $85 million first close for its latest fund. Limited partners include CalPERS and Daiichi Sankyo Co. The firm previously was known as Thomas Weisel Healthcare Ventures.

Piper Jaffray is raising a $50 million cleantech fund, according to a regulatory filing.

Human Resources

Dave Andonian has joined Tudor Ventures. He is the chairman of Affinova Inc., and the onetime president and chief operating officer of CMGI. Tudor has declined to comment on the hire.

Dana Settle and Andrew Lipsher have joined Greycroft Partners as partners based in Los Angeles and New York, respectively. Settle previously was a partner with VSP Capital and, before that, as a venture partner with Mayfield. Lipsher previously served as head of M&A, corporate development and administration for Interscope Geffen A&M Records.

Star Ventures, an Israeli venture capital firm, has lost four of its ten general partners, according to Rami Kasterstein left to become CEO of Neocrafts, Yoni Cheifetz joined Lightspeed Venture Partners’ Israel office in July; Ami Samuels left to become a senior director with Poalim Capital Markets, where he is a senior director; and Pinny Chaviv took over a stealth startup that is circulating term sheets in Israel. Star says it still plans to raise a new fund, but declined to comment on the departures.

Richard Venegar has agreed to join Minneapolis-based Milestone Growth Fund as president and CEO. He currently serves as senior vice president of Dallas-based Pacesetter Growth Fund, and will succeed the recently-retired Esperanza Guerrero-Anderson.

John Kremer has joined Credit Suisse as head of European institutional distribution for asset management. He previously was president of Lehman Brothers Alternative Investment Management in London.

Mike Wilson, head of SSgA Ventures, is moving from Tokyo to London, in order to assume responsibility for relationship management for State Street Global Advisors’ top European clients. He will retain responsibility for the SSgA Ventures group.