PE Week Wire, Oct. 16, 2006

The sun is shining, VC fundraising slowed in Q3 and the launch of “big new project” is just a couple of weeks away. In other words, it’s time for some Monday Mouth-Off…

Most of last week’s email was about Sevin Rosen Funds, and its decision to postpone fundraising just days before a scheduled first close. My ultimate conclusion was twofold: (A) SRF is sincere in its belief that the venture capital model is severely damaged; and (B) The postponement decision was partially prompted by SRF-specific issues like recent returns and intra-partnership dynamics.

George writes: “Those of us with enough years in the business remember when the vast majority of exits were from mergers rather than IPOs. It was only during the 1990s that IPOs allowed for VCs to get early monetization of investments — and when that ended, it became a tough business again. What is really going on is that the productivity cycle for semiconductors is not providing quantum-like gains as it did in the 80’s and 90’s, and so those firms who are hardware-oriented like Sevin Rosen are having to either change their model or exit the business. All of this creative destruction began with AOL and was accelerated by Netscape and Google and Yahoo. Venture capital will be around as long as there are people with ideas — it is just that the ideas are now in different areas.”

Jack: “How can you argue a business which takes $25 billion in a year and returns $10 billion ‘during good times’ isn’t broken? (and some of the $10b being distribute is from when we were investing $100b per year). Many Institutional investors think they will make 12% instead of 20% and are happy with that…but when they figure out the J curve is permanent at this investment rate and that they will lose principle, they will recognize what SR is saying is correct.”

Wayne: “Firms got really big after they discovered that partners could deliver mediocre returns and still get paid very, very well. Also, The LPs were naive: They didn’t have enough institutional memory within their own shops and thought the venture business was as scalable as anything else.So push more money across the table to fewer managers and rake in the profits.Life would be so easy…”

Jim: “Good to see you get the Sevin Rosen story right in the end. There always has been – and always will be – too much money chasing too few deals. That was true when Sevin Rosen raised funds in the 1980s, and remains true today. It also remains true that the only firms that will produce “venture-style” returns are in the top decile. Sure it was nice when everyone was generating 30%+ IRRs, but that was all built on inflated paper… Sevin Rosen is just using these timeless truisms as excuses.”

For more Sevin Rosen commentary, Matt Marshall takes a stab at my Friday column. Also, check out Matt’s new VentureBoard, an online marketplace for the tech startup community in Silicon Valley…

*** No one seems terribly concerned about the reported DOJ investigation into possible private equity collusion. Krishnan seems to sum up reader sentiment: “This investigation into private equity buyouts seems silly to me (though perhaps politically expedient). Let’s remember: (A) Public-to-private buyouts typically take place at a premium to the market price, so at that moment, if you believe public markets are efficient, the public shareholder stands to gain; (B) No one is forcing public shareholders to approve of the buyout and/or tender their shares, and this happens when the price isn’t high enough; (C) 80% of private equity gains go to LPs, many of whom are pension funds whose employees need these gains to refresh under-funded plans.” All true Krishnan, but largely irrelevant if the Feds can prove collusion.

*** K on LPs faced with follow-up funds for emerging VC managers: “Investors backing Emerging VC managers, especially in early stage investing, have to be prepared going in to re-up in Fund II without liquidity events. Unless there is a roaring bull market going on, it’s not logical to assume that there would have been time enough for Fund I to have generated a significant number (or any) liquidity events. But you are not flying blind, and in effect have a lot more data points upon which to make your re-up decisions. The key points are:

Team Stability: Judging team dynamics is always the most difficult part of Due Diligence with a new group. After three years in the trenches investing together, you should have a lot better feel for whether this is a cohesive team.

Deal Flow: For a first time fund, it’s always difficult to judge whether or not the deal flow is really there. Three or four years into the investment period, that should be a lot more obvious.

Strategy: Does the deal flow match their stated strategy or was their take on the market totally wrong? And if their strategy is different then what was sold to you on Fund I, is that because there was a totally sea change in the market – or did they just get things wrong?

Track Record Milestones: Though you are unlikely to have exits, you should have key milestones in the portfolio – up rounds, companies approaching profitability, strong syndicate partners.

*** Jason: “I’m not a conspiracy theorist or anything of the sort, but something doesn’t smell right with the online-gaming legislation timed right around the TPG/Apollo bid for Harrah’s.”

*** Finally, I want to extend best wishes to Danielle Fugazy, whose last day as Editor of Buyouts Magazine was on Friday. She is moving on to pursue a freelance communications career, with a continued focus on the private equity industry. Danielle and I used to share an office in Midtown Manhattan (the one that annoyed others with its loud music), and it was by far the most enjoyable environment I’ve ever worked in. Good colleague, great friend. She sends her regards to all, and can be contacted going forward at

Top Three

The Carlyle Group and Providence Equity Partners have agreed to acquire Open Solutions Inc. (Nasdaq: OPEN), a Glastonbury, Conn.–based provider of enabling technologies for financial institutions, for $38 per share. The total deal is valued at over $1.3 billion, including the assumption of debt.

Genstar Capital and Nautic Partners have agreed to sell Axia Health Management LLC to Healthways Inc. (Nasdaq: HWAY) for $450 million. Axia is a Tempe, Ariz.–based provider of preventative health and wellness programs, and was formed by Genstar, Nautic and company management in 2004.

Acme Packet Inc., a Burlington, Mass.-based maker of session border controllers for service providers (i.e., VoIP infrastructure), priced 8 million common shares at $9.50 per share, for an IPO take of approximately $76 million. It began trading on the Nasdaq under ticker symbol APKT, with Goldman Sachs and Credit Suisse serving as co-lead underwriters. The company has raised $45.5 million in total VC funding since its 2000 inception, from firms like Menlo Ventures, Advanced Technology Ventures and Canaan Partners.

VC Deals

Pharmaca Integrative Pharmacy Inc., a Boulder, Colo.-based pharmacy operator, has raised $18 million in new VC funding led by Highland Capital Partners.

Sterecycle, a UK-based waste recycling company, has raised $15 million in third-round funding led by Goldman Sachs.

Fat Spaniel Technologies Inc., a San Jose, Calif.–based provider of critical IT infrastructure for the distributed generation industry, has raised $7 million in Series A funding. DFJ Element led the deal, and was joined by Chrysalix Energy.

Buyout Deals

Summit Partners and GSO Partners have formed Aurora Diagnostics LLC, a Palm Beach Gardens, Fla.–based acquisition platform for anatomic pathology and other diagnostic laboratory businesses. No financial terms were disclosed. Aurora already has signed five letters of intent for lab acquisitions, with two already closed and the others expected to close by year-end. Its management team includes James New, former CEO of AmeriPath (former Summit Partners portfolio company), Martin Stefanelli, former AmeriPath chief operating officer and Haverford Healthcare Advisors co-founders Chris Jahnle and Kirk Rebane., a France-based online broker of financial products like mortgages and insurance, has sold a 40% ownership stake to 3i Group for €32 million.

RWE AG is not expected to receive the £10 billion bids it was expecting for subsidiary Thames Water, according to The Guardian. The German utility has received four bids, with the top offer being £8 billion from the Qatar Investment Authority. Other bidders include Terra Firma Capital Partners, a consortium led by Macquarie Bank and one led by Alinta. Deutsche Bank and Goldman Sachs are running the auction for RWE.

Verizon Communications (NYSE: VZ) is likely to spin off its directories business instead of selling it, according to The New York Times. The pending decision is based on unfavorable tax implications of a sale.

Acto, a Paris-based private equity firm affiliated with Finama Private Equity, has acquired Gérard Menguy Investments, a provider of corporate residences in France. No financial terms were disclosed, except that GMI has expected 2006 revenue of €46 million. Acto also has acquired a majority stake in Villages Vacances Famille, an operator of family tourism resorts in France (€145m in 2006 revenue). Acto will hold 55% of VVF, while Caisse des Dépôts et Consignations will hold 40% and company management will retain 5 percent.

Steelpoint Capital Partners has acquired The Internet Marketing Center Inc., a Blaine, Wash.-based provider of Internet marketing information, software and consulting services for small and mid-sized businesses. No financial terms were disclosed, except that IMC has over $20 million in annual revenue.

Inflexion Private Equity has sponsored a £24 million management buyout of Parasol Ltd., a UK-based provider of tax and regulatory services for self-employed workers and independent contractors. Inflexion provided £9.4 million in equity, while HSBC provided a 12 million leverage package.

PE-Backed IPOs

OrbComm Inc., a Ft. Lee, N.J.-based operator of a commercial wireless messaging system for narrowband communications, has set its proposed IPO terms to around 11.15 million common shares being offered at between $12 and $14 per share. It plans to trade on the Nasdaq under ticker symbol ORBC, with UBS and Morgan Stanley serving as co-lead underwriters. The company has raised around $105 million in VC funding from firms like Pacific Corporate Group, Ridgewood Capital, SES Global Participations and Northwood Ventures.

Home Inns & Hotels Management Inc., an operator of an economy hotel chain in China, has set its proposed IPO terms to 7.9 million American depository shares to be offered at between $10 and $12 per share. It plans to trade on the Nasdaq under ticker symbol HMIN, with Credit Suisse and Merrill Lynch serving as co-lead underwriters. Shareholders include Poly Victory Inv*stments Ltd., AsiaStar IT Fund, IDG Technology Ventures and Kangaroo Inv*stments LLC.

PE-Backed M&A

ClientLogic Corp., a subsidiary of Onex Corp. (TSX: OCX), has agreed to buy New York-based customer call center company Sitel Corp. (NYSE: SWW). The total deal is valued at around $450 million, including $310 million in equity ($4.05 per share).

Signature Aluminum Inc. (f.k.a. WXP Inc.), a Greenville, Pa.–based portfolio company of H.I.G. Capital, has acquired Atlantic Aluminum LLC of Lumber Bridge, North Carolina. No financial terms were disclosed.

PE Exits

Olympus Partners has agreed to sell Meridian Rail Services to The Greenbriar Cos. (NYSE: GBX) for $227.5 million. Meridian is a Birmingham, Ala.–based provider of maintenance services to railroads, including wheel and rail car maintenance and component reconditioning.

3M Corp. (Nasdaq: MMM) has acquired Brontes Technology Inc., a Lexington, Mass.-based developer of 3D intra-oral imaging technology for use in dentistry. The deal was valued at $95 million in cash. Brontes had raised around $8 million in VC funding since its 2003 founding, from Bain Capital Ventures, Charles River Ventures and IDG Ventures Boston.

Endo Pharmaceuticals Holdings Inc. (Nasdaq: ENDP) has acquired RxKinetix Inc., Boulder, Colo.-based developer of products for oral mucositis and other supportive care oncology conditions. The deal includes an initial payment of $20 million, plus up to $95 million in earn-outs based on clinical development and regulatory milestones. RxKinetix had raised over $25 million in total VC funding since its 1996 inception, from firms like MedVenture Associates, Elan Corp., Aweida Capital Management and Skyline Ventures.

Microsoft Corp. (Nasdaq: MSFT) has acquired Colloquis Inc., a New York–based provider of conversational online business solutions that feature natural language-processing technology. No financial terms were disclosed. Colloquis had raised VC funding from firms like Dawntreader Ventures and Reuters.

Doughty Hanson & Co. has sold the IZD Tower in Vienna to Matrix Property Fund Management, for €247 million. The IZD Tower is a 38-story building adjacent to the United Nations complex, and was acquired by Doughty Hanson during construction in 2000.

Firms & Funds

Granite Global Ventures of Menlo Park, Calif. has closed its third fund with $400 million in capital commitments, according to PE Week.

Wellington Partners has partnered with the KfW Banking Group to form the ERP Startup Fund, which will provide venture capital to young life sciences technology companies in Germany.

Human Resources

David Dinerman has joined Probitas Partners, a San Francisco-based private equity placement and advisory firm, as chief financial and administrative officer. He previously worked at Grant Thornton, where he focused on providing financial due diligence services to private equity funds.

David Shrigley, former general partner with Sevin Rosen Funds, has joined the board of Rambus Inc. (Nasdaq: RMBS).

Pfizer Inc. has promoted Ed Harrigan to senior vice president of worldwide licensing and business development, a group that oversees co-promotion and licensing agreements, venture capital investments and acquisitions. Harrigan had served as senior vice president of worldwide regulatory affairs and quality assurance with Pfizer since 2003.

Jonathan Dries has joined Tricor Pacific Capital as an associate in the firm’s Chicago office. He previously was with Robert W. Baird & Co.