PE Week Wire, Sept. 22, 2006

The SEC has received a temporary restraining order against AA Capital Partners, after alleging that the Chicago-based private equity firm had misappropriated at least $10.7 million from its six union pension fund clients. More specifically, the SEC charges that AA Capital used the fraudulent guise of capital call-downs to cover such expenses as private jet rentals, Super Bowl tickets, donations to political candidates and the operations of a Detroit strip club (you just can’t make this stuff up).

Those unfamiliar with AA Capital probably just assume that it is some boiler room that preyed on unsophisticated pension funds – like a private equity version of the Nigerian email scam. But AA Capital is anything but fly-by-night, having been formed in 2001 as a spinout from ABN Amro Fund Investment Group. It has more than $194 million in committed capital, which is supposed to be disbursed for both fund-of-funds and direct investment activities.

Some of the money has indeed gone where it is supposed to, with fund commitments to: Charterhouse, ComVentures, De Novo Ventures, Evergreen, Gabriel Venture Partners, Leonard Green & Partners, Mission Ventures, Quantum Value Management, Sterling Partners, The Jordon Co. and Veritas Capital. Its direct portfolio includes a number of hotel, casino and housing projects, plus a music publishing company.

But it’s the other money that the SEC takes issue with. AA Capital in 2005 generated around $2.02 million from its 2% management fees, but apparently had more than $7.15 million in “operating expenses.” Guess who was allegedly tricked into paying the difference?

From an SEC summary of the complaint (which can be found here in its entirety):

AA Capital withdrew at least $5.7 million from its client trust accounts in more than 20 separate installments and sent the client funds to various accounts [AA managing partner John] Orecchio designated, including those of a Michigan horse farm owned by Orecchio and a company that manages a Detroit strip club. The complaint further alleges that Orecchio told AA Capital’s CFO that the withdrawals were needed to reimburse him for what he claimed was a miscalculation of taxes he owed relating to at least one of AA Capital’s affiliated private equity funds. The Commission’s complaint also alleges that, during 2005, AA Capital misappropriated at least $5 million in client funds to cover the shortfall between its revenues and its operating expenses. The complaint further alleges that AA Capital misrepresented the nature of the withdrawals by sending monthly account statements to it! s advisory clients that falsely characterized the withdrawals as “capital calls” on the clients’ existing investments.

The SEC pins the original sins on Orecchio, but also claims that other firm executives maintained the fraud after learning about Orecchio’s misdealings. In fact, Orecchio was not suspended until after the SEC had presented its findings to AA Capital, and he remains on the firm’s website as one of three managing partners. Moreover, he still has 50% ownership of the firm and equity stakes in its funds. Fellow managing partner Paul Oliver directed by questions to in-house marketing director Jennifer Pedigo, but she did not return my voice mail message.

These are very serious charges, and the court already has put law firm Barack Ferrazzano in temporary charge of AA Capital’s operations. I can understand – albeit not condone – why Orecchio did what he is alleged to have done. He didn’t respect his fiduciary duties, nor did he respect his partners. What I cannot understand, however, is why those partners did not immediately throw Orecchio out the door once they found out, or at least resign themselves. And there is an outstanding question as to how a firm of this size had so few financial controls that Orecchio was so easily allowed to divert cash into inappropriate accounts.

I’ll keep tabs on this, and report in when there are new developments. Perhaps AA Capital has a reasonable defense, and the SEC has gotten its facts wrong. But I would doubt it.

Top Three

Nycomed AS, a Danish drug company, has agreed to buy the pharmaceuticals business of Altana AG for approximately €4.5 billion. Nordic Capital holds a 51% stake in Nycomed, with other shareholders including DLJ Merchant Banking Partners, Blackstone Group and AlpInvest. The deal is expected to close by year-end, with the formal transfer scheduled to occur on January 1, 2007.

First Reserve Corp. and Nabors Industries Ltd. (NYSE: NBR) each have committed $500 million in equity to form NFR Energy LLC, a joint venture to invest in global oil and gas exploration opportunities. The new company will pursue development and exploitation projects with both existing customers of Nabors and other operators in a variety of forms, including operated and non-operated working interests, joint ventures, farm-outs and acquisitions.

VPSA (f.k.a. Viventures) has sold its 14 portfolio company positions to TempoVest Fund II, a new vehicle advised by Tempo Capital Partners and capitalized by HarbourVest Partners. No financial terms were disclosed. The portfolio companies include OneAccess Networks, TES Electronic Solutions, Webify, Neophotonics, and Infusio. In related news, former VSPA president Philippe Charquet has joined Tempo as a managing partner.

VC Deals

Operax AB, a Sweden-based provider of QoS control and bandwidth management solutions for convergent all-IP broadband networks, has raised $15 million in Series C funding. Nomura International led the deal, and was joined by return backers Nordic Venture Partners, Innovacom and Emano.

Voxant, a Reston, Va.-based provider of a “viral syndication network” for online news, has raised $10.5 million in second-round funding. SoftBank Capital and Court Square Ventures were joined by return backer Longworth Venture Partners.

MiCardia Corp., an Irvine, Calif.-based developer of implantable devices for the treatment of heart disease has raised $9 million in Series B funding. HBM Biocapital led the deal, and was joined by Japan Asia Inv*stment Co., MedFocus and BioStar Private Equity Fund.

Telepo Inc., a Sweden-based provider of enterprise communications software, has raised €4 million from Accel Partners.

RingCube Technologies Inc., a Mountain View, Calif.-based provider of portable personal computing software, has raised $4 million in Series A funding led by New Enterprise Associates.

LUCA Technologies LLC has raised $3 million from BASF Venture Capital America. The golden, Colo.-based biotech company uses microorganisms to reactivate or intensify the production of methane from finite fuels such as coal or oil.

Callison Architecture Inc., a Seattle–based professional architectural and design firm, has raised an undisclosed amount of private equity funding from Blue Point Capital Partners.

Buyout Deals

Wellspring Capital Management has acquired The Press of Ohio and D.B. Hess Co., two printing companies that serve the education, catalog and commercial markets. No financial terms were disclosed. Management of both companies will remain the same.

The Brakes Group PLC, a UK-based provider of food to the UK and French catering markets, has agreed to a £275 million refinancing, which is slated to close next month. The majority of the proceeds will be used to return capital to company shareholders, including majority holder Clayton, Dubilier & Rice (67% ownership stake). The refinancing is lead-arranged by JPMorgan, Credit Suisse and Deutsche Bank, with UBS as a co-manager.

Linde AG has received intense private equity interest in its Kion GmbH materials handling unit according to the Frankfurter Allgemeine Zeitung. Likely bidders include: Allianz Capital and Permira; Apax Partners and BC Partners; and KKR and Goldman Sachs. Other possible parties include CVC, Bain Capital, Cinven and Blackstone Group. Credit Suisse is running the auction.

The Carlyle Group reportedly has dropped out of a Citigroup-led consortium that is bidding for an 85% stake in Guangdong Development Bank of China. Associates First Capital has replaced Carlyle, while the Citigroup offer faces stiff competition from a Societe Generale-led group.

Eos Partners has sponsored a recapitalization of Addus Healthcare Inc., a Palatine, Ill.-based provider of skilled and non-skilled home health services. No financial terms were disclosed. Freeport Financial acted as lead agent for the debt financing, while Provident Healthcare served as Addus’ exclusive financial advisor.

Resilience Capital Partners has agreed to acquire substantially all the assets of Omega Polymer Technologies Inc., an Aurora, Ohio-based manufacturer of thin-wall, complex pultruded lineals. The deal is subject to bankruptcy court approval. No financial terms were disclosed.

PE-Backed IPOs

CommVault Systems Inc., an Oceanport, N.J.-based provider of data management software applications, priced 11.11 million common shares at $14.50 per share ($12.50-$14.50 range), for an IPO take of approximately $161 million. It will trade on the Nasdaq under ticker symbol CVLT, while Credit Suisse and Goldman Sachs served as co-lead underwriters. Shareholders include TH Lee Putnam, Sprout Group and DLJ Merchant Banking Partners.

DivX Inc., a San Diego-based provider of video compression technology, priced 9.1 million common shares at $16 per share ($12-$14 range), for an IPO take of approximately $145.6 million. It will trade on the Nasdaq under ticker symbol DIVX, while JPMorgan served as lead underwriter. DivX had raised around $47 million in VC funding from firms like Zone Ventures, WI Harper Group, Insight Venture Partners, Draper Atlantic, Wasatch Venture Fund, Springboard-Harper, Cardinal Venture Capital, Ali Corp. and Cyberlink International Technology Corp.

NewStar Financial Inc., a Boston-based provider of debt financing for middle-market businesses, has filed to raise $100 million via an IPO of common stock. It plans to trade on the Nasdaq under ticker symbol NEWS, with underwriters including Goldman Sachs, Morgan Stanley, Citigroup and Wachovia Securities. Shareholders include Capital Z Partners, Corsair Capital, JPMorgan Capital and Northwestern Mutual Life Insurance Co.

St. Francis Medical Technologies Inc., an Alameda, Calif.-based developer of motion-preserving technologies and procedures for orthopedic and neurological spine surgery, has filed to raise $86.25 million via an IPO of common stock. It plans to trade on the Nasdaq under ticker symbol SFMT, with Citigroup and JPMorgan serving as co-lead underwriters. The company has raised over $27 million in VC funding from firms like U.S. Venture Partners, Versant Ventures and Essex Woodlands Health Ventures.

Acme Packet Inc., a Burlington, Mass.-based maker of session border controllers for service providers (i.e., VoIP infrastructure), has set its proposed IPO terms to around 11.47 million common shares being offered at between $6.50 and $7.50 per share. It plans to trade 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.

Achillion Pharmaceuticals Inc., a New Haven, Conn.-based drug company focused on infectious diseases, has set its proposed IPO terms to 4.5 million common shares being offered at between $14 and $16 per share. It plans to trade on the Nasdaq under ticker symbol ACHN, with Cowen & Co. and CIBC World Markets serving as lead underwriters. The company has raised around $120 million in total VC funding since its 1998 inception, from firms like Atlas Venture, SV Life Sciences, Advent International, Bear Stearns Health Innoventures, SGC Partners, Gilead Sciences and Connecticut Innoventions.

BioVex Group Inc., a Cambridge, Mass.-based developer of oncolytic virus technology that replicates and spreads within solid tumors, has set its proposed IPO terms to 3.4 million common shares being offered at between $11 and $13 per share. It plans to trade on the Nasdaq under ticker symbol BVEX, with Janey Montgomery Scott serving as lead underwriter. BioVex has raised around $75 million in total VC funding since its 1999 inception, from firms like Merlin Biosciences, Innoven, Lloyds Development Capital, Scottish Equity Partners, ABN Amro Capital, WestLB, V-Sciences and Genechem Therapeutics Venture Fund.

PE-Backed M&A

Eau Ecarlate, a France-based provider of stain removers and other clothes washing products, has acquired the Household Products division of Italy-based Guaber. The deal was partially financed via an additional investment from existing Eau Ecarlate shareholder European Capital. AXA Private Equity is Eau Ecarlate’s majority shareholder.

PE Exits

Art Technology Group Inc. (Nasdaq: ARTG) has agreed to acquire eStara Inc., a Reston, Va.–based provider conversion solutions for enhancing online sales and support initiatives. The deal is valued at up to $48.3 million, including $2 million in cash, a $6 million cash earn-out and around 15.3 million common shares of ATG stock. Estara raised $17 million in VC funding in 2000, including a $15 million infusion at a $25 million post-money valuation. Backers included Texas Pacific Group, One Equity Partners and JNet Ventures.

Firms & Funds

The Maryland Technology Development Corp. (Tedco) and the NASA Goddard Space Flight Center have brokered a partnership designed to commercialize technologies developed at the Greenbelt space research laboratory.

Human Resources

Barbara Piette has joined Knightsbridge Advisers as a managing principal, focused on venture capital. She has been president of Blackwood Capital since 2000, before which she was a partner with both Schroder Ventures and Charles River Ventures. Knightsbridge also said that Jon Sweemer has joined the firm’s venture and post-venture inv*stment committees. He already was a Knightsbridge board member, and currently runs SPS Global Inv*stors.

Julian Nikolchev and Michael Gallatin have joined Frazier Healthcare Ventures as venture partners. Nikolchev previously was founder, president and CRO of CardioMind Inc., a VC-backed developer of a guidewire-based stent delivery system. Gallatin is the former chief scientific officer of ICOS Corp. (Nasdaq: ICOS). Frazier also promoted Steven Tallman from entrepreneur-in-residence to venture partner.

JP Lachance has joined San Francisco-based KCA Partners as a vice president. He previously was with Fundamental Capital.

Eric Chilton has joined Fortis as a managing director and U.S. head of corporate and I-banking. He previously was a managing director with Barclays Capital, where he most recently served as head of global loans (Americas).

Stephen Schwarzman of The Blackstone Group is the first pure private equity pro on the Forbes 400 Richest Americans list. His net worth is listed at $3.5 billion.

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