PE Week Wire: Thurs., Aug. 16, 2007

Today’s top news item is that Citrix has agreed to buy virtualization software company XenSource for $500 million in stock and cash (60/40 split). A few quick thoughts:

XenSource had raised around $38 million in VC funding from such firms as Kleiner Perkins, Accel Partners, New Enterprise Associates and… Sevin Rosen Funds. That would be the same Sevin Rosen Funds that last October suspended fundraising after declaring the VC model to be “broken.” For the uninitiated, see here and here.

So has Sevin Rosen’s own success proved its argument wrong? Nope, because its argument was wrong to start with. XenSource is just a case in point. Hold on one moment, a fictional reader has his hand raised. Go ahead…

“Ummm, Dan. Wasn’t it just two weeks ago that you made a big deal about how the majority of VC funds raised post-bubble are underwater, and how that indicates a lack of VC market sustainability?”

Yes, but there is a difference between a broken VC model and broken VC firms. The problem isn’t that too many firms have failed by using the VC model, but rather that too many have failed after abandoning it. As I wrote last year:

Even [Sevin Rosen’s Steve] Dow acknowledges that some of Sevin Rosen’s best hits lately have come from companies that it seeded, not from ones it jumped into bed with at Series B or Series C. Too many firms have spent the past few years rushing downstream in the name of risk aversion, without realizing that the water is actually safer up above. These shops might get shaken out when all is said and done, but that’s more on them than on the VC model itself (which they abandoned).

XenSource is one of those companies that Sevin Rosen seeded. In fact, it incubated XenSource in its offices. I’m obviously not saying that every firm that continues to focus on early-stage investing will succeed – or vice versa – but it’s all about improving your chances. So congrats Sevin Rosen. Revel is being wrong. You and your fellow XenSource investors have 500 million reasons to do so.

*** I spoke yesterday with Sevin Rosen partner Nick Sturiale about the XenSource deal, but was mostly unable to pull him into the “VC model is broken” discussion. Quite the laser-focus on XenSource. So I went in a different direction: Does he wish that Citrix had approached XenSource a month or so later, so that the deal terms would not have been signed before XenSource competitor VMWare had what is arguably the best tech IPO since Google?

He said that he can’t let himself think like that, or else it would cause too many “gray hairs.” I hope he doesn’t get too upset when looking in the mirror this morning, because his denials were unconvincing (which is good, because their validity would make him some sort of cyborg). It’s a great win that was certainly aided by VMWare buzz, but what if… Well, what if?

*** Quiz Time: Can you name the Wall Street titan that is raising $1 billion for a fund that will buy up debt from hung bridges? Hint: This isn’t the first time that this firm has tried making lemonade out of a larger economic lemon.

*** Quote of the day: An LP yesterday said the following to me, in regards to KKR’s serial overpricing prior to the credit crunch: “KKR could be the 2007 version of Hicks Muse.” Well, I guess it could be worse, since Hicks Muse is improbably back alive and kicking (albeit without its more successful European affiliate). He could have told me that KKR would be the Forstmann Little of 2007…

Top Three

Citrix Systems Inc. (Nasdaq: CTXS) has agreed to acquire XenSource Inc., a Palo Alto, Calif.-based provider of enterprise-grade virtual infrastructure solutions. The total deal is valued at $500 million in cash and stock, including approximately $107 million in unvested stock options. It is expected to close in the fourth quarter. XenSource was incubated by Seven Rosen Funds in 2005, and later raised over $38 million in VC funding from SRF, Accel Partners, Kleiner Perkins and New Enterprise Associates.

HelioVolt Corp., an Austin, Texas-based developer of thin-film photovoltaics, has raised $77 million in Series B funding. The round was co-led by Paladin Capital Group and Masdar Clean Tech Fund, an affiliate of the Abu Dhabi government. Series A backer New Enterprise Associates also participated, alongside Solucar Energias, Morgan Stanley Principal Investments, Sunton United Energy and Yellowstone Capital.

Accredited Home Lenders Holding Co. (Nasdaq: LEND) shared jumped 25.1% in heavy pre-market trading today, after the private equity firm slated to buy it said it will extend its tender offer for the troubled mortgage company’s shares. Lone Star Funds said Accredited Home still doesn’t meet all of the conditions needed to close the tender offer, but was required to extend the offer after Accredited Home asked it to do so.Accredited Home sued Lone Star and two affiliates Tuesday to get them to follow through on the $400 million buyout.

VC Deals

Leptos Biomedical Inc., a Brooklyn Center, Minn.-based developer of nerve stimulation therapy for treating obesity, has raised $20 million in Series C funding. The deal includes a pair of $10 million tranches, with the first called down in April and the rest dependent on the achievement of certain milestones. Latterell Venture Partners led the deal, and was joined by return backers Spray Venture Partners, Technology Partners and Thomas McNerney & Partners. The round was first reported by VentureWire. Leptos previously raised a $6 million round in 2004.

Metrolight Inc., a maker of smart electronic ballasts for HID lighting, has raised $9 million. Virgin Fuels and Gemini Israel Funds co-led the deal, and were joined by Israel Cleantech Ventures and Altshuler Shaham. Metrolight has now raised $23 million in total VC funding since its 1996 inception. It has offices in Brentwood, Tenn. and Israel.

Kongregate, a San Francisco-based social gaming website, has raised over $5 million in VC funding led by Greylock Partners. Angel backers include Reid Hoffman, Joe Kraus, Jeff Clavier and Richard Wolpert.

Calidora Skin Clinic, a Seattle–based operator of skin care clinics in the Pacific Northwest, has raised $4 million in its first round of institutional funding. Fluke Venture Partners led the deal, and was joined by existing angels and company management.

Semantra Inc., a Dallas–based provider of enterprise search solutions, has raised $3.8 million in second round funding from return backer CPMG Inc. The company had raised $2.3 million in September 2006.

Rontal Applications Ltd., a Lod, Israel-based provider of incident management and business continuity systems, has raised $3.5 million in second-round funding from Pegasus Capital.

ARC Solutions Inc., a Washington, D.C.-based provider of association management software, has raised $2 million from Advantage Capital Partners and Enhanced Capital Partners.

Serious Inc., a New York-based provider of digital publishing and marketing services, has raised $7 million in venture debt funding from Hercules Technology Growth Capital. The company had raised $14 million in VC funding this past February from Greenhill SAVP and North Hill Ventures.

Buyout Deals

Antero Resources Corp., a Denver-based oil and gas exploration and production group, has secured a $1 billion line of equity funding. Warburg Pincus led the deal, and is joined by Yorktown Energy Partners, Lehman Brothers Merchant Banking and Antero management. This is the second incarnation of Antero Resource Corp. The first was funded by the same group with a focus on the Barnett Shale, before being sold for over $1 billion to XTO Energy in 2005. Since that sale, the Antero group has focused on developing its properties in the Arkoma Basin of Oklahoma and the Piceance Basin of Colorado.

Charlesbank Capital Partners and Transportation Resource Partners have agreed to acquire MasterCraft Boat Co. from US Equity Partners, a fund sponsored by Wasserstein & Co. Company management will partner with the buyers, while debt financing will be provided by Jefferies & Company. No financial terms were disclosedl MasterCraft is a Vonore, Tenn.-based maker of powerboats. It was advised on the sale by Lazard.

Charter Communications (Nasdaq: CHTR) chairman Paul Allen said in a regulatory filing that he is considering strategic options for the company, which could include a privatization. He also is reviewing steps to reduce Charter’s debt, and is buying up some additional shares.

Code Hennessy & Simmons is in talks to buy Swank Audio Visuals from American Capital Strategies, according to LBO Wire. No financial terms were reported, except that the deal would probably come in below $200 million. Swank is a St. Louis-based provider of audio/visual rental and set-up services to hotels and convention centers.

Equita Management of Germany has acquired Austrian compressor system manufacturer Leobersdorfer Maschinenfabrik from Austria’s Invest Equity and Germany’s Nord Holding. No financial terms were disclosed.

Esporta, a troubled UK health-club operator, has held preliminary talks with potential buyers. Press reports suggest that the most serious suitors include MidOcean Partners, Aurigo and strategic London & National. Both Virgin Active and The Blackstone Group are also reported to have interest. Esporta was bought last year by entrepreneur Simon Halabi from Duke Street Capital for £480 million.

Key Principal Partners has acquired Duvinage Corp., and its wholly-owned subsidiary Mitchell Machine Shop. No financial terms were disclosed. Duvinage is a Hagerstown, Md.-based manufacturer of custom spiral and circular stairs, with installations in such landmarks as The White House, MIT and the National Gallery of Art. Mitchell Machine is a Greencastle, Penn.-based custom machining and fabricating company.

Monomoy Capital Partners has acquired Transeo LLC, a Dayton, Ohio–based maker of armored trucks and similar specialty vehicles for the cash-in-transit and emergency vehicle response industry.No financial terms were disclosed. Monomoy expects Transeo to serve as an acquisition platform for other companies in the security and emergency vehicle space.

New Mountain Capital has completed its $655 million acquisition of Oakleaf Global Holdings Inc. from Charterhouse Group. Oakleaf is an East Hartford, Conn.-based asset-light provider of outsourced waste logistics solutions. Charterhouse acquired the company four years ago, and helped finance six add-on acquisitions. Oakleaf was advised on the deal by Robert W. Baird.

RimRock Energy LLC of Denver has received $250 million in private equity commitments from Bear Stearns Merchant Banking and Natural Gas Partners. Rimrock is a newly-formed natural gas exploration and production company focused on onshore unconventional resources in North America, including shale gas, tight gas and coalbed methane.

Sallie Mae (NYSE: SLM) shareholders approved a $25 billion buyout by J.C. Flowers & Co., Friedman Fleischer & Lowe, J.P. Morgan Chase andBank of America. The private equity firms would own a combined 50.2% stake, while the banks would each invest $2.2 billion for a combined 49.8% stake.

Veritas Capital has closed its $1.1 billion buyout of Aeroflex Inc., a Plainview, N.Y.-based provider of high technology solutions to the aerospace, defense, cellular and broadband communications markets. Aeroflex stockholders received $14.50 per share.

Wynnchurch Capital has acquired a majority stake in Webex Inc., a Neenah, Wis.-based maker of precision-engineered rolls and custom web handling machinery for a wide range of web handling and converting applications. Senior debt was provided by ORIX Finance and CIT Group, while Audax Mezzanine provided both subordinated notes and equity. No additional terms were disclosed. William Blair & Co. advised Webex on the deal.

PE-Backed IPOs

Reliant Technologies Inc., a Mountain View, Calif.-based manufacturer of medical laser technologies for aesthetic applications, has filed for a $95 million IPO. It plans to trade on the Nasdaq or NYSE Arca, with Piper Jaffray and Banc of America Securities serving as co-lead underwriters. The company has raised around $70 million in total VC funding since 2003, from Three Arch Partners (25.7% pre-IPO stake), Meritech Capital Partners (11%), Delphi Ventures (5.4%) and Pinnacle Ventures.

PE Exits

Perot Systems Corp. (NYSE: PER) has agreed to acquire JJWild Inc., a Canton, Mass.-based provider of med-tech consulting services. The deal is valued at $89 million. JJWild had raised a $20 million Series A round from Advent International last year, which included both growth equity and some liquidity for existing JJWild shareholders.

PE-Backed M&A

Vercuity, a Greenwood Village, Colo.–based provider of telecom expense management solutions, has acquired iWave Wireless, a New York-based provider of wireless expense management services and solutions. No financial terms were disclosed. Vercuity shareholders include One Equity Partners, Dolphin Equity Partners and Megunticook Management.

Human Resources

Close Brothers has named Stephen Aulsebrook as its new CEO. He previously ran the firm’s European special situations group. Former CEO Richard Grainger will become executive vice chairman, while managing director Matthew Priest will become head of the European special situations group.

Matt London and Pete Tedesco have joined Waud Capital Partners as associates. London previously was with Deutsche Bank as an I-banking analyst for the industrials sector. Tedesco was an analyst with UBS, where he provided M&A advisory services and helped raise capital for the firm’s corporate and private equity clients.

Jeffrey Bede has joined ORIX Venture Finance as a principal. He previously was a managing director with Chessiecap.