PE Week Wire: Thurs., Dec. 6, 2007

Regular readers of this space know that I support a change to the tax treatment of carried interest. You also know that I strongly oppose many of the fees that buyout firms suck out of their portfolio companies, including deal closing fees and management agreement termination fees. In other words, my non-pandering bona fides are established and well-distributed.

I put this out there as a precursor to the following: I am extraordinarily disappointed by the short documentary film released today by Brave New Films, which is kicking off a campaign called “The War on Greed.” I have liked much of director Robert Greenwald’s past work, but find this film grossly unfair to the private equity industry as a whole, and to Henry Kravis in particular. This would be bad enough on its own, but is particularly galling because the intended audience is people who currently know little to nothing about private equity. It is, in short, agitprop.

The film tries to be a tongue-and-cheek look at income inequality, and juxtaposes Henry Kravis’ many mansions against the more modest surroundings of a school teacher, and other less wealthy individuals. I also takes Kravis’ 2006 income – a speculative $450 million figure published by Forbes – and breaks down how he makes in an hour or day what many people make in a year.

“I want people to first understand the size and scope of private equity, before getting into more substantive matters,” Greenwald told me last night. “So we decided we were going to focus on Kravis as one of the most egregious examples of economic disparity.”

And that would have been fine, if that was all Greenwald did. A bit juvenile, to be certain, but fine. My problem is that the film also tries to provide some “substantive” context, in a simplistic and damning definition of private equity. Here it is:

Kravis and KKR, like all of the private equity giants, take over public companies using primarily borrowed money. To pay off this debt, they then sell off the assets of the companies, fire thousands of workers and radically cut benefits of the remaining employees. It is the same product, in the same building with the same customers as before.

First, note the inherent contradiction. PE firms strip companies by selling off assets, but it’s the “same product in the same building with the same customers.” But leave that aside for a moment.

But the bigger issue is that Greenwald seems stuck in the 1980s and early 1990s. Sure some firms still follow a buy/strip/flip strategy in specific situations, but it is hardly the rule anymore. Greenwald says he’s only talking about the biggest buyouts shops, acknowledging that the second-tier often follows a buy-and-build strategy. But this still isn’t accurate. Remember yesterday, when I wrote about Travelport? Sure I objected to the dividend recap, but Blackstone has actually grown the company by adding Worldspan. And Travelport still holds a controlling interest in Orbitz, which it hardly “stripped.”

I asked Greenwald to name me some recent examples where KKR has followed the buy/strip/flip model, and he cited three: Dollar General, First Data and Nielson Company. Not to get too bogged down into details, but the first two deals only closed a few months ago. Way too early to make judgments, even with evidence of initial layoffs. VNU might be a better case – more than 4,000 layoffs and some asset sales to 3i – but again we’re talking about a company KKR has owned for less than two years.

Even if I grant Greenwald legitimacy to each example, his definition of PE fails to point out that some PE-backed firms add employees and increase value for the shareholders – which happen to be public pensioners, universities and charitable foundations. I’m not saying that PE is a benevolent force, but can we get some balance here. Ditto for Kravis, who has worked hard to fund and champion to New York City Investment Fund, which provides capital to both nonprofit and for-profit enterprises that often are based in struggling urban neighborhoods. Again, not saying he’s a saint. But Greenwald’s piece paints him as an uncaring sinner, without a mitigating word.

There are real issues to be dealt with as it relates to private equity, regulation, worker’s rights and equity. The “War on Greed” has not yet begun to seriously address any of them.

I’ve posted the film to peHUB. Watch it, and share your thoughts.

Top Three

Thomas H. Lee Partners has closed its sixth buyout fund with $8.1 billion. It also has raised a $2 billion co-investment vehicle.

Pelikan Technologies Inc., a Palo Alto, Calif.–based developer of hand-held blood glucose diagnostic and monitoring devices for diabetics, has raised $69 million in Series F funding. Clarus Ventures led the round, and was joined by return backers HBM BioVentures, Global Life Science Ventures, Mannheim Holdings and Bio*One Capital. It previously had raised around $57 million. In related news Pelikan also has received pre-approval for a $20 million venture loan facility from GE Capital and Oxford Finance.

VantagePoint Venture Partners has made the following hires: Tom Bevilacqua and Bill Harding as managing directors and co-head of the IT practice group, Craig Cooper as a venture partner focused on IT opportunities and Dave Thompson as a venture partner focused on healthcare opportunities. Bevilacqua previously co-founded ArrowPath Venture Partners (f.k.a. E*Trade Ventures) and served as its managing partner for the past seven years. Harding previously was a managing member of Morgan Stanley Venture Partners. Cooper was formerly a partner with Softbank Capital, where he led the West Coast digital media and wireless group, while Thompson has spent the past 30 years with Eli Lilly, most recently as head of corporate strategy, biz dev and corporate ventures.

VC Deals

iKang Healthcare Inc., a Chinese provider of health management services, reportedly has raised $25 million in VC funding. Backers include ePlanet Ventures, Merrill Lynch, Walden International, WI Harper, Shanghai Venture Capital and Zero2IPO.

Insitu Inc., a Bingen, Wash.-based developer of long-range autonomous unmanned aircraft systems, has secured $21.33 million of a $25 million Series D round, according to a regulatory filing. Return backers include Battery Ventures and Second Avenue Partners.

International Battery of Oakland, N.J. has raised $25 million in financing from Digital Power Capital, an affiliate of Wexford Capital. The funding will be used to complete a manufacturing facility in Allentown, Penn., which will make large-format lithium ion rechargeable cells and batteries.

Lineagen Inc., a Salt Lake City-based developer of medical diagnostic tests, has raised $5.78 million in Series A funding, according to a regulatory filing. Backers include vSpring Capital, Sanderling Ventures and Mesa Verde Capital Partners.

Gene Security Network Inc., a Portola Valley, Calif.-based molecular diagnostics company that uses data informatics to enhance genetic testing, has raised around $4 million in Series A funding. Claremont Creek Ventures led the round, and was joined by Sequoia Capital, Huntington Reproductive Centerand Marissa Mayer (Google’s VP of Search).

Buyout Deals

Fashion Fund One has acquired TRB International SA, a Luxembourg-based holding company that owns worldwide operations for men’s swimwear brand Vilebrequin. No financial terms were disclosed.

Graphite Capital has sponsored a Gbp100 million management buyout of Alexander Mann Solutions from Advent International. HSBC provided acquisition finance. AMS is a UK-based provider of recruitment process outsourcing solutions.

TPG Capital might have a hiccup in its planned $1.3 billion buyout of Canadian drug company Axcan Pharma Inc. (Nasdaq: AXCA). Pennant Capital Management, a 9.95% shareholder in Axcan, said in a letter that it supports the idea of a sale, but believes the current $23.35 per share offer is too low. The company’s stock closed trading yesterday at $22.60 per share.

Rose’s Restaurant and Bakery has raised $5.2 million in private equity funding from Aequitas Capital Management, in order to help fund the planned expansion of the Portland, Ore.-based restaurant chain to 20 locations over the next five or six years.

Packsize Corp., a Salt Lake City-based provider of lean packaging solutions for businesses with corrugated packaging needs, has raised $4.6 million in private equity funding from Peterson Partners.

PE-Backed IPOs

BG Medicine Inc., a Waltham, Mass.-based developer of molecular diagnostics based on biomarkers, has cut its proposed IPO range from $14-$16 per share to $8-$10 per share. It still plans to offer 4.5 million common shares, and trade on the Nasdaq under ticker symbol BGMD. Cowen & Co. is serving as lead underwriter. BG Medicine has raised around $37 million in VC funding since 2000, from firms like Flagship Ventures (57.5% pre-IPO stake), Gilde Investment Management (17.4%) and Koniklijke Philips Electronics (8%).

Entropic Communications Inc., a San Diego-based provider of home networking for digital entertainment, has cut back its IPO terms to eight million common shares being offered at between $6 and $8 per share. It previously filed to sell 10 million shares at between $9 and $11 per share. The company plans to trade on the Nasdaq under ticker symbol ENTR, with Credit Suisse and Lehman Brothers serving as co-lead underwriters. Entropic has raised over $75 million in total VC funding since 2001, from firms like Anthem, CMEA, Comcast, Revolution, Cisco Systems, Intel Capital, Liberty Associated Partners, Mission Ventures, Motorola Ventures, Panasonic Ventures, Redpoint Ventures, Time Warner and YAS Broadband Ventures.

PE Exits

IBM (NYSE: IBM) has agreed to acquire Arsenal Digital Solutions, a Cary, N.C.-based provider of on-demand computer protection solutions. No financial terms were disclosed. Arsenal Digital has raised around $80 million in VC funding since 2000, from firms like Southeast Interactive Technology Funds, Beacon Partners, Tyco Capital and Convestco Seteura.

PE-Backed M&A

Clear2Pay NV, a Belgian provider of payment solutions for financial institutions, has acquired Diagram EDI, a French provider of e-banking and online payment solutions. No financial terms were disclosed. Clear2Pay has raised around $40 million in VC funding since 2001, from firms like Big Bang Ventures, Intel Capital, GIMV, Quest Management, Iris Capital, AGF Private Equity and TrustCapital Partners.

Hub International Ltd., a Chicago-based insurance brokerage, has agreed to acquire HKMB International Insurance Brokers, which will operate as a regional platform based in Toronto. No financial terms were disclosed. Hub was taken private earlier this month for $1.8 billion, by Apax Partners and Morgan Stanley Principal Investments.

MVC Capital has invested a further $30 million in portfolio company Ohio Medical Corp., in order to support the acquisition of Amvex Corp., a Toronto-based maker of respiratory therapy devices. Guggenheim Partners and AEA Investors provided leveraged acquisition financing.

Firms & Funds

The Blackstone Group has closed its fourth European collateralized loan obligation (CLO) fund with €400 million. Citigroup Global Markets was sole arranger and book-runner.

Human Resources

Bruce Pasternack has joined CMEA Ventures as a venture partner, within the firm’s energy & materials practice. He spent nearly 30 years as a senior vice president with Booz Allen Hamilton, including as managing partner of the firm’s energy, chemicals and pharma groups. More recently, he was CEO of Special Olympics Inc.

Anthony Fry next month will join Evercore Partners as a London-based senior managing director in the firm’s advisory business. He formerly was with Lehman Brothers, as head of UK investment banking and chairman of the media group.

James Davidson, a managing director of Silver Lake Partners, has resigned from the board of Seagate Technology (NYSE: STX).

Paul Horn, former Director of IBM Research, has joined the advisory board of New Venture Partners, a Murray Hill, N.J.-based firm focused on corporate technology spinouts.