PE Week Wire: Thurs., Nov. 15, 2007

Parthenon Capital was having a near-death experience. It was August 2005, and fundraising had come to a standstill. Existing limited partners were so down on Parthenon’s Boston office (which included the firm’s two co-founders), that many of them had offered to fund Parthenon’s San Francisco team as an independent spinout. Prospective limited partners were even more unresponsive – some scared off by the Atkins Nutritionals debacle, and others believing that the San Francisco team would walk. The flatline was deafening.

Two years later, Parthenon is alive and kicking hard. It’s more a story of rebirth than survival, with some LPs referring to the current effort as “New Parthenon.” It’s also a story that should be told in this space, given past in-depth discussions of Atkins.

The Beginning

Parthenon Capital was founded in March 1998 by Ernest Jacquet, previously a partner with Summit Partners, and John Rutherford, a former Bain & Co. consultant who had gone on to found a strategic advisory called The Parthenon Group. Rutherford’s private equity firm and consultancy were independent of one another, but still shared an informal symbiosis – much like Bain Capital originally did with Bain & Company. Parthenon Capital also shared some carry with Parthenon Group, in exchange for deal-flow and access to research.

The investment strategy was industry-agnostic, with a focus on recaps of mid-market companies. Parthenon’s entire team was based in Boston, and closed its oversubscribed debut fund in 1999 with $350 million. LPs include General Motors, General Mills, the State of Oregon, Duke University and the University of Chicago.

Parthenon stuck to its knitting for a while, but eventually began to stray. Buyouts Magazine even noted some style drift in a February 2001 article about how the firm had held a $500 million first close on what would become its $750 million second fund. Buyouts reported on the atypical nature of a deal in which Parthenon had teamed with Berkshire Hathaway and Cort Furniture to launch Relocation Central, an information database company that would cater to corporations that needed to relocate personnel. There also were a series of particularly small transactions, which probably wasn’t surprising given that Jacquet’s average deal size at Summit was just $10 million. Nothing too problematic yet, but something worth keeping an eye on.

Later that year, Parthenon hired former GTCR partner Will Kessinger to help launch a San Francisco office. Kessinger had an existing relationship with John Rutherford, and liked the idea of reapplying GTCR’s rollup strategy – except that Parthenon would help managers grow existing businesses, rather than forming new companies around managers plucked from outside organizations. Among his first San Francisco hires would be a local tech executive named Brian Golson.

The Middle

In October 2003, Parthenon seemed to have stepped into the batter’s box for its first grand slam. It led a $533 million leveraged buyout of low-carb company Atkins Nutritionals, with Goldman Sachs participating as a minority co-investor. The deal was so hot that Summit Partners accused Parthenon of violating a deal-sharing agreement that had been negotiated as part of Ernest Jacquet’s departure. Parthenon quietly paid Summit $20 million to go away, and everything seemed to be chugging along.

Just as Parthenon began raising its $1 billion-targeted third fund the following fall, Atkins was began raising eyebrows. For example, the New York Times piece used the company as its test case for a piece titled: “Is the low-carb boom over?” Parthenon assured investors that the situation could be worked out, and received its $1 billion in soft circles. But Parthenon was very, very wrong. It was forced to mark down Atkins’ value by 50% at the end of December, installed a new CEO in February and wrote off the entire investment by the end of March 2005. In the meantime, LPs had recalled their Fund III commitments.

Not only was Atkins a failure, but it had been exacerbated by the fact that Parthenon had invested around 25% of its Fund II capital into the deal. No violation of the LPA, but certainly violations of common sense and original investment strategy.

Atkins had been sourced and transacted by the Boston team, as had some other black holes like Pharmedica Communications and Wolverine Proctor & Schwartz. Parthenon’s strongest returns, on the other hand, were coming out of San Francisco. LPs had noticed the discrepancy, and some had vocally lost faith in Jacquet and Rutherford (although many still had close personal ties to the two men).

Parthenon took a gamble at restructuring the partnership, at around the same time it legally extricated itself from Atkins. Will Kessinger became chief investment officer, with the investment committee being broadened to include Brian Golson in San Francisco and Dave Ament in Boston. Most of the remaining Boston team was replaced, save for co-founders Jacquet and Rutherford (who filled out the investment committee). Parthenon also refocused its investment strategy on majority recaps, around a trio of industry verticals: healthcare services, financial/insurance services and business services.

All of this brings us back to the lead. LPs appreciated the remodeling effort, but weren’t sold. Wasn’t the succession plan still a work in progress so long as Jacquet and Rutherford were still around? Didn’t it make more sense for San Francisco to spin out on its own? And what assurances did anyone have that something like Atkins wouldn’t happen again?

(Not) The End

Kessinger just kept pointing at the numbers. Even after having to write off around a quarter of Fund II due to Atkins, Parthenon was still projecting a 17% net IRR and at least a 2x net return multiple. And the data looked even better if the San Francisco-led deals were looked at in isolation – and those were the guys now in charge. For example, Golson sat on the board of Rackable Systems, which went public and today is projected to net Parthenon a 12x return.

As for the two co-founders, Parthenon argued strenuously that the management shift would allow them to spend more time on where they provided the most value. Rutherford had never really been a deal guy, but instead was a consummate consultant whose operational knowledge had led him to sit on more Parthenon portfolio boards than any other partner. Jacquet would have more flexibility to do the smaller deals he specialized in at Summit, albeit as add-ons to existing Parthenon portfolio companies. Kessinger and company also emphasized the value of their reconstituted Boston deal team, including Dave Ament.

Many existing LPs finally began to bite earlier this year, and the firm announced a $700 million final close in June. It’s not the $1 billion targeted back in 2004, but is still plenty of runway for Parthenon to reestablish itself as a responsible fiduciary.

Most firms on the brink either give up or stubbornly cling to thorny structures. Parthenon, on the other hand, willed itself to adapt. It knows how close it came to extinction, and has evolved into an 11-year-old newborn. The firm will certainly face future pitfalls, but at least has given itself a chance at jumping over them.

Top Three

Cerberus Capital Management has backed out of its planned $4 billion purchase of United Rentals Inc., the rental equipment company said yesterday. United Rentals said the private equity firm did not cite a material adverse change, which could mean that Cerberus would be required to pay a $100 million breakup fee.

Gala Capital has led a €3.41 billion buyout approach for Spanish airline Iberia.

EnergySolutions Inc., a Salt Lake City-based provider of low-level radioactive waste disposal services, raised approximately $690 million in its IPO. The company priced 30 million American depository shares at $23 per share ($19-$21 range), and will trade on the NYSE under ticker symbol ES. Credit Suisse, JPMorgan and Morgan Stanley served as co-lead underwriters. The company is owned by a private equity consortium of Lindsay Goldberg & Bessemer, Peterson Partners and Creamer Investments. The consortium retains a majority ownership position post-IPO.

VC Deals

Silicon Clocks, a Fremont, Calif.-based provider of integrated timing solutions for electronic systems, has raised $8 million in second-round funding. Lux Capital led the deal, and was joined by return backers Charles River Ventures, Formative Ventures and Tallwood Venture Capital.

Power Analog Microelectronics, a Santa Clara, Calif.-based maker of LED display driver semiconductors and digital audio amplifiers, has raised $6 million in Series B funding. Hotung Investment Holdings and H&Q Asia Pacific co-led the round, and were joined by CVM Capital, VentureTech Alliance and company management.

Vaxart Inc., a San Francisco-based developer of oral vaccines, has raised $2.7 million in Series A funding from Quantum Technology Partners and Life Science Angels.

GigaOmni Media, parent company of business blogs like GigaOm, has raised around $1 million in second round funding from return backer True Ventures.

AVSmoot LLC, a provider of restoration and commercial painting services in the Washington DC area, has raised $500,000 from Advantage Capital Partners.

Buyout Deals

3i Group has agreed to acquire Agent Provocateur, a UK-based luxury lingerie retailer. No financial terms were disclosed.

Arcapita has acquired Profine GmbH, a German maker of PVC window and door frames, from Advent International and The Carlyle Group. No financial terms were disclosed, except that it was the largest of Arcapita’s three recent deals in the building materials industry. The others were a €620 million buyout of Paroc, and a $543 million buyout of Tensar.

American Infrastructure MLP Fund has agreed to recapitalize Oxford Resource Partners, the largest provider of surface-mined coal in Ohio. The deal includes a $115 million senior credit facility arranged by FirstLight Financial Corp.

Lion Capital has agreed to acquire AS Adventure Group, a European retailer of branded outdoor equipment and clothing. The deal is valued at €263 million, including leverage.

Sentinel Capital Partners has agreed to acquire ReachOut Healthcare America, a Phoenix–based provider of mobile dental services for underserved children, seniors and army personnel, according to LBO Wire. No financial terms were disclosed.

Mezzanine Management has led the acquisition of TNT Crane & Rigging, a Houston, Texas-based crane and rigging operator. No financial terms were disclosed. Senior debt facilities were provided by JPMorgan Chase and Bank of America. TNT was advised by the GulfStar Group on the deal.

PE-Backed IPOs

EnteroMedics Inc., a St. Paul, Minn.–based developer of medical devices for the treatment of obesity and gastrointestinal disorders, raised approximately $40 million in its IPO. The company priced five million shares at $8 per share, which was the low end of an $8-$9 range that had been lowered from $14-$16 range. It has an initial market cap of $130.47 million, and will trade on the Nasdaq under ticker symbol ETRM. JPMorgan and Morgan Stanley served as co-lead underwriters. EnteroMedics had raised around $65 million in total VC funding since its 2002 inception, from firms like MPM Capital (30.8% pre-IPO stake), Bay City Capital (20.4%), Aberdare Ventures (13.2%), InterWest Partners (12%), Onset Ventures (7.7%) and Charter Life Sciences (5.6%) and he Mayo Foundation for Medical Education and Research.

Virtual Radiologic Corp., a Minnetonka, Minn.-based provider of remote diagnostic image interpretation services, has raised approximately $68 million in its IPO. The company priced four million common shares at $17 per share ($16-$18 range), for an initial market cap of around $278.79 million. Virtual Radiologic will trade on the Nasdaq under ticker symbol VRAD, while Goldman Sachs served as lead underwriter. Generation Capital Partners held a 33.3% pre-IPO position.

MagnaChip Semiconductor LLC, a South Korean maker of analog and mixed-signal semiconductor products for high-volume consumer applications, has filed for a $575 million IPO. It plans to trade on the NYSE under ticker symbol MX, with Goldman Sachs, UBS and Credit Suisse serving as co-lead underwriters. The company was formed in 2004, via the $828.2 million carve-out of Hynix Semiconductor’s non-memory semiconductor operations, by Citigroup Venture Capital, CVC Asia Pacific Ltd. and Francisco Partners.

Affinion Group Holdings Inc., a Norwalk, Conn.-based provider of integrated marketing and loyalty solutions, has withdrawn registration for an IPO. No explanation was provided. The company had filed to sell 32.5 million common shares at between $15 and $17 per share, with Morgan Stanley and Deutsche Bank Securities co-leading a roster of 10 underwriters. Apollo Management acquired Affinion in October 2005 from Cendant Corp. for approximately $1.83 billion.

Reliant Technologies Inc., a Mountain View, Calif.-based manufacturer of medical laser technologies for aesthetic applications, has indefinitely postponed its IPO due to market conditions. The company had filed to sell 4.7 million common shares at between $14 and $16 per share, with Piper Jaffray and Banc of America Securities serving as co-lead underwriters. Reliant Technologies 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

Acrongenomics Inc. (OTC BB: AGNM) has agreed to acquire Molecular Vision Ltd., a UK-based handheld diagnostic device company that recently raised Gbp500,000 in seed funding from Imperial Innovations Group PLC. No financial terms are being disclosed.

Brazos Private Equity Partners has agreed to sell ORS Nasco Inc. to United Stationers Supply Co. (Nasdaq: USTR) for approximately $180 million in cash. ORS Nasco is a Muskogee, Okla.-based wholesale distributor of branded and private-label products and services to industrial customers.It was acquired by Brazos in December 2005.

Burger King Holdings Inc. (NYSE: BKC) has priced a secondary public offering of18 million common shares at $25 per share, or $450 million in proceeds. The sellers were Bain Capital, Goldman Sachs and TPG Capital, which held a combined79 million common shares prior to the offering, or a 58% position. Following the offering, the firms’ combined stake was expected to be reduced to 41%, or 38% if over-allotment options are fully exercised.

Charlesbank Capital Partners has agreed to sell IT staffing firm Technisource to Spherion Corp. (NYSE: SFN). The deal is valued at $140 million, including $120 million in cash and a $20 million note.

IDEX Corp. (NYSE: IEX) has agreed to acquire Nova Technologies Corp., a Huntsville, Ala.-based provider of metering technology and flow monitoring services for the water and wastewater markets. The deal is valued at approximately $158 million in cash, and is expected to close by year-end. Nova Technologies has raised over $40 million in VC funding from Battery Ventures, Commonwealth Capital Partners and Ascent Venture Partners.

Permira has agreed to sell Aearo Technologies Inc., an Indianapolis-based manufacturer of personal protective equipment and energy-absorbing products, to 3M for $1.2 billion. Aearo earlier this year agreed to a leveraged recap that included a senior secured first-lien facility and a senior secured second-lien facility worth a combined $735 million. Lenders included Bank of America, Bear, Stearns & Co. and Deutsche Bank.

Synthes Inc. has agreed to acquire N Spine Inc., a San Diego-based maker of devices to treat lumbar spinal disorders using posterior dynamic stabilization. The deal includes a $30 million up-front cash payment, and up to $45 million in cash earn-outs. N Spine had raised around $8 million in VC funding from groups like Life Science Angels and Tech Coast Angels.

PE-Backed M&A

Clearview Capital has acquired Dakota Line Contractors LLC, a Bismarck, N.D.-based provider of horizontal directional drilling services. No financial terms were disclosed. Clearview structured the deal as an add-on for existing portfolio company Hettinger Welding LLC, a provider of facilities construction, pipelining and welding services for customers building natural gas infrastructure in the Rocky Mountain region.

Westec InterActive Inc., an Irvine, Calif.–based remote video monitoring company, has acquired Digital Wireless LLC, a Dallas, Texas-based provider of video monitoring solutions and services via a subscription-based model to small and medium-sized businesses in major metropolitan areas. No financial terms were disclosed. Westec raised $20 million in 2005 from Clarity Partners.

Zustek Corp., an email marketing company recently acquired by Investcorp Technology Partners, has acquired Adverb Media, an interactive marketing, technology and services company. No financial terms were disclosed. The combined company will be known as Zeta Interactive.

Firms & Funds

The Foundry Group has closed its debut fund with $225 million in capital commitments. The Boulder, Colo.-based venture capital firm was formed late last year by the Colorado team of Mobius Venture Capital, which is winding down operations. Limited partners include Guardian Life, Morgan Stanley, Parish Capital and UTIMCO.

Updata Partners has closed its fourth fund with just over $223 million in capital commitments. The firm has offices in Reston, Va. And Edison, N.J., and focused on growth-stage technology investments.

Lehman Brothers, which wrote off more than $1 billion of leveraged-buyout loans in its fiscal third quarter, has reduced its loan commitments by about $17 billion since the end of the quarter in August, co-chief administrative officer Ian Lowitt said yesterday at a Merrill Lynch conference. Lehman ended the third quarter with $27 billion of leveraged-loan commitments, but has since reduced that to about $10 billion.

PA Early Stage Partners has changed its name to Novitas Capital. The Wayne, Pa.–based firm invests in early-stage technology and life sciences companies.

Carl Marks & Co. has acquired a minority ownership interest in Capital Counsel LLC, a New York-based investment advisory that manages more than $1 billion in concentrated portfolios for individuals, families, foundations and endowments. No financial terms were disclosed.

Human Resources

Jens Tonn has joined Vestar Capital Partners, where he will launch and run a new office in Munich, Germany. He previously was a managing director with Candover, where he was responsible for German operations.

Karan Mehandru has joined Scale Venture Partners as an associate. He previously was a sales account manager with Synopsys Inc.