PE Week Wire: Thursday, May 29, 2008

Guy Hands, head of UK-based buyout firm Terra Firma Capital Partners, has published his latest quarterly letter. In it, he first reiterates a gloomy economic outlook that he first hinted at in the salad days of 2006. Then he goes on to suggest that private equity firms have three strategies available to them:

1. Don’t Invest

2. Switch Investment Strategy

3. Invest in Downturn-Resistant Businesses

One might argue that a number of private equity firms have already adopted the first option. In fact, I think I made that argument on Tuesday. The problem with it, Hands correctly points out, is that it’s antithetical to private equity. If you’re not going to invest, then hand your committed capital back to limited partners. After all, it worked for some of the best – and some of the worst – VC firms in 2002 and 2003. Hands does point out, however, that PE firms are particularly resistant to parting with their commitments – a sentiment I’ve heard ruefully repeated by limited partners. “VCs are an arrogant bunch, but they’re humble compared to buyout guys,” one explained.

The second option is where we’ve seen lots of the mega-firms going, particularly into areas like distressed debt. I’m not so sure it’s a “switch” in investment strategy, as Hands puts it, so much as it’s a diversion. Something to do while the traditional stuff is on (self-imposed?) hold. Hands again suggests that firms in this position give back uncommitted capital from general funds, and raise dedicated funds for such programs.

I too am made uncomfortable by the idea of a “private equity” fund investing in “corporate opportunities” – because the return profile is different, and because it’s unclear if many of the actual investors have enough relevant experience. But, that said, most firms doing this are limited by LPAs from investing too much of their general funds into such deals. Moreover, the majority of these investments have been made out of the types of specially-raised vehicles Hands is talking about. In other words, I think firms taking this option have, at least partially, followed Hands’ advice.

The third and final option is the one that Hands says Terra Firma has adopted: Investing in industry sectors less likely to be affected by a downturn. This basically translates into asset-backed businesses in need of management, operational or strategic alterations.

Makes sense, but only so long as that’s what a firm has traditionally done. For example, imagine you manage a tech-focused fund, which primarily invests in asset-light companies that are heavy on IP. If you switch focus, then aren’t you running into Hands’ objection to Option #2 (i.e., straying from the investment thesis presented to LPs during fundraising)? Moreover, there is a legitimate concern that certain firms are taking this option too much to heart – by refocusing on asset-heavy areas like infrastructure and real estate, which have lower return profiles than do traditional leveraged buyouts.

So let me suggest a fourth option, particularly for firms that don’t already focus on asset-heavy deals: Do Invest. The best PE returns are always found by investing in a down market, and CEOs/boards are nearing the acceptance phase of their valuation grief cycle. Firms don’t need to switch strategies in order to succeed, as it opens them up to the very contradictions Hands seems to fall into.

If this doesn’t work for you, then go back to the Don’t Invest option. Tell LPs that you’re shrinking the fund size. As the VC experience proved, it will garner admiration from your LPs, and reduce the risk that you’ll do something stupid. Be a trailblazer. But, as I said, it would be best to just return to work.

*** Yesterday’s PE Insider story on Citi killing off one of its internal mid-market groups was accurate. This is the shop launched last summer after spinning off Court Square, and before acquiring MetalMark. It was called Citi Venture Capital (not to be easily confused with Citi Venture Capital International or Citi Private Equity).

Everyone fired except for Bill Comfort, who may team with his ex-partners to buy the four-company portfolio (including Texas beverage phenomenon Big Red). If he makes a competitive offer, expect him to get it. If not, Citi has already held talks with some direct secondaries firms. No official comment from Citi, natch.

*** As I writer, I was always annoyed by idealab!, because it used that stupid exclamation point in its name. Also been bothered by .406 Ventures, thanks to that preceding period (made slightly less bothersome by the Red Sox derivation). But we’ve now entered a new level with [x+1], a predictive online marketing company that just raised $16 million in new VC funding. It’s like the company is asking my word processing software to spontaneously combust.

*** Connie wonders why the Washington State Investment Board is hatin’ on venture capital. She’s also got an update on the doings of former CNet chief Shelby Bonnie.

*** David Toll has advice for junior buyout pros charged with making cold calls.

*** peHUB First Read, including Wall Street’s preference for Democrats this November.

Top Three

Sapphire Energy Inc., a Sonoma, Calif.-based company that creates “green” gasoline by produces crude oil out of algae, has raised over $50 million in VC funding. Backers include Arch Venture Partners, Venrock and the Wellcome Trust.

Aurora Capital Group has completed its take-private buyout of NuCO2 Inc., a provider of bulk CO2 products and services to the U.S. fountain beverage industry. The deal valued NuCO2 at approximately $487 million, with stockholders receiving $30 per share. UBS Investment Bank advised NuCO2 on the deal, while UBS Securities provided debt financing.

ComScore (Nasdaq: SCOR) has acquired M:Metrics, a Seattle-based provider of mobile measurement solutions. The deal includes a $44.3 million cash payment, and 50,000 options to purchase comScore common stock. M:Metrics had raised around $17 million from VC firms like Prism VentureWorks and i-Hatch Ventures.

VC Deals

[x+1], a New York-based provider of predictive online marketing, has raised $16 million in new VC funding. Advanced Technology Ventures led the round, and was joined by return backers Hudson Venture Partners and Blue Chip Venture Company.

AM-Pharma NV, a Dutch developer of improved endogenous proteins and peptides, has held a €7 million first close on its Series C round, which is targeting a total of €20 million. Backers include Forbion Capital Partners and Inventages Venture Capital.

EnvIO Networks Inc., a Waltham, Mass.-based developer of wireless messaging and content management technologies, has raised $10 million in Series B funding, according to a regulatory filing. Return backers include Matrix Partners and North Bridge Venture Partners.

Azuki Systems (fka: peermeta), an Acton, Mass.-based mobile software startup, has raised $6.1 million in Series A funding, according to a regulatory filing. Backers include Kepha Partners and Sigma Partners. The round had been previously disclosed without a dollar amount.

Xtract, a Helsinki-based provider of social advertising intelligence, has raised €3.5 million in VC funding. Creandum led the round, and was joined by return backer Eqvitec.

Laser Light Engines Inc., a Stratham, N.H.-based developer of an “innovative digital light source to upgrade the future cinema experience,” has raised $5 million in Series A funding, according to a regulatory filing. Backers include Braemar Energy Ventures and Harris & Harris Group.

Zmags, a Copenhagen-based provider of online publication solutions, has raised $4.2 million in Series B funding from OpenView Venture Partners. It had previously raised $2.6 million from NorthCap Partners.

Correction: SkyFire (fka DVC Labs), a San Jose, Calif.-based developer of mobile Web browsers, raised $13 million in Series B funding. Yesterday’s issue incorrectly put the round at $15 million.

Buyout Deals

Bain Capital has completed its take-private buyout of Bright Horizons Family Solutions Inc. (Nasdaq: BFAM), a provider of employer-sponsored child care, early education and work/life solutions. The total deal was valued at $1.3 billion, with Bright Horizons stockholders receiving $48.25 per share in cash. Goldman Sachs provided debt financing, while Goldman and Evercore Group advised Bright horizons on the deal.

Barilla, the Italian food company, described as “groundless” newspaper reports that its family owners are considering a 30% sale to The Blackstone Group or other outside investor.

Clear Channel Communications said that its $17.9 billion buyout is now fully funded, and is expected to close by the end of Q3.

Laud Collier & Co. has acquired Tread Corp., a manufacturer of bulk handling and processing equipment for the explosives industry. PNC Business Credit provided debt, while junior capital came from Gladstone Investment Corp. and Argosy Investment Partners. Ewing Bemiss & Co. advised Tread on the deal. No financial terms were disclosed.

Ripplewood Holdings may raise $1.5 billion to launch a bond insurer to compete with such incumbents as Ambac Financial Group and MBIA, according to The New York Post.

Riverside Partners has acquired Innovative Product Achievements, a designer and manufacturer of automated surgical scrub and linen distribution systems for hospitals and ambulatory surgery centers. No financial terms were disclosed.

Six private equity firms have expressed interest in acquiring Italian fashion house Roberto Cavalli, and will be told next week if the process will go forward. The firms are Candover, Carlyle Group, Cinven, CVC Capital Partners, Doughty Hanson and TPG Capital.

PE-Backed IPOs

PNA Group Holding Corp., an Atlanta-based steel processor and distributor, has raised its IPO target from $175 million to $200 million. It has not detailed how many shares it plans to sell, or at what price. PNA expects to to trade on the NYSE under ticker symbol PNA, with Citi and UBS serving as co-lead underwriters. It was acquired in 2006 by Platinum Equity, and originally filed for its IPO over one year ago.

PE Exits

VMWare Inc. (NYSE: VMW) has agreed to acquire B-hive Networks Inc., a San Mateo, Calif.-based maker of application performance management software. No financial terms were disclosed. B-hive raised a $7 million Series A round in mid-2006, co-led by Index Ventures and Venrock.

PE-Backed M&A

Oncogenex Technologies Inc., a Vancouver-based drug company focused on cancer therapeutics, is going public via a reverse merger with Sonus Pharmaceuticals Inc. (Nasdaq: SNUS). OncoGenex backers will receive 37 million Sonus shares, which were valued at around $10.4 million after Sonus shares slumped down to just $0.28 on the merger news. They also could receive another 25 million shares based on certain milestone earnouts. Oncogenex has raised VC funding from such firms as Ventures West, BDC Venture Capital, GrowthWorks, HIG Capital and Milestone Medica Corp. It had once planned to go public on its own, but canceled the offering in March 2007 due to “market conditions.”

SezWho, a Los Altos, Calif.-based provider of ratings and reputation services for online communities, has acquired Tejit, a provider of semantic intelligence solutions. No financial terms were disclosed. SezWho last year raised $1 million in first-round funding from KPG Ventures.

Summit Energy Services Inc., a Louisville, Ky.-based provider of energy management services, has acquired Siemat Energy, a Belgium-based company with around 130 industrial and commercial clients in Europe. No financial terms were disclosed. Summit Energy last year raised $82.5 million in a common stock round led by Weston Predisio.

Firms & Funds

Headway Capital Partners has acquired shareholding positions in six companies from Viveris Management. No financial terms were disclosed. The companies are Trophos, Ipsogen, Maxmat, Certeurope, Travelsoft and Pytheas. Viveris will continue to manage some of the investments on Headway’s behalf, while others will be managed by LC Capital.

Morgan Stanley has agreed to buy a 40% stake in Chinese wealth management company Jutian Fund Management Co., although the detail still requires regulatory approvals.

Onex Corp. is raising upwards of US $4.5 billion for its third private equity fund, according to a regulatory filing.The Toronto-based companyalready has secured over $2.4 billion, and is using Credit Suisse as a placement agent. The fund is called Onex Partners III.

Human Resources

Rakesh Gangwal has joined Teachers’ Private Capital as a senior advisor. He is the former president and CEO of U.S. Airways, and also served as chairman, president and CEO of Worldspan Technologies Inc.

Raymond Land has resigned as senior vice president and CFO of Safeguard Scientifics (NYSE: SFE), in order to become CFO of Safeguard partner company Clarient (Nasdaq: CLRT). He will be succeeded at Safeguard by Stephen Zarrilli, who served as the company’s acting CFO between December 2006 and June 2007.