PE Week Wire: Thursday, October 16, 2008

I’m back at the desktop, after a debilitating six hours on the phone with Dell technicians (and, in the end, I had to reformat my hard drive anyway). Moving on to the business of business:

*** The Private Equity Council has released the latest iteration of a long-term study on private equity’s role in the financial market. Not surprisingly, it finds that the industry does not pose significant risks to the financial system at large (particularly when contrasted to investment banks). Here are its six main points, with my gut reactions:

1. Efforts to turn around or strengthen undervalued companies represent a very unlikely source of systemic problems in capital markets.

I would agree, if only that’s what private equity was doing prior to the credit crunch. Instead, lots of firms (particularly in the large/mega markets) abandoned buy low/sell high strategy for buy high/sell higher. How many times did we see substantial premiums paid for public companies in the midst of a bull market? How many times did we hear: “This is already a market leader” or “This is a very strong company that we feel could be just a bit stronger?” Very few private equity firms were able to follow the sage words of Rudyard Kipling…

2. Private equity losses are unlikely to be of a cascading nature that could trigger a systemic event.

This point here is that PE transactions are financed with less debt than are bank investment holdings. And it’s fair, albeit damning with faint praise.

3. The character of PE investments is fundamentally different from those of leveraged financial institutions because they involve the acquisition of individual commercial businesses rather than financial instruments.

This is the point where the study’s comparative nature begins to grate on me. Let’s stipulate that PE isn’t going to cause the same types of troubles as Lehman did. Does that suddenly make them a source of market stabilization? My local mini-mart also isn’t going to cause the same troubles as Lehman did… Maybe someone should do a study on them. And, again, I go back to the changing profile of private equity investments. We’re talking some huge companies here, including Chrysler, Washington Mutual, Harrah’s, etc. If one of them fails, big ripples will be created.

4. Private equity funds occupy a place in the capital markets that is likely too small to trigger broad, cascading financial market problems.

Excuse me while I swallow my birthday cake (someone else’s B-day, but he left the cake here). Maybe true in the past, but not after the 2005-2007 buying binge… And before you tell me that I need to include 2000-2004 like the study does, please tell me how many of today’s busted subprime mortgages were signed prior to 2005. I know those are far more toxic than PE deals, but the broader point should hold: Private equity changed in character after 2004, and therefore so did its potential impact on the economy at large.

5. Private equity funds are diversified and have built-in protections from systemic events.

Legit point for the big funds we’re really talking about here, particularly in terms of the illiquid nature of limited partner capital.

6. Bank exposure to Private Equity is relatively small

The study says that banks, other financial intermediaries and insurance companies contributed a total of 29.5% of all PE fund capital. Not sure what that’s small in relation to. Now we might agree that lots of big PE firms should cut their fund sizes by 30%, but don’t tell me it wouldn’t hurt if they were forced to do so (staffing cuts, etc.). Plus, I really believe that lots of the new sources of PE capital – particularly SWFs in Asia and the Middle East – are going to be much more cautious going forward. In general, however, this item has more to do with the macro economy’s impact on PE than it does with PE’s impact on the macro economy.

Be sure to let me know how much you wholeheartedly agree with my assessment…

*** Dow Jones is coming out with its Q3 venture capital deal data later today, and I’ll post at peHUB once it becomes public (don’t have an embargoed copy, as DJ has stopped handing it out to the competition). As for our MoneyTree numbers, they’ll come out soon after. What I will tell you is that they are not as bad as I originally suggested. That doesn’t make them good, just not as bad.

*** Two readers have written in this morning to suggest “Joe the Plumber” knows more about economics than do most VCs (many of whom are predisposed to Obama). I’m not in sync with their larger political point, but will grant this: A lot more plumbers have turned a profit in the past five years than have venture capitalists…

Top Three

Teranet Income Fund has withdrawn its opposition to a hostile C$11 per unit buyout bid from Borealis Infrastructure Management, which would be worth a total of C$1.7 billion. Teranet holds a monopoly on the electronic land registry in Ontario.

7 Days Inn Group, a Chinese budget hotel chain, has raised $65 million in new private equity funding. Actis led the round, and was joined by return backer Warburg Pincus.

Vicente Capital Partners has closed its first growth equity fund with $150 million in capital commitments. The Los Angeles-based firm will invest between $5 million and $15 million in companies that have between $2 million and $25 million in revenue and up to $5 million of EBITDA. Vicente was previously known as Kline Hawkes & Co., although Frank Kline is not part of the new effort.

VC Deals

Predictive Biosciences, a Lexington, Mass.-based developer of intervention diagnostic assays for cancer management, has raised $21.75 million in Series B funding. New Enterprise Associates led the round, and was joined by Kaiser Permanente Ventures and return backers Flybridge Capital Partners and Highland Capital Partners. The company had previously raised a $10 million Series A round.

Sonoa Systems Inc., a Santa Clara, Calif.–based provider of secure cloud gateways, has raised $10.2 million in Series C funding. Third Point Ventures led the deal, and was joined by return backers Norwest Venture Partners, Bay Partners and SAP Ventures. The company has now raised around $38 million in total VC funding since 2005.

CleanScapes Inc., a provider of recycling and waste collection services in the Pacific Northwest and Bay Area , has raised $10 million in Series A funding. Backers include SJF Ventures, while Vinton Street Partners served as placement agent.

Siri Inc., a San Jose, Calif.-based developer a Web-based personal assistant, has raised $8.5 million in Series A funding from Menlo Ventures and Morgenthaler Ventures. The stealth-mode company’s product includes elements of artificial intelligence.

Adura Technologies, a San Francisco-based maker of wireless lighting management systems for commercial buildings, has raised $5 million in Series A funding. VantagePoint Venture Partners led the round, and was joined by Claremont Creek Ventures.

BioImagene Inc., a Cupertino, Calif.-based provider of digital pathology solutions for cancer diagnosis and preclinical research, has raised an undisclosed amount of new VC funding from Siemens Venture Capital. It had previously raised around $36 million from firms like Burrill & Co., Ascension Health Ventures, National Healthcare Services, Artiman Ventures and ICCP Ventures.

Coherix Inc., an Ann Arbor, Mich.-based developer of optical-based measurement and inspection products for the automotive and semiconductor industries, has raised an undisclosed amount of funding from Volvo Technology Transfer AB.

Buyout Deals

Centre Partners has amended its acquisition agreement with Canadian food-maker Connors Bros. Income Fund, in order to increase the certainty of close.

CVC Capital Partners is in talks to acquire a 51% stake in Royal Bank of Scotland’s UK insurance assets, according to Bloomberg.

Pala Investment Holdings was told by South African regulators that it must ammend its $85.7 million buyout offer for Rockwell Diamonds Inc. (TSX: RDI), if it wants approval. The regulators said that Pala’s existing bid does not “properly consider the rights of option holders and warrant holders.”

Pala Investment Holdings has agreed to acquire a majority stake in Dumas Contracting Ltd., a Canadian mining contractor. No financial terms were disclosed.

Providence Equity Partners has received Indian government approval for its $640 million purchase of Aditya Birla Telecom Ltd., a unit of mobile operator Idea Cellular. ABTL owns telecom licenses in the Eastern states of Jharkhand and Bihar.

Sterling Investment Partners has acquired FCX Performance Inc., a Columbus, Ohio-based provider of process flow control solutions, according to LBO Wire. No financial terms were disclosed.

PE-Backed M&A

Automattic Inc., creator of the WordPress blog platform, has acquired PollDaddy, an Ireland-based provider of online polling widgets. No financial terms were disclosed. Automattic has raised around $30 million in VC funding from firms like Polaris Venture Partners, Radar Ventures, True Ventures and The New York Times Co.

Confie Seguros, an acquisition platform focused on insurance brokerages, has acquired San Antonio-based auto insurance brokerage Alamo Auto Insurance. No financial terms were disclosed. Confie Seguros was formed earlier this year by Genstar Capital.

Icicle Seafoods Inc., a seafood harvesting and processing company, has acquired the M/V Stellar Sea, a 315-foot processing vessel, currently equipped to process crab, salmon, herring and cod. No financial terms were disclosed. Icicle Seafood is owned by Paine & Partners.

TargetSpot Inc., a New York-based provider of advertising solutions for streaming audio, has acquired competitor Ronning Lipset Radio. No financial terms were disclosed. TargetSpot has raised around $12 million in VC funding from firms like Bain Capital Ventures, Union Square Ventures, CBS Corp. and Milestone Venture Partners.

Technorati Inc., a San Francisco-based search engine for the blogosphere, has acquired AdEngage, an online advertising network and advertising exchange. No financial terms were disclosed. Technorati has raised over $30 million in VC funding, from firms like Draper Fisher Jurvetson, Mobius Venture Capital and FG Incubation (operator of Technorati Japan).

Wohler Technologies Inc., a Hayward, Calif.-based provider of in-rack audio and video monitoring solutions, has acquired Europa Australia, a provider of high-end solutions to the broadcast industry. No financial terms were disclosed. Wohler Technologies is a portfolio company of Hanover Partners.

Firms & Funds

EQT Partners has opened a new office in Warsaw. It will be led by new partner Piotr Czapski, who previously was on the board of Polish telecom operator Netsia SA and, before that, led McKinsey & Co.’s business tech practice in Eastern Europe.

Kirkland & Ellis is setting up a private equity funds practice in Asia. The effort will be run out of Hong Kong, with partner Justin Dolling relocating from London and partner Albert Cho relocating from New York.

Human Resources

Nick Smirensky is leaving the New York State Common Retirement Fund, where he serves as deputy CIO and head of private equity investing. He will soon join the New York State Health Foundation, in order to help launch an investment program.