PE Week Wire: Thursday, October 23, 2008

With the election less than two weeks away, it’s time for our final reader survey of presidential preferences. Back in July, (the collective) you preferred Obama 41%-40% among those who had already decided, while that lead expanded to 50%-48% when “leaners” were taken into account. In other words, it was a virtual dead heat.

A lot has happened in the intervening three months, so let’s see where you now stand. The survey will take just a moment or two to complete, and can be accessed here:

The survey will be open until midnight tonight, with final results published here and at peHUB tomorrow morning…

*** Word is that mid-market lenders are putting the screws to PE firms engaged in bolt-on acquisitions for platform companies. Specifically, they’re insisting that leverage for new acquisitions include renegotiation of the initial loan package (which usually were agreed upon prior to the credit crunch). There is probably a floor for such actions – you don’t want to burn a relationship over a few million dollars – but it seems to be fairly low.

*** The WSJ today reports that Sankaty Advisors, the credit affiliate of Bain Capital, is experiencing some markdowns of between 40% and 50% in two of its recent funds. This is obviously bad news for Bain, and even worse when one recalls that the firm took $200 million out of its ninth buyout fund to help bolster one of the Sankaty funds in question…

*** I made some remarks at an ACG Boston event last night, specifically about how private equity is now in a “transformational” moment. Not a “transitional” moment (bull market to bear market, up cycle to down cycle) but something more fundamental. Here is the Cliffs Notes version:

• I view the current buyout situation through the lens of what happened to VCs after the tech bubble burst. After all, talking to a buyout pro circa 2006 was just like talking to a VC circa 1999. Rock star swagger, what me worry, we’ve taken most of the risk out of a high-risk asset class.

• Since 2001, there has been virtually no market for VC-backed IPOs. For example, over 19,300 U.S.-based companies have received VC funding since 2002, but there have been only 351 VC-backed IPOs in the same period. There have been some ebbs and flows, but outsized VC returns were largely based on an IPO market that really hasn’t existed for nearly a decade. It is the primary reason why the median venture funds from 2002, 2003 and 2004 are underwater.

• The resulting VC market has been one in which the wheat has separated from the chaff, and there’s much more chaff. It’s been transformational, in that the typical VC is no longer going to succeed (which, among other things, leads to a different breed of folks entering the business). Winners must find new technologies/markets rather than glom onto cloned ones, and then spend more time with CEOs in the boardroom than with your partners on the golf course.

• For buyout pros, the transformative event has been the credit crunch. Like the IPO market (which buyout firms don’t rely upon as much as VCs do), it will have ebbs and flows over the next few years. But it will not revert to the 2006 insanity in (most of) your business lifetimes. And, with the absence of “easy in, easy out,” most buyout pros will not be successful going forward.

• Why widespread failure and mediocrity? Largely because today’s buyout market has grown on the backs of a new generation of buyout pros who have never been through tough times. I’m not questioning their toughness, but rather their experience. How many “new” buyout pros have ever really sourced proprietary deals, or focused more on operational inefficiencies than growth potential? How many have ever used the types of late 1980s/early 1990s debt structures that will now be required? Moreover, how many veteran buyout pros will want to do the hard work again, after years of easy money?

• Many will succeed, and will do so fabulously. But I fear most will not, judging by how few seem to have really done the math on their own portfolios vis-à-vis their hurdle rates. It’s not a pretty outlook, but it certainly is a transformed one…

Top Three

LinkedIn, a San Francisco-based operator of a professional networking platform, has raised $22.7 million in additional Series D funding. It had previously held a $53 million first close at a valuation of just over $1 billion. The new tranche came from Goldman Sachs, McGraw-Hill Cos., SAP Ventures and return backer Bessemer Venture Partners. The original tranche had been led by Bain Capital Ventures.

ArcLight Capital Partners and Kelso & Co. are planning a $17 per unit tender offer for all outstanding common units they do not already own of pipeline operator Buckeye GP Holdings LP (NYSE: BGH). The two firms – along with Lehman Brothers – bought a 63% stake in Buckeye from Carlyle-Riverstone last year. Lehman Brothers was not mentioned in the announcement.

Goldman Sachs plans to cut approximately 10% of its workforce.

VC Deals

Advanced Micro-Fabrication Equipment Inc., a Shanghai-based developer of plasma etching and chemical vapor deposition equipment for use in semiconductor fabs, has raised $58 million in Series C funding. Shanghai Venture Capital Co. Ltd. and Shanghai Pudong Science & Technology Investment Co. Ltd. Were joined by return backers Walden International, Lightspeed Venture Partners, Goldman Sachs, Redpoint Ventures, Global Catalyst Partners, Interwest Partners, Bay Partners, QUALCOMM Ventures and KT Venture Group. The company had previously raised around $88 million.

PixelOptics Inc., a Roanoke, Va.-based developer of optics for use in spectacle lenses, has raised $30 million in Series C funding. Longitude Capital led the round, and was joined by return backers The Carlyle Group, Delphi Ventures, Stark Investments and Life Science Angels.

Nora Pharmaceuticals Inc., a developer of products for women’s reproductive health, has raised $25 million in Series A funding, according to VentureWire. Burrill & Co. led the round (which closed in May), and was joined by Prospect Venture Partners and Vivo Ventures. The company does not have a website.

Apitope International, a UK-based developer of vaccines and diagnostics for autoimmune and allergic diseases, has raised €10 million in Series A funding. LRM and Vesalius Biocapital co-led the round, and were joined by VINNOF and the University of Hasslet. Innovator Capital served as placement agent.

HyperQuality Inc., a Seattle-based provider of contact center quality assurance solutions, has secured around $7.6 million of a $12.1 million Series C round, according to a regulatory filing. The company previously raised around $17 million from firms like Ignition Partners, Miramar Venture Partners, RusticCanyon and Divergent Ventures.

Baronova Inc., a Goleta, Calif.-based developer of non-invasive devices to treat obesity, has raised $7.5 million in Series B funding, according to VentureWire. Allergan Inc. led the round, and was joined by return backers Arboretum Ventures, Highland Capital Partners and Onset Ventures. It had previously raised $9.6 million.

Metaplace (f.k.a. Areae Inc.), a San Diego-based developer of a platform that allows users to create virtual online worlds, has raised $6.7 million in new VC funding. Marc Andreessen and Ben Horowitz were joined by return backers Charles River Ventures and Crescendo Ventures. The company has now raised $9.4 million.

Envia Systems Inc., a Hayward, Calif.-based provider of energy storage solutions using lithium ion batteries, has raised $3.2 million in Series A funding, according to a regulatory filing. Backers include Bay Partners and Redpoint Ventures.

MultiPON Network Ltd., an Israeli optical communications equipment startup, has raised $1.75 million in first-round funding led by Vertex Venture Capital.

IncentOne, a Lyndhurst, N.J.-based provider of incentive solutions in the healthcare and green energy spaces, has raised an undisclosed amount of equity funding from Camden Partners.

iContact Corp., a Durham, N.C.-based provider of email and Web-based marketing solutions, has secured $5 million in debt funding from North Atlantic Capital. The company previously raised $8.35 million in VC funding, from Updata Partners and IDEA Fund Partners.

Buyout Deals

Atalaya Capital Management has received bankruptcy court approval for its acquisition of casual restaurant operator Bennigan’s Franchising Co., which also includes the Tavern and Steak & Ale brands. The deal is expected to close by month’s end.

Atlantic Aqua Farms, a Canadian mussel farmer operating under the name Canadian Cove, has received an undisclosed amount of funding from Encore Consumer Capital. The news was first reported by The Halifax Herald.

Gatehouse Ventures has acquired Brooklyn, N.Y.-based Sunrise Bakery for an undisclosed amount. The firm previously acquired Delawre-based Amalfitano’s Italian Bakery baked goods distribution company The Total Bakery Source.

General Motors has retained Merrill Lynch to help it explore a sale of its ACDelco auto parts business.

Laredo Energy IV LP has raised $55 million to acquire, explore and developer natural gas resources in the Lobo Trend of South Texas. Avista Capital Partners led the deal, and was joined by existing shareholders like EnCap Investments.

Miura Private Equity has agreed to acquire a majority stake in Atrezzo Group, a Spanish provider of mannequins and accessories to fashion chains. The deal includes a €30 million equity commitment from Miura over the next two years.

Platinum Equity is in talks to acquire a 40% stake in the Arena Football League for approximately $100 million, according to The Sports Business Journal.

Wellman Inc. (OTC BB: WMAN) has sold its Engineering Resins business to J.H. Whitney & Co. and group management. No financial terms were disclosed. The new company will be known as Wellman Plastics Recycling, and will operator out of Johnsonville, South Carolina.

PE-Backed IPOs

Phenomix Corp., a San Diego-based drug developer, has withdrawn registration for an $86.25 million IPO, citing “market conditions.” It had planned to trade on the Nasdaq, with Morgan Stanley and Credit Suisse serving as co-lead underwriters.

Phenomix has raised around $125 million in total VC funding since its 2001 founding, from firms like JPMorgan Partners (18% pre-IPO stake), Nomura Phase4 Ventures (15.8%), Delphi Ventures (11.1%), Alta Partners (9.8%), Sofinnova Ventures (9.8%), Novartis BioVenture Fund (9.1%), Baker Brothers (7.6%), Bay City Capital (6.5%), CMEA Ventures (5.8%) and GBS Venture Partners. The company’s most advanced programs include a Phase II inhibitor of the protease DPP4 for treatment of Type 2 diabetes, and a preclinical program inhibiting NS3 protease for treatment of hepatitis C.

PE Exits

Enghouse Systems Ltd. (TSX: ESL) has acquired Envox Group AB for $14 million. Envox is a provider of IP-based voice self-service and contact center solutions. It has annual revenue of approximately $16 million, and had raised over $5 million in VC funding from firms like Eqvitec Partners and Northzone Ventures.

Health Care Service Corp., operator of Blue Cross and Blue Shield plans in Illinois, New Mexico, Oklahoma and Texas, has agreed to acquire TMG Health, a King of Prussia, Pa.-based provider of business process outsourcing for Medicare, Medicaid and group retiree health plans. No financial terms were disclosed. TMG Health had raised over $4 million in VC funding from NewSpring Capital and SCP Private Equity Partners.

Firms & Funds

Baird Capital Partners is raising upwards of $400 million for its fifth fund, according to a regulatory filing. The Milwaukee-based firm closed its fourth fund in 2006 with $300 million.

Invesco is raising up to $500 million for its fifth international private equity fund-of-funds, according to a regulatory filing.

Human Resources

Rit Amin has joined Houlihan Lokey as a Los Angeles-based senior vice president in the firm’s private finance practice. He previously was a director in Wachovia Securities’ leveraged finance group.

Omidyar Network has made several new hires: Mark Halprin as a partner, after serving as VP of global safety and trust for eBay; Sal Giambanco as a partner in charge of human capital, after previously serving as VP of HR for PayPal and eBay; Stephen King as an investment director, after serving as a director with the BBC World Service Trust; Chris Bishko as an investment director, after spending 16 years as an I-banker with J.P. Morgan Chase; Sophie Bromberg as an investment director, after having been a senior director of global safety and trust for eBay; and Stacy Donohue as an investment director, after spending nine years in various roles with HP.

Richard Yanowitch has joined Emergence Capital Partners as a venture partner. He previously was a venture partner with Accel Partners. As founder and chairman of The Entrepreneurs Group, Yanowitch serves as an independent director of the boards of Yume, Mig 33, Lithium and Raptr Technologies.