PE Week Wire: Tues., July 3, 2007

First up a correction to yesterday’s post following a rather “robust” conversation with a chap from Permira. I mistakenly wrote that both CVC and Charthouse were attending today’s Treasury Select Committee hearing. It turns out Charterhouse isn’t; but plenty more are. Other leading lights called before the committe included David Blitzer, senior managing director at Blackstone who missed the previous meeting because of Blackstone’s IPO, Jon Moulton, the outspoken head of Alchemy Partners, Peter Taylor, the UK managing partner at Duke Street Capital, and CVC managing partner Donald Mackenzie

Despite the guy from Permira telling me that CVC was not called to the hearing on the basis of the AA/Saga merger, it was inevitably brought up by the committee. Sally Keeble MP asked about what sort of carry such a deal will generate for the firm, to which Mackenzie said that carry is calculated over the 10 year life of their funds, not on a deal by deal basis.

Unfortunately, Mackenzie didn’t give a good enough answer to committee Chairman John McFall when he asked why the new company was being burdened with GBP4.8bn of debt: “We’re here to ask questions, and unpeel the onion of private equity. You’ve been invited here to answer our questions.”

McFall then turned to Moulton, asking for his opinion over the deal. “It’s not the finest PR wecould have had, at a time when the industry is under scrutiny,” he said, to which McFall amusingly responded “You’re not a bit jealous that you didn’t get in there first?” “Not a bit. Very!” Moulton retorted.

Moulton was also asked, by Brooks Newmark MP, over the tax treatment of carried interest. “My carried interest is taxed at between 0% and 40%. Taper relief is a small part of that,” he said, adding “You have far too simplistic a view of the tax industry.” He also drew another laugh when McFall, referring to a letter in the FT this morning from Moulton where he called it “bloody wrong” that some are abusing the tax system, by simply saying: “Yes, some people are abusing it.”

Peter Taylor also came in for a bit of fire over the Focus DIY group – Duke Street acquired the business in 1987 and was sold for GBP1 (yes, one pound) in June. Taylor admits that his firm left too much money in the business, although did point out that under Duke Street’s watch, the business grew from four stores to 270.

Taylor was also questioned about Burton Foods, a UK biscuit manufacturer Duke Street owns which has recently announced some job cuts in a factory in Wirral, near Liverpool. Angela Eagle, a Labour MP who has been campaigning against the cuts, is also a member of this very same Treasury Select Committee. It was on her recommendation that Taylor has been called up, and she has proved so far to be one of the most hard-hitting members of the committee – in the first hearing, with the BVCA, things go so heated that she and Conservative MP Brooks Newmark continued arguing out into the corridor after the meeting.

When asked about the issue, Taylor replied that the firm’s intention was to grow the business organically and through acquisitions which would result in more jobs.

The assembled private equity heads were then quizzed about how much money their managers put into their funds, the questioner saying that managers only contribute about 1% of their own hard earned cash, so where’s the risk? Taylor said his firm is currently raising a €1bn fund to which staff are contributing 2.5%. Moulton said that very few firms still put in as little as 1%, with some large funds putting as much in as 15%, with senior partners reinvesting their earnings. Blitzer said the average for Blackstone is 6% and Mackenzie said the average for CVC was 1.5%, but admitted that there was LP pressure to raise that.

There was also a question about non-domiciled tax status. Taylor said that eight of his nine London partners are domiciled in the UK (the remaining one in France). Moulton blamed the government for allowing people to earn money here and not pay tax, claiming such people were just “playing the system.” “But I see people who have lived here for 50 years, and they’re not paying capital gains tax. I don’t see how that’s right,” he said. Chairman McFall then cheekily asked whether these are the same people he referred to as the “enemy within” – he named Sir Ronald Cohen and Nick Ferguson in a letter to the Sunday Telegraph just over two weeks ago. “There may be some overlap between the two groups,” to which he was greeted with a chorus of chuckles.

All in all it was a pretty good showing from the private equity guys – it was along similar lines as the previous one, fairly low key, but the committee members did appear more knowledgeable of how the industry works in relation to carry and taper relief.

Encouragingly, straight after the hearing Peter Taylor held a press conference to talk to journalists about it. This is pretty savvy from Taylor (or his PR firm). In times such as these when the media is so hellbent on painting private equity managers as the bad face of capitalism, being more open can only be beneficial. One of the most frustrating things for journalists is to be told either “no comment” or be denied access to a senior partner. This irritation, mixed with a certain degree of ignorance about the industry, results in the situation the UK has today. I’m not saying that throwing open your doors so any journalist can walk in for a nice chat over a cup of tea is going to mean that every member of the press is going to fall at your feet – British newspaper make no bones about their ideological leanings – but it will certainly produce a more accurate portrait of an industry which is, in the UK at least, getting a good-kicking from all quarters.

*** In his discussion at the Treasury Select Committee, Sir David Walker, the former chairman of Morgan Stanley and current chairman of a BVCA working group looking at disclosure, said the industry was looking to increase transparency when his group releases its report in the Autumn.

He said the guidelines would recommend that portfolio company’s should publish their reports and accounts online four months after a company’s year end, ahead of the compulsory nine month deadline. There will also be increased transparency regarding fund managers, although not LPs.

*** The FSA was represented at the Committee hearing by Hector Sants, managing director of wholesale and institutional markets, and Sally Dewar, director of markets. Sants said that debt levels were high but didn’t believe it was yet a threat to the market, and Dewar said that the ratio of debt to EBITDA the FSA calculated was higher than they expected at 6.4.

*** I should also point out, further to yesterday’s post, that the AA is owned by Permira AND CVC, and Saga is owned by Charterhouse. Apparently Permira is a bit annoyed that whenever the AA is written about in the press – the coverage of which is almost always negative – it is always Permira that is mentioned but never CVC. Job done.

*** A bit of data for you now. UK research house Private Equity Intelligence (Preqin) has released some fundraising stats for the opening half of 2007. So far, 265 private equity funds have raised US$260bn, a 10% increase on the previous six monthly record of US$237bn in 2006 H2. For buyouts, US$116bn was raised by 67 funds, while 31 real estate funds raised US$116bn, six infrastructure funds raised US$18bn, seven distressed debt funds raised US$13bn and 28 fund-of-funds raised US$16bn.

The results also reveal that fund sizes have continued to increase over the last six months: the average fund is now US$1bn, with 12 funds above US$5bn. The report also states that there are a record 1,090 new funds currently on the road, looking to raise a total of US$552bn. However, and as Preqin points out, only 26% of the new funds fundraising in H1 2007 reached final close, compared to 45% during the second half of 2006.

Thomson Financial also released some stats of their own yesterday on the M&A market. H1 2007 saw a total of US$2.7trn deals completed, a 62% increase on the same period last year. The US took a 41% share of the deals, with Europe in second place on 36%. Private equity firms were involved in 24.3% of all M& deals in the first half of this year.

It also released some VC data in conjunction with the National Venture Capital Association (NVCA), revealing that 26 venture backed companies raised US$4.27bn through IPOs on US exchanges in the second quarter of 2007. This dollar volume represents a 112% increase from the same period last year when 19 venture-backed companies flaoted raising US$2bn. Venture-backed merger and acquisition activity declined with 67 transactions completed this quarter compared to 95 in the second quarter of 2006.

Top Three

The battle for BCE, Canada’s largest telephone company, looks to be drawing to a close following the approval of a US$48.5bn bid from a consortium comprising Ontario Teachers Pension Plan, Teachers Private Capital, Providence Equity Partners and Madison Dearborn. A report from Reuters however seems to suggest that it might not be all over as rival bidders consider their options: Telus, the country’s second largest telephone company has been tipped to re-enter the fray, and Cerberus Capital Management is said to be considering its options.

Permira is looking to buy out minority stakeholders in Italian fashion group, Valentino. The UK firm took a 30% stake in the company in May, paying US$1.1bn (EUR808m) for the privilege. The latest offering values the company at US$3.54bn (EUR2.6bn), and will be paying EUR35 per share. Valentino counts among its brands such names as Marlboro Classics and Hugo Boss.

SS&C Technologies, a Connecticut –based financial software developer, is to raise US$200m when it floats on NASDAQ. The company is backed by Carlyle, CCP Equity Partners, General Atlantic, JP Morgan Partners, Liberty Ridge Capital, Wachovia Corporation.

VC Deals

Diatos, a French oncology drug developer, has accumulated EUR9.4m (US$12.8m) in a Series D financing round. Investors included AGF Private Equity, Biotech Fund Flanders, Credit Agricole Private Equity, GIMV, InterWest Partners, Innoven Partenaires, NIF SMBC Ventures, Societe Generale Asset Management, Sofinnova Partner and Sopartec.

Right90, a Foster City, California-based sales forecaster, has raised US$12m from InterWest Partners, Shasta Ventures and US Venture Partners.

NewScale Inc., a Foster City, California-based software company has raised US$11m in a Series D round from Wasatch Cross Creek Capital, Chess Ventures, Crosslink Capital, Menlo Ventures, Montagu Newhall Associates, Inc., New Enterprise Associates and Parker Price.

CardioMind, a Sunnyvale, California-based cardiovascular specialist has raised US$33m in a Series C round from SV Life Sciences, De Novo Ventures, InterWest Partners, Latterell Venture Partners, Morgenthaler Ventures and Onset Ventures.

AdJug, an online advertising company based in the UK, has raised GBP1m (US$2m) in a funding round lead by Balderton Capital, formerly Benchmark Capital Europe.

Accelecare Wound Centers Inc., a Seattle-based provider of wound care services, has raised US$10m as a part of a US$35m funding round from SV Life Sciences and Bain Capital.

Mirics Semiconductor, a UK developer of wireless technology, has received £5m from Intel Capital and Pond Venture Partners.

Buyout Deals

Leonard Green & Partners, a California mid-market firm, has acquired The Container Store Inc of Dallas, Texas, for an undisclosed sum.

Ashmore Investment Management, a UK multi-asset class investor dedicated to emerging markets, and the Swarth Group has acquired ECI Telecom of Israel.

Berkshire Partners is buying a minority stake in Masai Group International, a Swiss orthopedic shoe maker.

Eagle Fund and The Omnia Group Fund have backed the MBO of Desierto Verde, an Arizona-based provider of native tree salvage and relocation services.

Palm Beach Capital has acquired DDP Holdings Inc., an Arkansas-based maker of shelves for the retail industry, for an undisclosed sum.

North Castle Partners has acquired a controlling interest in Performance, the largest independent bicycle dealer and direct marketer of bicycles and cycling accessories in the US.

GSO Capital Partners is to welcome Reddy Ice Holdings into its portfolio following a US$1.1bn acquisition of the Dallas-based manufacturer and distributor of packaged ice.

PE-Backed IPOs

NetSuite, a San Mateo, California-based business software company, has filed for an IPO to raise up to US$75m. The business is backed by Cross Atlantic Capital Partners and StarVest Partners.

ViewSonic, a Walnut, California-based maker of computer monitors and projectors, is to list on NASDAQ to raise around US$143.8m. The company is backed by Intel Capital and Partech International.

Horsehead Corporation, a Pennsylvania-based manufacturer of zinc products, is to raise US$115m on its IPO on NASDAQ. Sun Capital Partners are investors in the company.

BladeLogic, a Massachusetts-based develops of data center automation software, is offering 5 million shares as part of its IPO, priced at between US$12 and US$14 per share. Backers in the business include Battery Ventures, Bessemer Venture Partners,

Globespan Capital Partners and MK Capital.

Virtual Radiologic, a Minnesota-based radiology specialist, is to raise up to US$75m via an IPO. It is owned by Generation Capital Partners and Invision Private Equity.

PE Exits

Carlyle has sold Intelistaf Holdings, an Illinois-based medical staffing business, to Medical Staffing Network Holdings for US$92m. The sale marks end of an investment which began in 2000 when Carlyle acquired a majority stake for US$67.5m.

New York-based risk management company RiskMetrics Group is to buy accounting firm Center for Research & Analysis from TA Associates.

PE-Backed M&A

3PD Inc, an Atlanta, Georgia-based logistics company backed by Arcapita, has acquired Affinity Logistics, a home delivery business.

L-com, a Massachusetts-based maker of telecom interconnection components, has acquired HyperLink Technologies, a Florida-based wireless technology specialist. L-com is owned by mid-market private equity firm The Riverside Company.

Active Interest Media (AIM), an El Segundo, California-based publisher, has acquired The Collector’s Guide, an annual guide to New Mexico for art lovers, for an undisclosed sum. AIM is owned by Wind Point Partners.

Firms & Funds

Roark Capital Group, an Atlanta, Georgia-based outfit, is reported to be raising a US$1bn mid-market buyout fund. It closed its first fund, Roark Capital Partners, on US$413m back in 2005.

Fund-of-funds manager New York Life Capital Partners is looking to raise a US$300m fund-of-funds aimed at the smaller buyout fund.

CDC, the UK Government-backed emerging market private equity fund of funds investor, has committed a further US$100m to two private equity funds in China. The two private equity funds – CDH and CITIC – in which CDC has recently committed capital are expected to raise over US$2bn for investment in China.

Human Resources

London-based secondaries firm Greenpark Capital has promoted and appointed a total of for members of staff following the closing of its €730m fund. Daniel Green has been promoted to investment director and Philippe Munch to associate investment director. New faces Mark Huber and Tanja Saaty join the team as investment directors.

Millennium Technology Ventures, a New York-based firm, has added Noah Yago to the firm’s investment team as vice president, and promoted Dan Borok to vice president. Yago was previously an associated at Veronis Suhler Stevenson (VSS).

Union Bancaire Privée (UBP) has appointed Vincenzo Narciso as head of private equity. Prior to joining UBP, he was with Swiss Re Private Equity Partners, where he was responsible for fund investments in Europe, the US and Asia. He will be based in London.

Genstar Capital has hired former CEO of Andersen Consulting George T. Shaheen as an advisor to its business services investment team.

Key Principal Partners, a private equity and mezzanine investor, has promoted Daniel Kessler from senior associated to vice president. He has been with the firm since February 2001.

Asset Management Advisors has strengthened its private equity team by recruiting new staff member from SunTrust Equity Partners: Ted Mayden, Ken Millar, Jeff McNeill and David Cusimano. Mayden will lead the team.

GE Commercial Finance Corporate has installed David Gozdecki as a managing director of the restructuring finance team, providing turnaround and restructuring finance to midsize and larger companies in the Midwest US and Canada. He joins from LaSalle Business Credit where he led the national restructuring group.