PE Week Wire: Tues., Sept. 25, 2007

Last week, I had the opportunity to discuss the carried interest tax issue with Rep. Tom Reynolds (R-NY), who has been perhaps the most vocal opponent of change. He’s the Congressman whose office runs the From Wall Street to Main Street blog, and who often appears on CNBC to butt talking heads with Rep. Sandy Levin (D-MI). I still disagree with his position, but he articulated his rationale far better than did Levin during an earlier conversation.

To begin with, Reynolds is a Yankees fan. I only begin with that because our first 15 minutes or so centered around baseball. Moving on…

Reynolds’ primary argument against a change to carried interest tax treatment is that it could be the first step on a slippery slope toward an overall repeal of beneficial rates for capital gains. Not an increase back to Clinton-era levels, but an overall abolition. I’ve heard this argument over and over again from GOP sources, who sincerely believe that they must stand their ground on carried interest, in order to gain a foothold for future fights.

Reynolds also makes a secondary and tertiary case: (1) This is primarily being done by tax & spend Democrats to raise revenue; (2) This would force investment firms offshore, which would actually lower federal tax revenue. Kind of like Sabanes-Oxley redux.

It’s good Reynolds laid out his argument in that order, because it goes from strongest to weakest. He may well be right about the impact this legislation will have on the overall capital gains fight (coming soon, as current provisions sunset), from a political perspective. And I would agree with him that capital gains should continue to be taxed at a lower rate than is ordinary income. That said: This argument does nothing to address the fundamental inequity of current tax treatment of capital gains. Establishing one wrong to prevent a future wrong is… well, wrong. Moreover, there will be a much larger groundswell when “general” capital gains treatment arises, given the masses who have some sort of investment-derived income.

As for the tax & spend issue. I think Reynolds is correct in saying that this issue originally came to the fore because of budget shortfalls. In fact, I recall NVCA president Mark Heesen talking about such things back in February. However, the issue has since morphed into an electoral one – as Democrats have slowly learned that the tax revenue bump will likely be minimal post-2006. In other words, Reynolds’ argument was stronger three months ago, before the credit crunch.

Finally, there is the issue of investment firms moving offshore. I just don’t believe it will happen. Will VCs leave Silicon Valley? Will buyout pros leave Manhattan? Again, we’re essentially talking about individual income rates, so places of residence and investment matter (not just where a fund is incorporated). I would, however, agree with Reynolds that most PE firms will attempt to find some way around the Levin bill (were it to pass) – which means that the extra tax revenue is more likely to come from law and accounting firms than from PE firms.

Reynolds said that he is not yet entertaining the possibility of a compromise bill, but seems pragmatic enough to consider it should the ground begin to shift a bit beneath the GOP’s feet on this issue. For example, Democrats could gain ground by asking the following question: “If private equity – and particularly venture capital – was able to thrive under the higher capital gains rates of the 1990s, why couldn’t it do so again?”

Reynolds didn’t have much of an answer for this one, save for switching over to the founders’ equity argument. But I’d expect he would soon, as my deconstruction of his argument belies its rhetorical power (at least coming from his mouth). In fact, I dare say he understands Sandy Levin’s bill better than Sandy Levin does. He’s simply reached the wrong conclusion.

Top Three

EchoStar Communications Corp. (Nasdaq: DISH) has agreed to acquire Sling Media Inc., which makes the Slingbox device that allows people to watch their home television signals via PCs and various handheld devices. The deal is valued at approximately $380 million in cash and EchoStar options. Sling has raised around $57 million in VC funding since 2004, from firms like DCM, Mobius Venture Capital, Allen & Co., Goldman Sachs, Hearst Corp., Liberty Media Group and Hercules Growth Capital.

Veronis Suhler Stevenson has agreed to acquire a majority stake in Inc., a New York–based provider of online career information for more than 30 industry verticals. No financial terms were disclosed, although the WSJ puts the Vault enterprise value at between $60 million and $85 million. VSS is being joined on the deal by former MSNBC president Erik Sorenson, who will become CEO of Vault. Black & Associates advised Vault on the deal.

CardioMEMS Inc., an Atlanta-based developer of wireless medical pressure sensors, has called down $23.28 million of a $31.5 million Series D round, according to a regulatory filing. The deal comes four months after CardioMEMS withdrew registration for an $86.25 million IPO, which it said would have been “discretionary.” It also said that “terms currently obtainable in the ! public marketplace are not sufficiently attractive” to pursue an IPO. No new shareholders are listed on the filing by CardioMEMS, which previously had raised $52.6 million from firms like Arcapita, Boston Millennia Partners, Foundation Medical Partners, Easton Capital Partners, Medtronic Inc. and Johnson and Johnson Development Corp.

VC Deals

LiquidHub, a King of Prussia, Penn.–based systems integrator and technology consultancy, has raised has raised $20 million in Series A funding. NewSpring Capital led the deal with $7.5 million, and was joined by NewSpring limited partners like PPM America Capital Partners and Credit Suisse Alternative Investments. LiquidHub also secured an $18 million senior credit facility from M&T Bank.

NebuAd, a Redwood City, Calif.-based provider of a behavioral targeting network for the online advertising industry, has raised around $20 million in Series B funding from Menlo Ventures and return backer Sierra Ventures. The company has now raised over $30 million in total VC funding.

Woven Systems Inc., a Santa Clara, Calif.-based developer of 10 gigabit Ethernet fabric solutions, has raised $20 million in Series B funding. Mohr Davidow Ventures led the deal, and was joined by return backers Goldman Sachs and Palomar Ventures. Woven Systems has now raised $35 million in total VC funding.

Rave Wireless Inc., a New York–based provider of mobile phone programs for colleges and universities, has raised $18 million in Series C funding, according to a regulatory filing. Trilogy Equity Partners was joined by return backers Bain Capital Ventures, Sigma Partners and RRE Ventures. It previously had raised around $17 million since 2005.

Purple Labs, a Chambery, France-based provider of embedded Linux solutions for the wireless market, has raised $14.5 million in Series A funding. The deal was led by Sofinnova Partners, which five months ago bought a majority stake in the company from Vitelcom of Spain. Other backers include Earlybird Venture Capital and Partners Group.

DocuSign Inc., a Seattle-based provider of online document delivery and signature solutions, has raised $12.4 million in Series C funding. WestRiver Capital led the deal, and was joined by return backers Frazier Technology Ventures, Ignition Partners and Sigma Partners.

Apprion, a Moffett Field, Calif.-based provider of application network systems designed for the process manufacturing industry, has raised $12 million in Series B funding. Anvil Investment Associates led the deal, and was joined by CTTV Investments and return backers Advanced Technology Ventures and Allegis Capital.

MatchMine has raised $10 million in Series A funding from The Kraft Group. The Needham, Mass.–based company has developed an online platform that delivers personalized recommendations for movies, music and other online media content.

Turn Inc., a San Mateo, Calif.-based online automatic-targeting advertising network, has raised $8 million in Series B funding, according to a regulatory filing. Listed shareholders are return backers Norwest Venture Partners, Trident Capital and Shasta Ventures. It closed on an $18 million Series A round in late 2006.

Upfront Chromatography AS, a Copenhagen-based maker of industrial-scale protein chromatography processes, has raised €6.8 million in VC funding. DSM Venturing led the deal, and was joined by return backers InnovationsKapital and NBGI Ventures.

Trutap Ltd., a London-based provider of free mobile services that “allows users to stay connected to their social lives,” has raised $6.5 million in follow-on Series A funding led by The Tudor Group. The round now stands at $13 million.

Solarity Inc., an Atlanta-based developer of nano-structured solar cells, has raised $5 million in Series A funding led by New Enterprise Associates, according to a regulatory filing. The company is being spun out of Georgia Tech, and is founded by Ajeet Rohatgi.

Cocona Inc., a Longmont, Colo.-based maker of textiles using green-friendly polymers derived from coconut shells, has raised $4.86 million in Series A funding led by FairHaven Capital Partners, according to a regulatory filing. The deal had been previously disclosed, but without the dollar amount.

NCSRT Inc. has raised $5 million in Series A funding from Inverness Capital Partners, according to a regulatory filing. The Apex, N.C.-based company makes filtration and separation systems and consumables for the food processing, biotech and pharmaceutical industries.

Stonybrook Water Purification Inc., a Setauket, N.Y.-based water purification startup, has secured $500,000 of a $4.1 million Series A round, according to a regulatory filing. Backers include Battery Ventures, TianDi Growth Partners, T2 Venture Partners and Modern Water PLC.

Positive Networks Inc., an Overland, Kansas-based provider of virtual private networks (VPNs), has called down $2.35 million of a $3 million Series C round, according to a regulatory filing. Backers include Digital Coast Ventures and Mariner Capital Ventures.

Tribotek Inc., a Burlington, Mass.-based maker of high-current density power and data connectors, has raised $2.98 million in Series E funding, according to a regulatory filing. Backers include J&W Seligman & Co. and Lehman Brothers.

Rustic Crust Inc., a Pittsfield, N.H.–based provider of organic pizza products, has raised $1.5 million in Series B funding. SJF Ventures led the deal, and was joined by CEI Community Ventures and individual angels.

Apptus Technologies AB, a Swedish provider of search technology in the ecommerce and e-directory sectors, has raised an undisclosed amount of VC funding from InnovationsKapital.

Buyout Deals

Kohlberg Kravis Roberts & Co. has completed its $26 billion acquisition of payment processing company First Data Corp. First Data stockholders received $34 per share, and First Data was delisted from the NYSE at market close yesterday. Michael Capellas has been named First Data’s new chairman and CEO, replacing Ric Duques. Capellas was previously CEO of MCI, president of Hewlett-Packard Co. and chairman and CEO of Compaq Computer Corp.

Vision Capital has bought JDR Cable Systems from Bridgepoint for an undisclosed amount. JDR has two business units: Umbilical Systems, which provides cables to oil and gas projects worldwide, and Smart Solutions, which provides cables primarily for the seismic exploration and naval defense markets.

Deb Shops Inc. (Nasdaq: DEBS) shareholders will vote on October 16, on their pending $27.25 per share buyout by Lee Equity Partners. The deal’s total equity value is approximately $395 million. Deb is a Philadelphia-based retailer of apparel, shoes and accessories for juniors in both regular and plus sizes.

PE-Backed IPOs

ZARS Pharma and Duff & Phelps are both expected to price this week. If successful, they would be only the second and third PE-backed IPOs to price in September, following Athenahealth. The first week of October should be busier, with the following companies on tap: BioHeart, Merrion Pharmaceuticals, Constant Contact, MAP Pharmaceuticals and China Digital TV Holding.

PE Exits

Montagu Private Equity has sold Open International Ltd. to European insurance company Towergate for £276 million. Open International provides IT solutions to insurance brokers in the UK and Ireland. Montagu sponsored a £182 million management buyout of Open International in March 2006.

NetScout Systems Inc. (Nasdaq: NTCT) has acquired computer security company Network General Corp. from TPG and Silver Lake Partners. The deal is valued at approximately $205 million, including $50 million in cash and $100 million of debt financing. TPG and Silver Lake had originally paid around $275 million to acquire Network General (f.k.a. Sniffer Technologies) from McAfee Inc. in 2004.

Verus Pharmaceuticals Inc. has sold its pediatric asthma development programs to AstraZeneca PLC. The deal includes a $30 million upfront payment, plus the possibility of a $280 million earnout payment. Verus raised a $78 million Series A round back in 2005, from Domain Associates, Prospect Venture Partners, Paul Royalty Fund, MPM Capital, Montreaux Equity Partners, Athenian Venture Partners and Windamere Venture Partners. In addition, the company received $20 million in product-specific royalty funding from Paul Royalty Fund.

CACI International Inc. (NYSE: CAI) has agreed to acquire Athena Innovative Solutions Inc. from Veritas Capital. No financial terms were disclosed. Athena is an Arlington, Va.-based provider of specialized services and solutions to the intelligence community and national security clients.

PE-Backed M&A

Susser Holdings Corp. (Nasdaq: SUSS) has agreed to acquire the parent company of Town & Country Food Stores, a San Angelo, Texas-based convenience store operator in West Texas and Eastern New Mexico. The deal is valued at approximately $361 million. Wellspring Capital holds nearly a 40% stake in Susser, as of this past April.

Firms & Funds

Atlanta Capital Partners has secured over $53 million in capital commitments for its debut fund, which is targeting between $100 million and $125 million. The firm is managed by former Georgia-Pacific Corp. CEO A.D. “Pete” Correll and private equity vet David Crosland, who previously ran U.S. operations for Arcapita Corp. It will focus on small and middle-market buyouts opportunities in the Southeastern United States.

CGS Management of Switzerland has closed its second buyout fund with CHF 130 million ($111m). The capital will be used for small-cap buyouts in Switzerland , Germany and other European countries.

Housatonic Partners has closed its fourth fund with $250 million in capital commitments. The firm focused on buyout or recaps of small-to-mid-sized media and communications companies, and has offices in both Boston and San Francisco.

Pamplona Capital Management of London has held a €1.3 billion first close on its second fund, which will focus on buyout opportunities in Europe.

The Washington State Investment Board has made the following fund commitments: $750 million for Warburg Pincus Private Equity Fund X; $700 million for KKR European Fund III; $25 million for Advent Latin American Private Equity Fund IV and $50 million to Avenue Special Situations Fund V.

The State of Wisconsin Investment Board has retained StepStone Group LLC to assist SWIB in making “specialized” private equity fund investments. StepStone will identify funds that have specific geographic, industry or investment structure focus.

Newbury Partners has agreed to acquire a portfolio of startup company interests from Israel-based Clal Industries & Investments Ltd. and Clal Venture Capital Management, according to Globes Online. The total deal was valued at $20 million.

Human Resources

Ralph Alexander has joined Riverstone Holdings as a managing director. He will be based in New York. Alexander previously served in various positions with BP PLC, including as CEO of both Innovine — BP’s $20bn olefins and derivatives subsidiary — and ofits Gas, Power and Renewables and Solar segment.

Randy Hicks has joined KPS Capital Partners as a managing director and head of business development. He previously was a senior managing director of origination for FirstLight Financial Corp. The firm also has added Sarah Weintraub as assistant controller, and four new associates: Ryan Baker, Michael Houy, Evan LePatner and Lee Mlotek.

Gerrit Zalm has joined Permira as an advisor. He is the former deputy prime minister and minister of finance of the Netherlands.

Thierry Paternot has joined Duke Street Capital as a France-based operating partner, focused on opportunities in the consumer space. He currently is president of Stanley Tools, Europe .