PE Week Wire: Tuesday, August 5, 2008

I had lunch yesterday with some veteran private equity litigators, and asked them to predict what they’ll be spending lots of time on over the next few years. Their response was swift and certain: Increased SEC enforcement of insider trading-type activities at private equity firms.

Government agencies already take a hard look at announced take-private transactions. For example, they automatically request lists of all individuals who had information about the negotiations, including winning bidders, losing bidders, bankers, lawyers, company executives and major shareholders. Sometimes there is even a second round of requests, in which recipients are asked to disclose relationships with specific individuals and/or institutions.

But the litigators think that the scrutiny will get much more intense, with the SEC beginning to look into deals that don’t get consummated (thus not triggering automatic investigations). For example, what if a public company is on the block, distributes private financial data to six PE firms but doesn’t get any offers? Or if a buyout firm cold-calls a private company, enters into quiet due diligence and learns that it’s drawn down $149 million of a $150 million revolving credit facility?

Both of those scenarios – plus dozens of others – are open to trading abuse by private equity professionals. Moreover, the temptation is magnified at firms with hedge fund or credit affiliates.

The attorneys I lunched with say that the SEC cannot possibly uncover all such cases, so instead would choose to make examples of one or two firms. This would include subpoenas of all firm emails, deal logs and the personal financial records of firm professionals. The result for private equity would be lost man-hours, massive legal fees and perhaps a few indictments (yeah, I believe most large organizations have at least a few potential crooks). As the attorneys said, it’s something to keep an eye on…

*** They also expect increased lawsuits filed against PE firms, from trustees of bankrupt portfolio companies. The problem here for PE firms, they say, is that most D&O policies don’t protect individual partners (as opposed to the fund) in the case of gross negligence. This means that partners are incented to settle rather than take the risk of a trial. One solution would be for LPs to pay for individual protection, but the sensible counter is that a partner deserves his/her personal hardship, if found guilty of such a crime. Rock meet hard place.

*** Wow — lots of supportive/nasty emails related to yesterday’s note on Manny Ramirez. All in good fun. But one thing: If you use the anonymous tip system, please don’t conclude with a request for response. I don’t know who you are, due to the “anonymous” part…

*** We will be announcing some new peHUB Shindig cities in about two weeks. If your firm is interested in sponsoring, please send me an email. If you’re personally interested in attending, please stay tuned…

Top Three

SpaceX, a Hawthorne, Calif.-based provider of private space launch services, has raised $20 million from Founders Fund.

Polaris Venture Partners has led a $50 million recapitalization of PartsSource, a maker of replacement medical repair parts for hospital equipment. Primus Capital also participated. Jason Trevisan from Polaris and Bill Mulligan from Primus will join the PartsSource board of directors.

Genstar Capital has acquired Voice Construction, an Edmonton, Alberta-based provider of civil construction services to operators in the Alberta oil sands and surrounding areas. No pricing terms were disclosed. CIBC and HSBC Bank Canada provided leveraged financing, while CIBC World Markets advised the selling Voice family.

VC Deals

Friendster Inc., a San Francisco-based social networking company, has raised $20 million in new VC funding. IDG Ventures led the round, and was joined by return backers Kleiner Perkins Caufield & Byers, Benchmark Capital, DAG Ventures and Founders Fund. The company has now raised nearly $50 million since 2002. Friendster also named a new CEO: Richard Kimber, former regional managing director of South Asia at Google.

Innolume, a provider of quantum dot laser diodes and modules covering the 1000 nm to 1320 nm optical spectrum, has raised €8.6 million in Series C funding. S-Group Capital Management led the round, and was joined by Applied Ventures and return backers NRW Bank, Peppermint Financial Partners, S-VentureCapital Dortmund, Robert Young and Juergen Kurb. The company has offices in Germany and Santa Clara, California.

Elastra Corp., a San Francisco-based provider of software that manages application systems in cloud computing environments, has raised $12 million in Series B funding. Bay Partners led the round, and was joined by and return backer Hummer Winblad Venture Partners.

Expression Genetics Inc., a Huntsville, Ala.-based developer of DNA and RNAi delivery and therapeutics, has raised $12 million in Series B funding. No investor information was disclosed. Flypaper Studio Inc., a Phoenix-based maker of rich media creation software, has raised $3.5 million in second-round funding. Return backers include Sierra Ventures and SCF Arizona., an online destination for parents with kids in preschool through twelfth grade, has raised $9.75 million in Series B funding. California Technology Ventures led the round, and was joined by return backers Azure Capital Partners and TeleSoft Partners.

WePlay Inc., a New York-based online community for youth sports, has raised $8.6 million in Series B funding. Deep Fork Capital led the round, and was joined by return backers like FirstMark Capital, company management and pro athletes like Derek Jeter, LeBron James, and Peyton Manning.

CheckPoint HR, an Edison, N.J.-based provider of outsourced administrative services for mid-sized organizations, has raised $7.6 million from Edison Venture Fund. Some of the proceeds will be used to provide shareholder liquidity.

Six Degrees Games Inc., a Marina Del Rey, Calif.-based video game and virtual world publisher, has raised $7 million in Series A funding co-led by Clearstone Venture Partners and Prism VentureWorks.

Ultizen Games Ltd., a Shanghai-based game development outsourcer, has raised $6 million in Series B funding. PAC-Link of Taiwan led the round, and was joined by Japan Asia Investment Co. and online ad agency CyberAgent.

Buyout Deals

Absa Capital Private Equity has offered to buy South Africa’s EnviroServ Holdings (J: ENVJ) for approximately $261 million.

Apax Partners has completed its take-private acquisition of The TriZetto Group Inc., a Newport Beach, Calif.-based provider of IT solutions for the healthcare supply chain. The deal was valued at approximately $1.4 billion, with TriZetto stockholders receiving $22 per share in cash. TriZetto customers BlueCross BlueShield of Tennessee and The Regence Group will participate alongside Apax as equity investors.

Hammond, Kennedy, Whitney & Co. reportedly has sponsored a recapitalization of Contract Land Staff LP, a Stafford, Texas-based provider of land management and right-of-way consulting. No financial terms were disclosed.

IRG Capital Group and Blackbird Capital Partners have agreed to acquire the assets of Norwalk Furniture Group, a Norwalk, Ohio-based maker and retailer of upholstered furniture. No financial terms were disclosed for the deal, which enables NFG to resume operations it had suspended in June.

Lehman Brothers Merchant Banking Partners has completed its $210 million take-private buyout of Angelica Corp., a St. Louis-based provider of linen and textile solutions to the healthcare market. Angelica stockholders received $22 per share.

Luxury Ventures LLC, a Florida retailer of fine jewelry operating as Hendricks Jewelers, has received an undisclosed amount of private equity funding from Kairos Capital Partners. The infusion is part of a reorganization for Luxury Ventures, which filed for bankruptcy protection last November.

Najafi Cos. and its portfolio company Energy Capital Investments have acquired a majority stake in Solverdi, a producer of renewable fuel for military and large industrial users. No financial terms were disclosed.

MML Capital Partners has acquired PaR Systems, a Shoreview, Minn.-based maker of specialized and standard automation equipment, from American Capital Ltd. No financial terms were disclosed. Edgeview Partners advised American Capital on the deal.

Sterling Investment Partners has led a buyout of Miller Heiman Inc., a Reno, Nev.-based sales consulting and training company, from Leeds Equity Partners. Also participating on the buy-side were GE Capital, Madison Capital and York Street Capital Partners. No pricing terms were disclosed.

TPG Capital will study Asciano Ltd.’s (AX: AIO) full-year results being released tomorrow, before deciding what to do about its rebuffed Au$2.9 billion buyout offer. Asciano is Australia’s largest port and rail operator.

PE-Backed IPOs

Convio Inc., an Austin, Texas-based provider of online constituent relationship management solutions for nonprofit organizations, has withdrawn registration for an $86.25 million IPO, citing “unfavorable market conditions.” It had planned to trade on the Nasdaq, with Goldman Sachs serving as lead underwriter.

Convio has raised over $36 million in VC funding from firms like Granite Ventures (21% pre-IPO stake), Austin Ventures (15.6%), Adams Street Partners (8.9%), Silverton Partners (5.2%) and Windspeed Ventures. Company shareholders also include El Dorado Ventures (9.1%), which had funded Convio acquisition GetActive Software.

PE Exits

LG-Nortel has acquired Novera Optics Inc., a Santa Clara, Calif.-based provider of fiber-optic access solutions that extend carrier Ethernet services from optical core networks to customer premises. The deal was valued at approximately $16 million in cash, plus up to $10 million in additional earn-outs over the next 18 months. Novera had raised around $73 million in VC funding since 2000, from firms like Redpoint Ventures, Storm Ventures, KLM Capital Group, KTB Ventures, Enterprise Partners Venture Capital, Meritech Capital Partners, Octane Capital Management and Saints Ventures.

Platinum Equity has completed its sale of PNA Group Holding Corp., an Atlanta-based steel processor and distributor, to Reliance Steel & Aluminum Co. (NYSE:RS). The deal was valued at approximately $1.1 billion. Platinum had acquired the company from Germany’s TUI AG in 2006, and had been originally considering an IPO.

PE-Backed M&A

Apollo Group Inc. (Nasdaq: APOL) has acquired a majority stake in Universidad Latinoamericana, an accredited private university in Mexico City, from Carlyle Mexico Partners. No financial terms were disclosed. Apollo Global is a $1 billion joint venture formed last year, and is 19.9% owned by The Carlyle Group, which manages the Carlyle Mexico Partners fund.

CriterionBrock, a Portland, Ore.-based provider of floor covering services for multi-family housing in the Western U.S., has acquired Golden Creek Carpets Inc. of Houston, Texas. No financial terms were disclosed for the deal, which was financed by Webbush Capital Partners, the Oregon Investment Fund and CriterionBrock management.

FleetPride, an independent aftermarket distributor of heavy-duty truck and trailer parts, has acquired Truck & Trailer Supply Inc., which has locations in Artesia and Roswell, New Mexico. No financial terms were disclosed. FleetPride is owned by Investocrp, Banc of America Capital Investors and company management.

Global Care Solutions LLC, a provider of furniture care and protection, has been formed via the merger of Stainsafe and Multimaster North America. No financial terms were disclosed. Stainsafe is majority owned by Palm Beach Capital, while Multimaster is a unit of Italy-based Uniters.

PlayCore Inc., a Chattanooga, Tenn.-based playground equipment maker owned by BSMB, has acquired Everlast Climbing Industries Inc., a Mendota, Minn.-based maker of climbing walls. No financial terms were disclosed.

Selig Sealing Products Inc., a manufacturer of closure lining materials, has acquired Unipac, a maker of foil and plastic inner-seals for packaging applications, from Illinois Tool Works Inc. (NYSE: ITW). No financial terms were disclosed. Selig Sealing is a portfolio company of Behrman Capital. In related news, Selig has secured a $125 million credit facility led by GE Commercial Finance, with funds also being provided by Madison Capital and BMO Capital Markets.

Tangoe Inc., an Orange, Conn.–based provider of enterprise communications lifecycle management software, has acquired Information Strategies Group Inc., a Parsippany, N.J.-based provider of telecom and IT expense processing services. No financial terms were disclosed. The transaction funding was led by Investor Growth Capital, which joins existing Tangoe backers like Edison Venture Funds, Sevin Rosen Funds, North Atlantic Capital, and Axiom Venture Funds. Orix Venture Finance also participated.

Firms & Funds

Pangaea Ventures Ltd., a Vancouver-based firm focused on the cleantech and advanced materials sectors, has closed its second fund with US$32 million in capital commitments. Limited partners include Asahi Glass, Umicore and Bekaert.

Swiss Re has agreed to buy Barclays’ life assurance portfolio for £753 million in cash.

Wachovia Corp. CEO Robert Steele said yesterday that he “didn’t” think a new capital raise was needed, and that the recent management shakeup was over.

Human Resources

Savinay Berry has joined Granite Ventures as a vice president, with a focus on the software and communications sectors. He previously was an associate with both JK&B Capital and MK Capital. From 200 to 2006, he held various positions with Dell.

Stefan Ryser has joined drug company Telik Inc. (Nasdaq: TELK) as senior vice president of corporate strategy. He previously was a founder and managing partner of Bear Stearns Health Innoventures.

P.J. Nachman has joined the private equity team of Angelo Gordon & Co., where he will focus on special situations opportunities. He previously was a vice president with Marlin Equity Partners.

James Sharwarko has joined Lake Pointe Partners as a partner. He previously has consulted for private equity sponsors like Allied Capital, Code, Hennessy & Simmons, Harbour Group and Kirtland Capital.