PE Week Wire: Tuesday, December 9, 2008

Last night I participated in a panel discussion called Pulse of the Middle Market, which was hosted by the Boston office of law firm Edward Angell Palmer & Dodge. Pretty dour session overall, but very well attended. After all, it’s not like people have new deals to work on…

Anyway, here are a few quick notes I jotted down while not pontificating:

* When it comes to leverage multiples, six is the new nine.

* There was recently an academic paper arguing that broadly-syndicated corporate loans were worse for issuers than were more narrowly-syndicated loans. Gotta find it, particularly given that broad syndication was a driving hallmark of the ‘06-’07 leveraged buyout boom.

* Lots of bewilderment that PE firms would lay off staff without simultaneously cutting fund sizes (thus keeping management fee income stable). It’s a very valid complaint.

* “Uncertainty is worse than bad certainty.” – Lee Tesconi, a partner with Lexington Partners (as relayed by Lane MacDonald of Harvard Management Co.)

* Typical buyout funds are down between 6% and 9% for the September marks. They’re expected to keep going lower, but not near public equity depths.

* Not only are LPs concerned about the basic denominator effect (overall portfolio value drops, thus illiquid PE exposure rises past allocation levels), but they also worry that the effect will be exacerbated by VC and buyout firms that keep drawing down capital faster than they provide distributions.

* The next credit shoe to drop may be cash-flow CLOs.

* No consensus on the best sectors for current mid-market investment. Some want to steer far clear of troubled areas like consumer, digital media and oilfield services — while others think those sectors will soon be low enough to consider. In general, make sure the company can control its operational cost structure (i.e., not unionized auto OEMs).

* I got asked if the BCE buyout will close. I said it would, because BCE would find a more favorable solvency opinion. Then I regretted having said it, since it was based on no concrete knowledge. Quite pleased to read this once I got home.

* The most optimistic panelist saw the LBO market returning to vibrancy in late Q2 of 2009. The least optimistic said to wait until 2011.

*** Buyouts Texas is this Thursday in Dallas. Hope to see you there. Get agenda and registration info

Top Three

BCE Inc. reportedly has received a second accounting opinion that finds the company would be solvent once acquired by a private equity consortium led by Ontario Teachers’ Pension Plan. An initial opinion from KPMG said the deal would result in insolvency, but BCE has since retained PricewaterhouseCoopers.

Ascent Therapeutics Inc., a Cambridge, Mass.-based developer of GPCR modulators, has entered into a licensing option agreement through the Novartis Option Fund. The deal includes an upfront fee and potential milestones totaling more than $200 million. Ascent announced late last month that it had raised $19 million in Series A funding from Novartis Option Fund, Healthcare Ventures and TVM Capital.

Morgan Keegan & Co. has acquired Revolution Partners, a Boston-based investment bank focused on M&A and private capital advisory services for the technology industry. No financial terms were disclosed.

VC Deals

Kosmix, a Mountain View, Calif.-based developer of vertical search engines based on specific topics, has raised $20 million in fourth-round funding. Time Warner led the round, and was joined by return backers DAG Ventures, Accel Partners and Lightspeed Venture Partners.

Interface Biologics Inc., a Toronto-based developer of biomedical-polymers for use in implantable medical devices, has raised C$5 million in new VC funding. Return backers include Covington Capital, VG Partners and BDC Capital.

Appcelerator Inc., a Mountain View, Calif.-based provider of open source technologies for building and managing rich Web applications, has raised $4.1 million in Series A funding. Storm Ventures led the round.

RiseSmart, a Sunnyvale, Calif.-based provider of job search and outplacement services via the Web, has raised $3 million in Series A funding from Norwest Venture Partners.

Mariah Power, a Reno, Nev.-based developer of a residential and commercial wind power appliance, has raised an undisclosed amount of Series B funding. Noventi Ventures led the round, and was joined by Greenhouse Capital, BigSky Partners and Sierra Angels.

Buyout Deals

Extended Stay Hotels is in talks that could result in the company being turned over to its lenders, according to The Wall Street Journal. Lightstone Group bought the hotel chain from The Blackstone Group last year for $8 billion, including $7 billion of debt.

Investcorp has acquired a 40% stake in UK debt collection advisor TDX Group for £28 million.

JLL Partners said that it will commence an offer for any issued or outstanding shares it does not already own in Panetheon Inc. (TSX: PTI), a Canadian provider of contract development and manufacturing services to the global pharmaceutical industry. The offer would be for US$2 per share, or a 138% premium to last Friday’s closing price. JLL currently holds around a 30% stake in Pantheon.

PE-Backed IPOs

Del Frisco’s Restaurant Group LLC, a Wichita, Kan.-based steakhouse operator, has withdrawn registration for a $100 million IPO, citing “current public market conditions.” It had originally filed in October 2007, with Piper Jaffray serving as lead underwriter. Lone Star Funds acquired the company in late 2006.

PE Exits

Micro Focus International PLC has agreed to acquire Relativity Technologies Inc., a Raleigh, N.C.-based provider of enterprise application modernization solutions, for approximately $9.7 million in cash. Relativity had raised over $30 million in VC funding since 1997, from firms like Noro-Moseley Partners and Tall Oaks Capital Partners.

PE-Backed M&A

Interstate Auto Group Inc., a Minneapolis-based buy-here/pay-here auto lot operator, has acquired Auto Master from First Cash Financial Services Inc. No financial terms were disclosed. IAG is a portfolio company of Alpine Investors.

Firms & Funds

Rodman & Renshaw yesterday offered to acquire rival investment bank Cowen Group Inc. for $7 per share, a 17% premium over last Friday’s closing price. The total deal would be valued at nearly $100 million, but was quickly rejected by Cowen.

Wayzata Investment Partners has closed its second distressed fund with $3.4 billion in committed capital, according to LBO Wire.

Human Resources

AnaCap Financial Partners has hired four ex-Lehman Brothers staffers: Chris Patrick as principal and co-head of M&A; Andy Wynn as director of business services; and Daniel Ang and Nassim Cherchali as analysts.

Doug Brockway has joined Stifel, Nicolaus & Co. as a managing director in the firm’s technology practice. He previously was co-head of Innovation Advisors, a tech-focused investment bank.

Richard Kent has joined Intersouth Partners as a venture partner focused on the pharmaceutical market. He previously was president and CEO of Serenex Inc., an Intersouth portfolio company sold to Pfizer in April.

SV Life Sciences has hired three venture partners: Sarah Bodary, formerly with Genentech, to focus on biotech; Gary Velasquez, former president and CEO of SV portfolio company Synarc, to focus on healthcare services; and Kevin Barrett, a founding partner of Commonwealth Health Partners, to focus on healthcare services.

MFC Capital Funding has made several promotions: Danny Weiss to managing director, Briget Brew to VP of marketing, Frances Miller to senior operations analyst and Elliot Drabs to senior associate.

David Yoo has joined Seoul-based SF Investment as a managing director and head of the Americas. He previously was with EarlyBirdCapital as vice president of I-banking.

The Caisse de depot et placement du Quebec has extended the medical leave of president and CEO Richard Guay. He was due to return tomorrow, but that has now been pushed back to January 5.