PE Week Wire: Tuesday, October 28, 2008

This is Erin Griffith filling in for Dan while he’s in Quebec City. Check later today for his liveblog of Steve Schwarzman’s speech.

***Water and Wine were once two forms of liquidity that PE firms don’t deal directly in. Not anymore. Last week we saw the PE world’s first wine-focused firm, Bacchus Capital Management, made its first investment. Today Aramid Capital Partners, a movie fund that backed the Oliver Stone film W., entered the market with a new fund.

If you ask me, this is the worst time ever for a super-specialized (and therefore super risky, I would think), “alternative strategy” fund to enter the market. Yet dozens are. And somehow, they’re finding the money.

I’m not just talking about run of the mill sector-focused funds. I’m talking about exotic vehicles designed to invest in revenue streams, aimed toward liquidity events I don’t quite understand.

These funds include art funds, life settlements, film and movie royalties. The strangest one I heard was a valuable coin fund, which makes me want to seriously re-evaluate my career as a business journalist.

Some of these are ridiculous sounding, but they prove that the need to differentiate is just as strong as it’s ever been. The one thing they have in common is they invest in something with a limited supply. Perhaps they’ll increase in popularity as investors rush to pour their money into tangible assets. Besides, LPs are eager to invest in the private sector while the stock market volatility plays out. Steven Huttler, a fundraising lawyer at Sadis Goldberg, told me, “LPs are hungry for these private non-traditional funds, and they aren’t afraid of over-specializing.”

As far as private equity is concerned, I believe the key to making super specialization worthwhile is diversification within your that specialty. Take Summit Global Management, a water rights fund based in Washington D.C. Jud Hill, a managing partner with the firm, told me that to invest in water rights, his firm will take private the 100 year rights for water from municipalities or ranchers. Beyond that, his firm can take control stakes in companies that treat or transport the water, or capitalize on water scarcity in other parts of the country by selling “virtual water,” or make real estate plays for water storage, or re-zone water usage rights after buying it from towns looking to monetize their resources. “It’s really a theme and not a category,” he said.

*** Following the news of Thoma Bravo’s fund, I sat down with Carl Thoma to talk about everything from lending terms to Lent and evaluations to egos. He was refreshingly candid (and occasionally comical) on topics some buyout pros get cagey about. A few highlights from the interview:

EG: Although it’s been widely reported, I know you can’t talk about specifics on your fundraising since it has yet to close. But, I have to ask, why did you want double your fund size this time around?

CT: It was just ego and greed (laughter). But really, that was put in check right away. Without lowering the fund, we could have gotten away with it, but we have smart LPs, and from day one they said, “There’s no need to raise a fund that big.” Looking back, we’re glad we listened to them, because the size and scale of our current fund is perfect for our buy and build strategy.

EG: How has that worked out so far? How are your other, similarly sized funds performing?

CT: Fund six, seven and eight are all managed by Thoma Bravo and Cressey & Co. together. We even share the same office space, so the way those are managed hasn’t changed at all. Fund six got beat up badly because it had exposure to companies serving the telecom space. We thought we were smart by not investing directly in telecom but as those companies blew up, we lost business.

So, fund six is about a break even fund. Some days it’s 5% or 6%, some days its 2% or 3%. There are still three companies left in fund six. We would have liked to have sold them by the end of the first quarter next year, but given the exit environment that’s not going to happen.

Fund seven is top quartile, in the high 30% range. Fund 8 is too early to tell.

Read the rest here.

*** Speaking of cutting fund size, LBOWire reported today that Hellman & Friedman, one of the most active post-credit crunch buyout firms, will not cut the target on its $10 billion seventh fund. The article makes a lengthy argument that the firm will have no problem meeting this target, citing returns greater than 44% on its fifth. I agree—with returns like that they’ll have no problem finding the money. But what about deploying it?

It’s true that the firm has struck many of the largest deals this year, including Getty Images, Goodman Global and Neuberger Berman. But $10 billion is still a $1.6 billion leap from the firm’s previous fund. Furthermore, today’s environment is far gloomier for PE deals than it was three months ago, when planning for the fund began. Even if Hellman & Friedman is prudent and uses 50% equity in every deal, to spend $10 billion on the size of deals they do will still take more debt than most lenders are willing to part with. The last I heard, lenders were topping out at $450 million in debt per deal. After watching firms like Blackstone and Madison Dearborn cut their targets, I want to say for the record: It’s no longer a sign of defeat to scale back, it’s just rational.

Top Three

Huntsman has said the lenders for its $6.5 billion merger with Apollo Management-backed Hexion Specialty Chemical will not commit the necessary capital to finance the deal. Credit Suisse and Deutsche Bank are not convinced the combined entity will be solvent, the company said. Read more. This development occurs even after Hexion shareholders offered additional funding commitments to support the buyout. Yesterday Hexion said certain stockholders of Huntsman agreed to make an additional cash commitment to Huntsman of about $217 million, raising the total amount of cash commitments from Huntsman shareholders to $677 million.

Value City Holdings Inc, a discount retail chain backed by Emerald Capital Management and Crystal Value LLC, has filed for bankruptcy with plans to liquidate its 66 stores. Emerald Capital Management and Crystal Value purchased majority stakes in the entity from its former owner, Retail Ventures, in a restructuring process last year.

Intrawest, a report operator owned by New York-based Fortress Investment Group, has refinanced a $1.7 billion loan that was due October 23. The agreement, which received unanimous support from lenders, allowed the company to narrowly avoid bankruptcy. Fortress bought the group in 2006 for $1.8 billion.

VC Deals

Fairhaven Capital, a Cambridge, Mass.-based venture capital firm, has closed its first fund with $250 million in commitments, $50 million greater than its target.

Playfish, a social networking game developer based in London, has raised $17 million in financing in Series B financing led by Accel Partners and Index Ventures.

Zuora, an on-demand subscription billing and payment service, has raised $15 million in Series B funding led by Shasta Ventures and Lehman Brothers Venture Partners. Existing investors Benchmark Capital and Mark Benioff participated. Total funding for the San Francisco-based company is $21.5 million.

Roku, the Saratoga, Calif.-based maker of the Netflix Player by Roku, has received Series C funding from Menlo Ventures.

Lutonix, a Minneapolis-based medical device company specializing in drug-coasted balloon angioplasty, has closed $20 million in Series B financing, led by Versant Ventures. New investor Delphi Ventures joined, along with Series A investor U.S. Venture Partners.

Infacare Pharmaceutical Corp has announced a $28 million private placement of its Series B Preferred Stock, led by HealthCare Ventures with participation from Longitude Capital, FirstMark Capital and Atlas Venture. The Trevose, Pa.-based company specializes in late stake neonatal disease treatments.

Darkstrand, a high-speed network company based in Chicago, has raised $12 million in angel backing from undisclosed investors.

Netviewer, a London-based internet developer focusing on “Web 3.0” has received 7 million Euros ($8.7 million) in funding from T-Online Venture Fund and European Founders Fund., an online career and workplace community operated in Sausalito, Calif., has secured $6.5 million in Series B funding led by Sutter Hill Ventures, with follow-on investments from Benchmark Capital.

Promosome, a biotechnology company based in New York, has completed a Series B round of funding worth $9.6 million, from an undisclosed group of investors. The round was oversubscribed by $2.1 million.

Buyout Deals

Francisco Partners, a San Francisco-based buyout firm, has agreed to purchase API Software, a Wisconsin-based labor management software company serving the health care industry, for an undisclosed price. The deal is expected to close in 30 days.

Deutsche Bank, Lloyds TSB and BNP Paribas have agreed to purchase Porterbrook, the train leasing arm of the UK bank Abbey, for $3.1 billion (2 billion pounds).

Intel Capital, the investment arm of Intel Corp, has made three investments in Chinese clean technology companies. The firm invested $20 million in Trony Solar Holdings, along with investments of undisclosed sizes in NP Holdings and Viewhigh.

Duke Street has completed its acquisition of Biomnis, a medical disgnostics provider based in France, for 217 million Euros. Duke Street is a London and Paris-based mid-market buyout firm.

Lakeside Energy, an energy-focused private equity firm, has committed $150 million in equity to support the growth of InenTec, a Bend, Ore.-based energy company. The investment will launch InEnTec Chemical, a JV deal that aims to convert chemical waste.

Ice Energy, an energy storage company based in Windsor, Colo., has received $33 million in financing from Energy Capital Partners, a private equity firm based in Short Hills, N.J.

PE Exits

JHT Holdings, the bankrupt transport services company backed by Stonehouse Capital, has emerged from Chapter 11 four months after its filing. Read more. JHT is based in Kenosha, Wis.

Value City Holdings Inc, a discount retail chain backed by Emerald Capital Management and Crystal Value LLC, has filed for bankruptcy with plans to liquidate its 66 stores. Emerald Capital Management and Crystal Value purchased majority stakes in the entity from its former owner, Retail Ventures, in a restructuring process last year.

Healthmedia, an online healthcoaching program developer backed by AvTech Ventures, Arboretum Ventures, Ardesta, Avalon Technologies, Chrysalis Ventures and Princeton Fund, has sold to Johnson & Johnson for an undisclosed amount.

PE-Backed M&A

Chrysler, backed by Cerberus Capital Management, has teamed up with GM to ask the U.S. government for $10 billion in rescue funding to support a merger between the two. The deal would offer the government around $3 billion in preferred stock. Cerberus has expressed a desire to end up with a “meaningful stake” in the combined entity, the Wall Street Journal reported.

Aqua-Chem, an Altus Capital Partners-backed osmosis technology and water pretreatment equipment maker based in Knoxville, Tenn., acquired Matrix Utilities Corp, a water purification company. The deal value was undisclosed.

Firms & Funds

Artis Capital Management has raised $43.1 million for its venture fund, named Artis Private Growth Partners, according to a regulatory filing.

Hellman & Friedman will not lower the size of its latest fund in the market, which has a target of $10 billion, LBOWire reported. The firm’s seventh fund has an $11 bilion hard cap and plans to hold a first close in January.

Darby Overseas Investments, a private equity firm owned by Franklin Templeton Investments, has raised Rs 6.3 Billion ($147 Million) for a private equity fund that invests in Indian retail companies.

Yaletown Venture Partners has held an initial $65 million close toward Yaletown Ventures II LP, a clean-tech and IT venture firm based in Western Cananda.

Aramid Capital Partners, a British firm that finances film and TV with investors from Future Capital Partners, Screen Capital International and Stonehenge Capital, is seeking $350 million for a new fund, according to industry reports.

Human Resources

Rothschild has hired three Lehman Brothers M&A bankers. Antonio Villalon has been named co-head of its Global Financial Institutions Group (FIG), Stephen Fox has been named co-head of its UK FIG, and Philippe Le Baquer joined to work on FIG deals in continental Europe and on cross-border deals.

Trivest Partners, a private equity firm based in Miami, has hired Todd J. Gross and Kevin M. Lyons as Associates. Previously Gross was at Banc of America Securities as an investment banking analyst and Lyons was a Raylond James & Associates investment banking analyst.