PE Week Wire: Wed., Aug. 15, 2007

Happy hedge fund redemption day everybody. It’s not a day off, but could soon lead to indefinite vacations for scores of fund managers. While we wait to learn “will they or won’t they,” a few quick notes:

*** The credit crunch has not yet tamped down mega-buyout fundraising plans, as firms like Bain, Carlyle, Madison Dearborn and Warburg Pincus are moving full-steam ahead. What is harder to determine, however, is how it’s affecting the distressed debt fundraising market. I’ve heard of a few distressed firms that have upped their maximums – like Avenue Cap from $5b to $6b – but it doesn’t seem terribly widespread. Maybe both markets are just experiencing some lagtime issues….

More interesting on the distressed side, however, is a real divergence in terms of capital calldowns. I’ve spoken with some LPs who tell me that many of their distressed GPs are calling for cash more regularly than are their kids, while other LPs say it’s been business as usual. Part of this, of course, depends on how funds define “distressed” – as 15% haircuts don’t really do it for most. Sorry for the lack of clarity, but I’ve been unable to find consensus so far. If you’ve got some insight, send it my way.

*** Quiz Time: Can you name the new social networking startup backed by Accel Partners? Hint: The brother of one of its non-Accel board members used to have a reality show (or maybe still does – it’s hard to keep track).

*** I’ve been trying to get my head around something Tony James said during Monday’s earnings call. He argued that the past few weeks have caused a PE market shakeout, which has knocked out a variety of peripheral players. The result, he said, would be less competition for deals.

Sorry, but it just doesn’t make sense. Even if some periphery players are gone, PE firms including Blackstone have lost their primary pricing advantage against strategics: Cheap debt. Doesn’t that mean greater competition? Moreover, firms like Blackstone already are signaling that they’ll look closer at smaller deals best defined as large or upper-middle market. Ok, but those areas are far more saturated with equity sponsors than is the mega-market. Again, more competition. I’m still bullish on deals picking back up by late September, but with more competition – not less.

*** If you are an MBA Forum member of peHUB, you will be receiving a separate email from me tomorrow. It will discuss new school access codes (for a new school year), and ask for feedback on how we can improve the site going forward. Thanks in advance for your attention and feedback.

*** Mitt Romney this week disclosed his investment holdings, and he continues to be seriously “allocated” to private equity. peHUB has the FEC filing, plus a summary of what he’s still got. Read it here.

*** Charley Polachi joins the Vox Populi. For those who don’t know Charley, he runs a top exec search firm in Boston for VC and high-tech execs. Glad to have him aboard.

Top Three

Midwest Airlines (AMEX: MEH) has received a $16.25 per share hostile takeover offer from rival AirTran Holdings (NYSE: AAI). The total deal would be worth around $445 million in cash and stock, and comes just days after AirTran had said that its best and final offer would be $15.75 per share in AirTran stock. Following that proclamation, Midwest had agreed to be taken private for $16 per share by TPG Capital, whose bid was being partially supported by Northwest Airlines.

Warburg Pincus has agreed to invest at least $245 million of private equity in Integra Telecom Inc., a Portland, Ore.-based CLEC. Proceeds will be paid to certain existing Integra investors in exchange for outstanding shares. No additional specifics were given, but Integra shareholders include Nautic Partners, BA Capital Investors, Boston Ventures and GE Equity. This deal is separate from Integra’s planned $566 million acquisition of Eschelon Telecom Inc. (Nasdaq: ESCH), which is backed by Bain Capital and Wind Point Partners. That deal is still expected to close on August 31, but its completion is not required for the Warburg infusion. Integra was advised by Deutsche Bank Securities, while Warburg Pincus was advised by Morgan Stanley.!

3Par Inc., a Fremont, Calif.-based provider of utility storage solutions, has filed for a $100 million IPO. It plans to trade on the Nasdaq or the NYSE, with Goldman Sachs and Credit Suisse serving as co-lead underwriters. 3Par has raised around $185 million in total VC funding since its 1999 inception, from firms like Mayfield fund (19.53% pre-IPO stake), Menlo Ventures (17.83%), Worldview Technology Partners (15.03%), Integral Capital Partners and Van Wagoner Capital Management.

VC Deals

Molecular Partners AG of Switzerland has raised CHF 18.5 million ($15.56m) in Series A funding. Index Ventures led the deal, and was joined by BB Biotech, Johnson & Johnson Development Corp. and Endeavor. The company developers repeat proteins designed to act as equivalent alternatives to antibodies, or as replacements if antibodies fail.

EKR Therapeutics Inc., a Cedar Knolls, N.J.-based drug company focused on therapeutics that enhance quality-of-life in acute care settings, has raised over $13 million in Series C funding. Quaker BioVentures led the deal, and was joined by the Garden State Life Sciences Venture fund, the Merrill Lynch Capital Healthcare Finance Group and return backers NewSpring Capital and ESP Equity Partners.

RipCode Inc., a Dallas-based developer of an appliance for transcoding digital video content, has raised $10.5 million in Series B funding. ATA Ventures led the deal, and was joined by return backers Hunt Ventures, Vesbridge Partners and El Dorado Ventures. RipCode had raised a $7 million Series A round in August 2006.

Sierra Surgical Technologies Inc., a Palo Alto, Calif.-based developer of female sterilization technology, has raised $7.1 million in Series A funding, according to a regulatory filing. Backers include Alta Partners and De Novo Ventures.

Rive Technology Inc. has raised around $3.15 million in additional Series A funding from Advanced Technology Ventures. The company had raised $5.22 million in initial Series A funding from Charles River Ventures and seed backers in June 2006. The Cambridge, Mass.-based company is commercializing zeolite catalyst technology for use in the petroleum refining, petrochemicals and other industries.

HerbalScience Nutraceuticals LLC, a Singapore-based developer of a botanical extraction technology, has raised an undisclosed amount of convertible preferred funding, from Aisling Capital and Weston Presidio. VentureWire reports that the deal was $28 million for a 25% stake. BMO Capital Markets served as placement agent.

SunEthanol, an Amherst, Mass.-based developer of cellulosic ethanol production technology, has raised an undisclosed amount of VC funding from VeraSun Energy Corp. (NYSE: VSE), Battery Ventures, Long River Ventures and AST Capital.

Verdant Power Inc., a New York-based hydropower company, is raising between $20 million and $30 million in Series B funding, according to VentureWire. Verdant is developing a hydropower plant on the East river, which will be used to power businesses on Roosevelt Island.

Buyout Deals

Home Depot Inc. will postpone closing a deal to sell its HD Supply division to a private-equity investment group. In an SEC filing, Home Depot said it will change the proposed closing date on the purchase agreement to Aug. 23 from Aug. 16. Home Depot is in the process of restructuring its agreement to sell its HD Supply business to Bain Capital, Carlyle Group, and Clayton, Dubilier & Rice for $10.3 billion. The deal was first announced in June.

Sallie Mae (NYSE: SLM) shareholders today will vote on a proposed $25 billion buyout. The equity sponsors are J.C. Flowers & Co., Friedman Fleischer & Lowe, J.P. Morgan Chase andBank of America. The private equity firms would own a combined 50.2% stake, while the banks would each invest $2.2 billion for a combined 49.8% stake.

Tricor Pacific Capital has acquired a 50% stake in Advance Engineered Products, a Canadian manufacturer of specialized truck tanks, trailers and vacuum truck systems. No financial terms were disclosed. RBC Capital Markets acted as financial advisor to Advance.

Cadbury Schweppes is more likely to spin off its drinks division as a separate unit, instead of selling it, according to The Times of London. The business is valued at around £8 billion, and had received interest from a pair of private equity consortia. One included Blackstone Group, KKR and Lion Capital, while the other included Bain Capital, TPG and Thomas H. Lee Partners. A sale was expected to net up to £7.5 billion.

Mirant Corp. (NYSE: MIR) has postponed its auction due to credit market troubles, according to The Financial Times. The Atlanta-based power company has a market capitalization of $9.85 billion, although it was over $10 billion when the auction began. JPMorgan is serving as Mirant’s financial advisor on the now-delayed sale.

PE-Backed IPOs

NitroSecurity Inc., a Portsmouth, N.H.-based provider of computer security hardware and software, has filed for an IPO. The company said that each unit will consist of one share of its common stock and one redeemable warrant to purchase one common share. It plans to trade on the Nasdaq, with Paulson Investment Co. serving as lead underwriter. NitroSecurity has raised over $13 million in VC funding from firms like Brookline Venture Partners and First Analysis Corp.

PE Exits

Emerson (NYSE: EMR) has acquired Decision Management International Inc., a Bradenton, Fla.-based provider of software and consulting for companies in FDA-regulated industries. No financial terms were disclosed. DMI has raised around $16 million in VC funding from BancBoston Ventures, Helpern Denny & Co. and MedEquity Investors.

PE-Backed M&A

Veritext Corp., a Florham Park, N.J.-based provider of court reporting services has acquired Knipes Cohen Associates Inc., a provider of court reporting services for the Philadelphia market. No financial terms were disclosed. Veritext was acquired in 2005 by The Riverside Co., and has since made seven add-on acquisitions.

Firms & Funds

Capital International is raising up to $2 billion for its fifth private equity fund, according to a regulatory filing. It already has secured more than $1.58 billion in capital commitments, with MVision serving as placement agent. The Los Angeles-based firm focuses on opportunities in the emerging markets.

Lexington Partners is prepping a pair of secondary funds, with a combined target of $6 billion, according to Private Equity Insider. The general secondaries fund would have a $5 billion target, while a dedicated mid-market secondaries fund would have a $1 billion target.

Oak Hill Capital Partners is planning to raise $4.5 billion for its third fund, according to LBO Wire. The general partner plans to contribute $500 million.

Human Resources

Beau Laskey has joined Steamboat Ventures as a Los Angeles-based managing director. He previously was a managing director with EDF Ventures, where his deals included Greenplum, RockeTalk, VoEx and Zyray Wireless.

Elvin Lopez has joined MetLife as a director of alternative investments. He previously ran private equity investments for the New Jersey State Treasury.

Dan Giampuzzi has joined Ventures West as an entrepreneur-in-residence, with a focus on the life sciences sector. He most recently served as president and CEO of Gemin X Biotechnologies Inc., an oncology drug company will offices in Philadelphia and Montreal.

Syncom Venture Partners has added three principals: Amiel Bent, former senior manager of strategic business analysis with MCI Telecom; Robert Greene, former president and CEO of the National Association of Investment Cos. (NAIC); and Stanley Smith, former director of corporate development for Yahoo’s search marketing group.

Garrett Ryan has joined CapitalSource as director for its syndication group. He will be based in Chicago, and previously spent nine years with ABN Amro.