PE Week Wire: Wed., March 12, 2008

Greetings from New York, where I flew yesterday for some meetings and a press dinner hosted by The Blackstone Group. One of said meetings (via phone) related to the pending Thomson-Reuters merger, which lots of you keep asking me about. All I can say at this point is that it should be a boon for both me and you, dear readers, in terms of both editorial and technological resources. But no specifics until the merger closes in late April, as all current discussions are essentially hypothetical.

The Blackstone press dinner is an annual event that Tony James brought over with him from Lehman Brothers, in which hacks like myself interact in an off-the-record environment with Blackstone bigs like James, Schwarzman, et all. Oh, and we all eat some very good food. I obviously can’t discuss the contents of what was said, but do want to express that it’s a very savvy move on Blackstone’s part.

Blackstone – particularly now that it’s public – has taken a lot of media darts over the past year, and likely feels that it’s not often given the benefit of the doubt. Last night’s dinner was essentially a preemptive strike the negativity of future coverage, by attempting to engender goodwill among a wide swath of reporters. No, not because of the free meal (we’re not that easy), but because it gives us what we really want: Access. Or at least a one-night illusion of access…

This doesn’t mean that all — or even most — future coverage will be positive, but it helps give Blackstone a better shot than it had yesterday at 5pm. That, in itself, validates the effort.

*** For years, certain limited partners have employed the barbell strategy, whereby they invest in small-cap and mega-cap buyout funds, but mostly ignore everything in between. The rationale has been threefold: First small-cap and mega-cap funds were considered the most likely to produce outsized returns, based on past performance data. Second, the middle-markets were saturated, which made it particularly difficult to pick winners. Third, that saturation resulted in purchase price inflation, as fewer and fewer firms had access to proprietary dealflow.

In today’s changed economy, however, many LPs are questioning the wisdom of a barbell strategy. Or, as one family office manager said to me the other day: “Those guys tried to be too cute by half… they’re going to lose their shirts.”

The barbell critique argues that middle-market funds are actually safer than small-cap or mega-cap funds, while acknowledging that all types of buyout firms overpaid during 2006 and early 2007. For example, today’s mega-funds are having a very difficult time securing leverage for new deals, which means that LPs will spend the next 12 months paying management fees on massive amounts of uncalled capital. On the small-cap side, critics suggest that these funds are particularly vulnerable to a recession, because their companies have the least margin for error. Middle-market funds, on the other hand, thread the needle – with less required leverage for new deals and more economic cushion for existing investments.

I floated this criticism by Erik Hirsch, chief investment officer for Hamilton Lane Advisors, a fund-of-funds and consultant that has championed the barbell strategy. He acknowledged having heard it before, but still doesn’t buy it.

“Most middle-market firms, and particularly the upper middle-market ones, were using similar debt ratios to the mega-funds, but weren’t getting the same terms, like covenant-light,” Hirsch argues. “What that means is that the lenders are more likely to come knocking on the doors of middle-market companies… I do put some stock in what is said about the small-market firms having a smaller margin for error, but you also have to realize that they rarely use leverage, so they’re the ones whose new deal business hasn’t been interrupted very much.”

As for me, I find merit in both arguments. So I need some tie-breaker ideas. For example, is it possible that middle-market saturation will actually work in its favor over the next years, as such firms will have a greater population of exit partners (via secondary buyouts)? I’ll keep pondering, and return to this topic soon. Let me know your thoughts

*** Denise Palmieri on job references: How to pick them, check them and give them.

*** Attorneys Ian Palm and Patrick McCoy on how Canada is trying to solve its cross-border exit issues.

*** I’ve posted the final video from Buyouts East: A panel discussion of spinout firms and fundless sponsors. Get them all in the video section.

*** peHUB First Read, including how the credit crunch could be impacting VC-backed starrtups.

Top Three

Google (GOOG) has completed its acquisition of online marketing company DoubleClick Inc. from Hellman & Friedman and JMI Equity for $3.1 billion in cash. H&F led a $1.1 billion buyout of DoubleClick in 2005, with JMI Equity participating as a minority investor.

Searchme, a new search engine that offers more dynamic results than just links, has raised $15 million in fourth-round funding. Lehman Brothers led the round, and was joined by return backers Sequoia Capital and DAG Ventures. It has now raised $31 million in total, with other shareholders including actor Will Ferrell. Searchme has been incubating at Sequoia for around three years, and is run by former AuctionDrop CEO Randy Adams. The company is currently in private beta.

Highland Consumer Fund, a growth equity fund affiliated with VC firm Highland Capital Partners, has acquired athletic retailer City Sports. No financial terms were disclosed for the deal, which also includes a growth equity investment.

VC Deals

LifeMasters Supported SelfCare Inc., an Irvine, Calif.-based provider of health improvement programs and services, has raised $15 million in new VC funding. Return backers include VantagePoint Venture Partners Saints Capital and Opus Capital. The company had previously raised $44 million since 1996.

Layered Technologies Inc., a Plano, Texas-based company that helps clients deploy on-demand hosting and utility computing solutions, has raised $11 million in new VC funding. Enhanced Equity Fund led the round, and was joined by return backer Pangloss International.

Click Forensics Inc., an Austin, Texas-based provider of click-fraud reporting for online advertisers, has raised $10 million in Series B funding. Sierra Ventures led the round, and was joined by return backers Austin Ventures and Shasta Ventures. The company had raised a $5 million Series a round in early 2007.

Pando Networks Inc., a New York-based provider of P2P file-sharing software, has secured $8.12 million of a $20.89 million Series B round, according to a regulatory filing.

TargetSpot Inc., a New York-based provider of advertising solutions for streaming audio, has raised $8.6 million in Series B funding. Bain Capital Ventures led the round, and was joined by return backers Union Square Ventures, CBS Corp. and Milestone Venture Partners.

Invoke Solutions, a Waltham, Mass.-based provider of real-time online and mobile research services, has raised $7 million. North Atlantic Capital led the round, and was joined by return backers Bain Capital Ventures and BEV Capital. Existing shareholder BRM Capital was not listed in the press release. Invoke has now raised over $38 million in total VC funding since 1999.

Pixim Inc., a Mountain View, Calif.-based developer of digital imaging systems for the security camera market, has raised $6.6 million in additional Series B-1 funding, according to an ammended regulatory filing. The round originally closed with $15 million one year ago, and later added an undisclosed amount of capital from In-Q-Tel. Other backers include Mayfield Fund, Ridgewood Capital and Tallwood Venture Capital.

OnCorp Direct Inc., a Canadian provider of online search and registration services to the legal, financial and business markets, has raised C$6.8 million from Vengrowth Private Equity Partners.

Mochi Media Inc., a San Francisco-based provider of advertising solutions within Flash games, has raised $4 million in Series A funding from Accel Partners, according to VentureWire.

Xirrus Inc., a Westlake Village, Calif.-based provider of WiFi solutions for the enterprise, has raised $26 million in Series C funding. peHUB had reported on the round last month, based on a regulatory filing. Canaan Partners led the round, and was joined by return backers August Capital, QuestMark Partners, U.S. Venture Partners and company CEO Dirk Gates.

TPG Biotech has entered into an agreement with Japan-based JCR Pharmaceuticals Co., to fund late-stage clinical development of two JCR drug candidates. No financial terms were disclosed.

Buyout Deals

TPG Capital and Sumitomo Heavy Industries have increased their unsolicited offer for Axcelis Technologies Inc. (ACLS) from $5.20 per share to $6 per share, after having their initial bid rejected. The revised offer increases the overall deal value from $544 million to $630 million. Axcelis makes ion implantation devices for chip makers.

KKR has completed its take-private buyout of UK-based specialist software company Northgate Information Solutions. The deal valued Northgate at around $2.2 billion.

Marlin Equity Partners of Los Angeles has closed on its acquisition of Courage Inc., a Las Vegas-based designer and marketer of unique novelty, gift and collectible pens. Couragewill be integrated with Ultra*Pro, a current Marlin portfolio company.

Azure Capital Partners and Bridgescale Partners have acquired NeoNova Network Services from Digitel Inc. No financial terms were disclosed for the deal, which also included participation from Hercules Technology Growth Capital. NeoNova is an Internet service provider for the rural U.S. market.

The European Commission has approved KESA Electric PLC’s proposed Gbp550 million sale of BUT to Colony Capital, Goldman Sachs and Merchant Equity Partners. BUT is a French retailer of electric fixtures and appliances.

PE-Backed M&A

Ping Identity Corp., a Denver–based provider of Internet identity technology for enabling secure business collaboration, has acquired on-demand identity management company Sxip Access. No financial terms were disclosed. Ping Identity has raised around $30 million in total VC funding, from firms like Appian Ventures, Draper Fisher Jurvetson, General Catalyst Partners, Fidelity Ventures, SAP Ventures and I-Vent.

Firms & Funds

The Pennsylvania State Employees’ Retirement Board today will discuss recommendations for follow-on commitments. The recommended funds are: ABS Capital Partners VI, Lime Rock Partners V, Madison Dearborn Capital Partners VI and Versa Capital Partners II.

Human Resources

Brendan Dyson has joined Lazard as a managing director in the firm’s corporate finance advisory group. He previously was with Piper Jaffray as a managing director and head of convertible securities.

Daniel Leff has joined Globespan Capital Partners as a venture partner, with a focus on cleantech opportunities. Last fall he left Harris & Harris Group, where he had been a managing director and executive vice president.

Greg Foster has joined venture capital firm Noro-Moseley Partners, with a focus on digital media opportunities. He previously was a vice president of corporate development with Turner Broadcasting.

Stephen Schwarzman, head of The Blackstone Group, has agreed to donate $100 million to the New York Public Library. It will be used to help transform the Central Library on 5th Ave. into a research and book-borrowing destination.