PE Week Wire: Wed., Sept. 5, 2007

House Democrats think they have found a stateside version of Nick Ferguson, the SVG Capital chairman who famously broke ranks by saying that he unfairly paid a lower tax rate than the woman who cleans his office. Their “star” may play well for the cameras and mainstream media, but he doesn’t have much wattage within private equity circles.

It’s Leo Hindery, the former AT&T Broadband CEO who now runs a media-focused private equity firm called InterMedia Advisors. I’ve learned that Hindery will be among those who testify during this Thursday’s Ways & Means Committee hearing on carried interest tax policy. He presaged his testimony with arecent column, where he wrote the following:

“I know firsthand that carried interest is nothing more than a form of performance fee and that a manager receiving carried interest can only gain and never lose, which of course flies in the face of the manager then receiving capital gains tax treatment. And to argue that the fiduciary investors whose capital is being managed care a whit about this issue is misleading and, frankly, dead wrong — in fact, every fiduciary investor I know would be thrilled to see fairer taxation of investment manager income, which ordinary income taxation would ensure.”

But Hindery is a newcomer to private equity, having only formed his firm back in 2005. Its debut fund had a $1 billion target, with $670 million committed as of a May 2007 regulatory filing. It’s done a few deals, but is still in its infancy. His only other semi-private equity experience was as president of N.Y. Yankees broadcaster The YES Network, which was backed by Goldman Sachs and Providence Equity Partners. The rest of his resume is as an operator rather than an investor – save for his generous donations and fundraising efforts for various Democratic candidates.

No aspersions on the man or his accomplishments – but he just doesn’t match up to Nick Ferguson as a private equity spokesman. Ditto for his comparison with Bruce Rosenblum, the Carlyle Group managing director who will testify against a change to tax treatment, on behalf of the Private Equity Council. Rosenblum has been a private equity pro for 13 years with major deals under his belt, including PanAmSat and Dex Media. He also spent the prior 18 years as a corporate M&A attorney. The Dems just have to do better.

peHUB has obtained a tentative witness list for the hearing, which has not yet been publicly disclosed. You can find it here.

*** It also seems that Dems are about to have the race/gender card played against their efforts to change carried interest tax treatment. Something called the Access to Capital Coalition announced its formation today, in order to argue that taxing carried interest as ordinary income “would introduce additional challenges for minority- and women- owned investment businesses in gaining and maintaining access to capital.”

The group’s members include a variety of trade associates, Robert Johnson of RJL Cos., Willie Woods of ICV Capital Partners, Louis Nogales of Nogales Investors and basketball legend-turned-movie theater mogul Magic Johnson.

They should be ashamed of themselves for injecting race and gender into this conversation. There are plenty of reasons to be against the tax change – and better reasons to support it, in my estimation – but this isn’t one of them.

I spoke to Willie Woods this morning, to understand how a color-blind tax change would disproportionately affect minority-and-women-owned businesses. He said that it would affect all small-and-mid-sized businesses equally, but that more minority-and-woman-owned businesses happen to be small and mid-sized. He said the figure was 99 percent. Even if true, there are two big problems with his argument:

Not nearly all of those 99% are private equity-backed, or even want to be private equity-backed. The majority of small businesses are backed by bank loans or other forms of financing that never involve carried interest. It’s a partial red herring.

There is still no evidence that a change to carried interest tax treatment would significantly reduce the amount of available capital to entrepreneurs. I asked Woods about this, and he said it would come down to a labor issue. In other words, fewer people would go into VC/PE (Woods is a former I-banker who said he shifted jobs for the better tax treatment). What he couldn’t answer, however, was how VC/PE did just fine during the Clinton years, under a much higher capital gains tax rate. The industry hardly had a personnel shortage. Again, red herring.

I wish opponents of the tax change would just be honest: You don’t want to make less money. It may not be the most politically-astute argument, but it’s at least legitimate. The rest is just for show…

*** Unrelated #1: I posted some new fund-level performance data, courtesy of UTIMCO.

*** Unrelated #2: I’m in NYC for my anniversary this weekend, and have a totally inappropriate request: Anyone got a pair of decent Jets tix they’re willing to sell? If so, please let me know. Gonna be a surprise for J, who somehow has become a football fan (now I’ve got to take her name off this distribution list)…

Top Three

Yahoo Inc. (Nasdaq: YHOO) has agreed to acquire San Jose, Calif.-based online ad network BlueLithium Inc. for approximately $300 million in cash. According to ComScore, BlueLithium is the fifth-largest ad network in the US and second-largest in the UK, with 145 million unique visitors each month. The company raised an $11.5 million VC round in 2005 from 3i Group and Walden Venture Capital. Get the full story here

Hyperion Therapeutics Inc., a San Francisco-based drug company focused on gastroenterology and hepatology, has raised $40 million in second-round funding. Sofinnova Ventures led the deal, and was joined by return backers Highland Capital Partners, New Enterprise Associates and WRF Capital. The company raised a $2 million seed round late last year.

General Atlantic has made a pair of senior hires in Asia. First, Jeff Leng has joined as a managing director in the firm’s Hong Kong office. Leng had been a managing director with Warburg Pincus since 1999. Also, Ranjit Pandit has joined General Atlantic as a managing director in the firm’s Mumbai office. He previously was chairman of McKinsey & Co. India.

VC Deals

Atempo Inc., a Palo Alto, Calif.-based provider of cross-platform data protection and archiving solutions, has raised $22 million in Series B funding. Intel Capital led the round, and was joined by fellow new backers Steelpoint Capital Partners and Ridgewood Capital. No word on if existing shareholder Vision Capital also participated. GrowthPoint Technology Partners advised Atempto on the transaction.

NeWorld Education Group, a Chinese language institute specializing in Japanese, has raised $20 million from Carlyle Asia Growth Partners.

UltraShape Inc., an Israel–based provider of non-invasive body contouring, has raised $15.1 million. Meritech Capital Partners led the deal, and was joined by return backers Israel Seed Partners and Polaris Venture Partners. UltraShape previously had raised $21 million.

Quattro Wireless, a Waltham, Mass.-based developer of mobile web network infrastructure, has raised $12.3 million in Series B funding. Globespan Capital Partners led the deal, and was joined by return backer Highland Capital Partners. Quattro has now raised a total of $18 million.

PowerID Ltd., a Tel Aviv, Israel-based provider of battery-assisted passive RFID technology,has raised $12 million in Series B funding.Partech International led the round, which included existing shareholders Amadeus Capital Partners, Apax Partners, Clal Industries and Investments and Infinity Venture Capital. This is PowerID’s first fund-raising as an independent company following its spin-out from thin-battery company PowerPaper earlier this year.

Trophos SA, a Marseille, France-based drug company focused on neurological disorders, has raised €8.5 million ($11.6m) in Series C funding. OTC Asset Management led the round, and was joined by CM-CIC Capital Prive and return backers SGAM, Viveris Management, Turenne Capital Partners, Blue Medical and the Association Française contre les Myopathies.

Destinator Technologies Inc., a Toronto-based maker of navigation software, has raised US$7.5 million in new private funding. Backers include VentureLink and Pac-Link Ventures.

NetBooks Inc., a Rohnert Park, Calif.-based provider of small business management software, has raised $6.9 million in Series A funding. Backers included CMEA Ventures, Integral Capital and individual angels. The company also secured a $2 million line of credit from Square 1 Bank. NetBooks uses an SaaS delivery model, and was founded by Ridgely Evers.

Buyout Deals

Ethos Private Equity has agreed to acquire listed South African gaming company Gold Reef Resorts Ltd., for an enterprise value of approximately $1.57 billion. The buying consortium also includes Goldman Sachs, Gold Reef management and certain current Gold Reef shareholders.

CM Equity Partners has sponsored a recapitalization of Preferred Systems Solutions Inc., a McLean, Va.-based provider of IT services, engineering and program management to various agencies of the U.S. federal government. No financial terms were disclosed. Company founder Rob Hisel will continue as chairman, while PSS advisor Scott Goss will take over as CEO.

Compass Diversified Trust has acquired American Furniture Manufacturing Inc., an Ecru, Miss.-based maker of upholstered home furnishings, for $92.5 million. Sellers include Hampshire Equity Partners, Hunt Private Equity and Pittco Capital Partners.

Corridor Capital has sponsored a majority recapitalization of Control Devices Inc., a St. Louis-based valve manufacturer. No financial terms were disclosed. Cascadia Capital advised Control Devices on the transaction, which closed in June.

TA Associates has acquired a minority stake in Arnhold and S. Bleichroeder Advisers LLC, a New York–based mutual fund and investment advisory firm. No financial terms were disclosed for the deal, which will enable ASB to provide equity incentives for its key investment and operational personnel.

Technology Crossover Ventures is nearing agreement to acquire a large minority stage in electronic trading platform TradingScreen, according to LBO Wire. No financial terms were disclosed for the deal, which would provide partial liquidity for existing TradingScreen shareholders.

PE Exits

LSI Corp. (NYSE: LSI) has agreed to acquire Tarari Inc., a San Diego–based maker of silicon and software that provides content and application awareness in packet and message processing. The deal is valued at $85 million in cash, and is expected to close later this quarter. Tarari had raised around $53 million in VC funding since 2002, from firms like Crosspoint Venture Partners, Enterprise Partners Venture Capital, Intel Capital, Morgan Stanley Venture Partners, XML Fund and Miramar Venture Partners.

Metalmark Capital has agreed to sell Denver-based Cantera Natural Gas LLC to Copano Energy LLC (Nasdaq: CPNO) for approximately $675 million. The deal includes $562.5 million in cash, and around 3.25 million newly-issues Class D shares.

Hexagon AB has agreed to acquire CogniTens Ltd., an Israel-based provider of 3D non-contact measurement technologies. No financial terms were disclosed. CogniTens has raised around $16.7 million in total VC funding since 2000, from firms like Yozma Venture Capital, Pitango Venture Capital, Walden Israel, Infinity Venture Capital, Docor International, Vertex Management Israel and Clal Venture Capital. It expects 2007 sales of around $8 million.

Firms & Funds

Climate Change Capital has raised €200 million for a new private equity fund that will focus on clean-tech opportunities in Europe. Limited partners include AlpInvest, Robeco, HSBC, USS, Alliance Trust, Bankinter, Woelbern Group and Harcourt. The fund will focus on expansion-stage, later-stage and buyout opportunities, in areas like clean power, clean transportation, energy efficiency, waste recovery and water.

Glenmont Partners is raising up to $50 million for a fund that will back early-stage companies in upstate New York, according to a regulatory filing. The Albany, N.Y.-based firm also will make opportunistic investments in New Jersey, Connecticut, Massachusetts and eastern Pennsylvania.

Noble Fund Managers has held an £87 million first close for its second venture debt fund, which is being targeted at £100 million.

Partners Group has opened an office in Tokyo, Japan. It will be headed by Junichiro Kawamura, a new senior vice president who previously was with Mizuho Group. This is the second Asian office for Switzerland-based Partners Group. The other is in Singapore.

Human Resources

Fred Watt has joined CVC Capital Partners as chief operating officer. He served as CFO of Royal Bank of Scotland between September 2000 and February 2006.

Rudy Scarpa has joined Pantheon Ventures as a New York-based partner focused on secondary investments. He previously was with Coller Capital.

Grotech Capital announced that Don Rainey has joined the firm as a general partner. PE Week Wire first reported the news last week. Rainey previously was with Intersouth Partners.

Craig Hanson has joined FTVentures as a vice president, with a focus on software opportunities. He previously was a principal with Vista Ventures.

Raymond Edgar and Thomas Verhagen have joined Natural Gas Partners as principals. Edgar previously was a managing director for GE Energy Financial Services, where he most recently was head of underwriting for the group’s oil and gas equity investment business. Verhagen spent the past 11 years with Oceaneering International Inc., most recently as a director of commercial operations of the company’s Western Region. In other NGP personnel news, the firm has promoted Christopher Ray from principal to managing director. He joined the firm in 2003, and currently serves as its general counsel.

Terry Tamminen and Bonnie Reiss have joined private equity firm Pegasus Capital Advisors as operating advisors. Tamminen is the former Secretary of the California EPA, while Reiss served as senior advisor to Calif. Governor Schwarzenegger during his first term.

Code Hennessey & Simmons has promoted Marcus George and Ed Lhee to partner, and Kirsta Hatcher, Robert Hogan and Doug Knoch to principal.

Proskauer Rose has added a new group of attorneys to its private funds practice in Paris. It is led by SGDM founder Daniel Schmidt and his longtime partner Olivier Dumas. Others joining include Mireille Mull-Jochem, Arielle Halimi, and Estelle Piazza.

Karen Dreyfus has joined law firm Wilson Sonsini Goodrich & Rosati as a partner in the firm’s corporate and securities practice. She previously was with O’Melveny & Myers, where she was a founding partner of the firm’s Menlo Park, Calif. office.

Bassam Yammine has agreed to join Credit Suisse as head of I-banking and asset management for the MENA region. He also will serve as a managing director and co-CEO of the Middle East.

Michael Hurt has joined the strategic advisory board of Genstar Capital. He is CEO of Altra Industrial Motion (Nasdaq: AIMC), a former Genstar portfolio company.