PE Week Wire: Wednesday, December 10, 2008

Handul of items before I catch a plane to Dallas for Buyouts Texas:

*** We don’t talk much about limited partner compensation, perhaps because it’s so puny compared to general partner compensation. But that may change come spring, when public pensions and other institutional investors begin to cut bonus checks.

Here’s the pending scenario: The value of a state pension system’s private equity portfolio falls 10% in 2008, but the system is still obligated to pay bonuses to its private equity portfolio managers. Why? Because the 10% loss was better than the 15% benchmark loss, and most LP bonus triggers are relative.

Every institutional investor seems to structure its bonus requirements a bit differently, and some public systems still don’t pay them at all. CalPERS, for example, uses performance as just one metric for its senior professionals – with other items like successful portfolio restructuring also taken into account. Colorado PERA pays out based on trailing 10-year return benchmarks compiled by Thomson Reuters. Teacher Retirement System of Texas uses State Street benchmarks. Other systems use trailing multi-year vintages from Cambridge Associates, or break out benchmarks by sub-asset classes (venture capital, buyouts, mezzanine, etc.).

In general, however, performance benchmarks do not include minimum hurdles. So long as you beat the herd, you get paid.

This may sound like a completely reasonable structure, particularly given that it can cut the other way in boom-times. But that argument is sure to fall on a lot of deaf ears, when headlines read that public pension staffers are receiving monetary rewards for losing money. Ditto for PE portfolio managers at university endowments. It’s a PR nightmare in waiting.

The only upside for private equity portfolio managers is that the brunt of such outcry will be borne by public equities managers, because: (a) Public equity returns are compiled earlier, and (b) Public equity managers get paid more than PE managers and lost more cash in 2008. But that’s really just a case of procrastinated pain…

*** Leon Black told the NY Times this weekend that “private equity is dead,” and that Apollo Management has “totally turned into a bond house.” My gut take is that such pronouncements exude a predilection toward market-timing, which rarely works out well (see: Big LBO firms doing VC investing in 2000, or VC firms co-investing on big LBO deals in 2007). Sure Apollo once was known more for debt than equity, but that was a few market cycles ago. And it doesn’t help that Apollo made a bunch of lousy debt bets earlier this year.

Erin, however, is much more charitable toward the shift. Particularly when it comes to what LPs thought they were getting when they signed up for Apollo’s seventh fund. Read her post here.

*** Just asking: Does cleantech VC investing inhabit the worst risks of both healthcare and IT investing? It has the same high-capitalization costs of healthcare, but no guaranteed reimbursement if the product works. It has the same execution risks (including sales & marketing) of IT, but costs much more to reach revenue.

*** Global secondaries firm Coller Capital has released its latest Private Equity Barometer, which surveys 100 limited partners in private equity. Most respondants expect (or even raise!) their current allocations to private equity, although they also expect to bump up against those allocations much sooner than in years past. In other words, gone are the days of 10% target allocation and 5% exposure. You can download the report here.

*** Tomorrow I’ll be moderating both a limited partner panel and an energy investing panel. I’ve got a list of questions for both, but could always use more…

*** Speaking of tomorrow, Erin will be pinch-hitting on Wire duty. I’ll try to do some posting at peHUB, and will be back in the saddle on Friday.

Top Three

Starr International, a firm controlled by Hank Greenberg, has failed to win Chinese government approval to launch a one billion yuan private equity joint venture with CITIC Securities.

JasperSoft Corp., a San Francisco-based provider of commercial open-source reporting solutions, has raised $12.5 million in fifth-round funding. Adams Street Partners led the round, and was joined by Red Hat and return backers DCM, Morgenthaler, Partech International and Scale Venture Partners. The company has now raised over $46 million in total VC funding.

EZ Lube LLC, an operator of quick oil change facilities in California and Arizona, has filed for Chapter 11 bankruptcy protection. The company had been acquired in 2005 by Bruckmann, Rosser, Sherrill & Co., but said in court papers that it has agreed to sell most of its assets to existing lenders GSO Capital Partners and an affiliate of Goldman Sachs. EZ Lube has asked a bankruptcy court to name GSO and Goldman as a “stalking horse” bidder.

VC Deals

JiWire, a San Francisco-based WiFi advertising network, has raised around $11.1 million in Series B-1 funding, according to a regulatory filing. It also sold another $1.53 million of Series B warrants, which could be converted into around $3.88 million of preferred stock. Comcast Interactive Capital came aboard as a new investor, with CIC principal David Horowitz joining the JiWire board of directors. JiWire had previously raised around $11.5 million, from firms like Draper Fisher Jurvetson, DFJ Frontier, CNet and Panorama Capital.

Diagnoplex, a Swiss developer of molecular cancer diagnostics, has raised CHF 10 million ($8.3m) in Series A funding. Novartis Venture Fund and NeoMed co-led the round, and were joined by Initiative Capital Romandie.

Roost Inc., a San Francisco-based search engine for residential real estate, has raised $8 million in Series B funding. Shasta Ventures led the round, and was joined by return backers General Catalyst Partners, The Cross Country Group LLC and Geolo Capital.

Emotive Communications, a Los Angeles-based provider of smart media applications for mobile entertainment, has raised $6.25 million in second-round funding. Mayfield Fund led the round, and was joined by return backers D. E. Shaw Ventures and Bertelsmann Digital Media Investments.

Lucid Imagination Inc., a Newton Highland, Mass.-based provider of support and services for the open source Apache Lucene search library and Apache Solr search server, has called down $6 million of a $7.5 million Series A round, according to a regulatory filing. Backers include Granite Ventures and Walden International.

Generation Health Inc., an Upper Saddle River, N.J.-based startup focused on genetic testing benefit management, has raised nearly $5 million in Series A funding. Backers include Highland Capital Partners, Correlagen Diagnostics, D2Hawkeye and company management.

Embotics, an Ottawa-based provider of virtualization lifecycle management solutions, has raised C$4 million in Series B funding led by Covington Capital Corp.

Anvato Inc., a Mountain View, Calif.-based provider of a video identification and monetization service, has held a $2 million first close on its Series A round, which is targeting $4 million. Oxantium Ventures led the deal.

Saber Es Poder Inc., a Los Angeles-based provider of educational brochures and video programming, has called down $1 million of a $2 million Series A round led by New Cycle Capital, according to a regulatory filing.

DecisionView Inc., a San Francisco-based provider of business performance optimization applications for the life sciences market, has raised an undisclosed amount of Series D funding. Backers include Granite Ventures, Adobe Ventures and Aeris Capital. The company previously raised around $20 million since 2004. Past backers Partech International and FirstVentury were not mentioned in the press release.

PhoenixESG, a Somerset, N.J.-based provider of energy management, monitoring, control systems and services, has raised an undisclosed amount of funding from Momentum Venture Management of Los Angeles.

Buyout Deals

Apax Partners has received European Union approval for its pending acquisition of French information and technology consultant Altran Technologies.

Moody’s Investors Service has cut CCS Medical Inc.’s corporate family rating from Caa1 from B3. It also has downgraded the company’s first lien senior secured credit facilities to B2 from B1, but affirmed the Caa2 rating on the second lien term loan. CCS Medical is a Clearwater, Fla.-based portfolio company of Warburg Pincus.

PAI Partners is in talks to renegotiate loans for portfolio companies Monier and Kaufman & Broad, according to The Financial Times. The firm has hired Goldman Sachs to advise on Monier, and hired Rothschild to advise on Kaufman & Broad.

The Riverside Company is in talks to buy Sencore Inc., a Sioux Falls, S.D.-based electronics company, peHUB has learned.

Reliant Energy (NYSE: RRI) has paid a $35 million termination fee to First Reserve Corp., after recently canceling a sale of $350 million in convertible preferred stock to First Reserve.

PE Exits

Levine Leichtman Capital Partners has agreed to sell Hackney Ladish, a maker of steel pipe fittings used in the energy industry, to Precision Castparts Corp.

PE-Backed M&A

Health & Safety Institute, a portfolio company of The Riverside Co., has acquired JSL Communications LLC, a Bainbridge Island, Wash.-based provider of continuing education training materials for first responders and emergency medical services. No financial terms were disclosed.

NPC International Inc., a Lenexa, Kan.-based franchisee and operator of Pizza Hut franchises, has closed two transactions whereby its acquired 191 new units and sold 70 to Pizza Hut Inc. NPC was acquired in 2006 by Merrill Lynch Global Private Equity, and now operates 1,098 Pizza Hut restaurants and delivery/carryout units in 27 states.

UAL Corp. (Nasdaq: UAUA), the parent company of United Airlines, has raised $150 million in cash via a sale-leaseback of 15 Boeing 757 aircraft to East Shore Aircraft, a portfolio company of Wayzata Investment Partners.

Firms & Funds

AnaCap Financial Partners, a mid-market private equity firm focused on the European financial services sector, plans to close its second fund with €600 million in early 2009, according to LBO Wire.

Bain Capital Ventures has begun raising its fourth fund with a $500 million target and $750 million hard cap, according to VentureWire. A first close is expected early next year. The Boston-based firm closed its third fund in 2007 with $550 million.

GSR Ventures, a China-focused VC fund with offices in Beijing and Silicon Valley, has secured $365.25 million in capital commitments for its third fund, according to a regulatory filing. A firm spokeswoman declined to say if GSR has held a final close.

Rustic Canyon Partners has sold its position in nineteen portfolio companies to Saints Capital. It also has sold 20% of its stakes in another eight companies.

SAIF Partners, a Japanese private equity firm, has secured 1.6 billion yuan ($233m) for its first yuan-denominated private equity fund.

Human Resources

Kartik Raghavan and Sean Flynn have joined Shasta Ventures as an entrepreneur-in-resident and senior associate, respectively. Raghavan previously was a venture partner with Trilogy Equity Partners, before which he spent ten years with Microsoft. Flynn previously worked in various roles with Yahoo, including as senior director of business development and business operations for the company’s communication and community products.

TVM Capital has promoted Christoph Schröder and Hui Hsing Ma to general partner. Both joins the firm in 2004 as venture partners, and focus on life sciences opportunities.