PE Week Wire: Wednesday, December 17, 2008

Last week I had drinks with a childhood friend, who asked if the firms I cover were going out of business. He had heard about Wall Street banks, of course, and also about hedge funds getting redeemed to death. My response was that it’s very hard to kill a private equity fund, due to their long-term and illiquid nature. So long as the firm’s partners have the fortitude and desire to keep on trucking, I said, chances are that they will be able to do so.

Maybe it was the alcohol, but there was a caveat I forgot to add: The only exception is exceptional Not even the most favorable of fund structures can save you from stupid.

Case in point is HRJ Capital, the San Francisco-based fund-of-funds manager formed in 1999 by a pair of retired NFL stars.

According to an 8-K filed yesterday by Silicon Valley Bank, HRJ is unable to pay back a $68.9 million warehouse loan, and now is negotiating a settlement that could include SVB taking over management of HRJ’s funds (with SVB possibly hiring certain HRJ professionals). If that were to happen, SVB would use related management fees and other income streams to retire the debt. It also would effectively mean the end of HRJ, because the aforementioned negotiations look an awful lot like foreclosure.

In an email sent to clients, SVB said:

“HRJ has been a client of Silicon Valley Bank for over 9 years and SVB has a strong relationship with them. Since its inception in 1999, HRJ has had consistently strong investment performance. While potential arrangements are being explored, there will be minimal impact on our investment managers and, if a definitive agreement is reached, we anticipate it to include arrangements that will result in a stronger and deeper SVB Capital team.

The SVB Capital team is committed to keeping you up to date on our activities and investments while bringing you the insights of the entire SVB platform. Unless and until a definitive agreement is reached, we and HRJ will remain separate entities and we will continue to run our organization as we have done in the past.”

The original warehouse loan was a bridge that allowed HRJ to make investments before it had actually raised enough of its own fund capital. HRJ put up certain assets of its management company as collateral, including various revenue streams.

HRJ invests in buyout, distressed and venture capital funds, but sources say that most of the “uncommitted commitments” in question came out of the buyout bucket. Specifically, HRJ last year began raising a new buyout fund-of-funds with a $250 million target, but was only able to get about halfway there. At the same time, however, it committed nearly the entire target — leaving it between $120 million and $140 million short.

“The strategy from the beginning of fund-raising was to make commitments ahead of securing investor capital, in order to give LPs more transparency into the portfolio,” says a source close to HRJ. “It’s what the firm has traditionally done, but fund-raising slowed down and then came to a halt… which no one had expected.”

Yes, that’s just as dumb as it sounds. Even if you accept that HRJ didn’t “expect” fundraising to fail, was it unable to even conceive of the possibility? Or just unwilling? By last August, it was clear that markets had sea shifted – including private equity fund-raising markets. Moreover, it was clear that a large percentage of 2007-vintage buyout funds were underwater, which means that HRJ’s capital gap was being exacerbated. And whatever happened to vintage-year diversification?

I’ve heard of funds-of-funds making pre-commitments, but almost all such examples have been for corporate investment arms that had in-house institutional backing. Or perhaps soft commitments, with hard commitments only coming once the fund-of-funds has its own capital in hand. If HRJ’s limited partners required transparency, they should have been investing in secondary funds.

We’ve also has learned that HRJ has initiated talks with secondaries firms about buying part, or all, of its existing portfolio. Under such a scenario, the secondary firm would pay HRJ a discounted price for its existing portfolios, and HRJ would use the money to pay back SVB. It is unclear, however, if any secondaries firm would be willing to step up without first having its own agreement in place with SVB. It’s also unclear why HRJ waited so long to begin such talks, given that the writing has been on the wall for quite some time.

“They just kept driving toward the cliff, hoping that someone would build a bridge,” says a source familiar with the situation. “It was incredibly risky, and now they’re paying for it.”

An SVB spokeswoman declined to comment on if her firm was involved in the talks with secondary firms. HRJ also declined official comment.

HRJ was formed in 1999 by former San Francisco 49ers stars Harris Barton and Ronnie Lott, with Joe Montana joining the following year. It was originally called Champion Ventures, and invested professional athletes’ money in venture capital funds like Accel Partners, Benchmark Capital, Kleiner Perkins Caufield & Byers, Mayfield Fund, MDV, Sequoia Capital, Summit Partners, Redpoint Ventures and Technology Crossover Ventures. Montana left back in 2006, by which point the since-rechristened HRJ Capital had broadened both its investo! r base and investment strategy. At around the same time, it hired Duran Curis (ex-LGT Capital) to run its buyout practice.

Curis has a good reputation, which makes it even more vexing that he got caught up in this sort of thing. Same for Barton.

We’ve posted the 8-K filing, which includes a lengthy Q&A section. Its very existence shows just how seriously SVB takes this situation. Now, it seems, so does HRJ.

Top Three, a Santa Clara, Calif.-based online marketplace for textbook rentals, has raised $25 million in Series C funding. Kleiner Perkins Caufield & Byers and Foundation Capital were joined by return backers Gabriel Venture Partners and Primera Capital.

Teachers’ Private Capital has completed its acquisition of Aquilex Holdings LLC from Harvest Partners. No financial terms were disclosed. Aquilex is a Norcross, Ga.-based energy service provider specializing in refining, nuclear and fossil power generation and waste to energy. It was acquired by Harvest Partners in 2007 from First Reserve Corp. Harris Williams & Co. advised Aquilex on both transactions.

Jonathan Mandel is leaving Morgan Stanley, where he had been head of Asia-Pacific private equity banking. He reportedly was let go as part of the round of layoffs announced by the firm last month.

VC Deals

Patersons HR and Payroll Solutions, a Salisbury, UK-based provider of HR and payroll software and services, has raised $30 million in Series A funding led by Rho Ventures. The company was founded in 1996, and had previously been funded by a group of individual angels.

Pioneer Surgical Technology Inc., a Marquette, Mich.-based spinal and orthopedic implants and instruments, has raised $15 million in Series B funding. InvestMichigan Growth Capital Fund was joined by return backers Pharos Capital Group, Highlander Partners, Hopewell Ventures and River Cities Capital Funds., a Dover, N.H.-based online secondary marketplace for timeshares, has raised $8.5 million in VC funding from Edison Venture Fund.

Rebit Inc., a Longmont, Colo.-based provider of PC backup solutions, has raised $5.7 million in Series B funding. Backers include Access Venture Partners, Grotech Ventures, and Highway 12 Ventures.

Overlay.TV, an Ottawa, Ontario-based interactive video platform, has raised C$4.6 million in second-round funding. Return backers include Celtic House Venture Partners, Tech Capital Partners and EdgeStone Capital Partners.

JackBe Corp., a Chevy Chase, Md.-based provider of enterprise mashup software, has raised $5 million in fourth-round funding. Return backers include Harbert Venture Partners, Core Capital Partners, Blue Chip Venture Company, Intel Capital and Darby Technology Ventures.

Rcadia Medical Imaging Ltd., an Israel-based provider of software for the automated analysis of coronary CT angiography, has raised $3.3 million in venture capital funding. BioVentures Investors led the round, and was joined by return backer 20/20 HealthCare Partners.

Rx Networks Inc., a Vancouver-based provider of mobile positioning technology, has held a C$1.85 million first close on a VC round expected to close on a total of C$3 million in March 2009. Return backers include British Columbia Discovery Fund (VCC) Inc., Audiovox Canada and TELUS.

Tagged Inc., a San Francisco-based social discovery site, has raised $5 million in venture debt co-led by Horizon Technology Finance and Leader Ventures. The company had previously raised venture capital from Mayfield Fund.

Buyout Deals

CGS Management, a Swiss private equity firm, has acquired Mould Technologies Holding, a Chinese mould maker. The deal was done as an add-on acquisition for MTH Group.

ECI Partners has agreed to sponsor a £32.9 million management buyout of Ascribe. A listed UK-based provider of healthcare IT solutions.

GIMV has sold its majority stake in Belgian food ingredients company Sfinc to Axa Private Equity, for an undisclosed amount.

PE Exits

PLX Technology Inc. (Nasdaq: PLXT) has agreed to acquire Oxford Semiconductor Inc., a Milpitas, Calif.-based provider of switch and bridge silicon. The deal is valued at nearly $30 million in PLX stock and promissory notes. Oxford Semiconductor has raised over $33 million in VC funding from firms like VantagePoint Venture Partners.

PE-Backed M&A

Overture Networks Inc., a Morrisville, N.C.-based maker of high-speed networking equipment, has acquired Ceterus Networks, a Richardson, Texas-based provider of metro Ethernet transport solutions. No financial terms were disclosed. Overture has raised around $45 million in VC funding, from firms like Lehman Brothers Venture Partners and Intersouth Partners. Ceterus had raised over $63 million from firms like Intel Capital, Aldus Equity, Sevin Rosen Funds and Velocity Interacti! ve Group (fka ComVentures).

Firms & Funds

3i Group has decided to close its offices in Hong Kong and Shanghai, with amenable deal-makers to be relocated to Beijing.

DMC Capital Funding has launched to offer growth capital to companies with between $20 million and $200 million in annual revenue.

Human Resources

John Knutsen has joined Madison Dearborn Partners as head of investor relations, according to LBO Wire. He previously was with Credit Suisse. Also moving over from Credit Suisse is David Pequet, who will serve as a vice president.

Bob Grady of The Carlyle Group is a leading candidate to become CEO of CalPERS, according to The Wall Street Journal.

Paul LaViolette has joined SV Life Sciences as a venture partner, according to VentureWire. He is the former chief operating officer of Boston Scientific. The report also says that SV Life Sciences will begin raising a new fund early next year.

Thomas Harney has joined Tri-Artisan Partners as a managing director and head of real estate. He previously was a senior managing director with Bear Stearns.

Greg Richey has joined Chrysalis Ventures as chief operating officer. He previously was COO and CFO of Butler, Shine, Stern & Partners.