PE Week Wire: Wednesday, December 31, 2008

Welcome to the final PE Week Wire of 2008, a year that future historians may primary refer to as the 12-month period of instability that helped set the stage of 2009. Or perhaps as the period in which fiscal visionary Hank Paulson was able to successfully remake American capitalism. Either way, Paulson may get his mug on some U.S. currency – replacing Hamilton on the $10 note in the latter scenario, or being plastered on inflation-required $200 bills in the former. Anyway, a few items:

*** Private equity in 2008 was a shrinking slice of a shrinking M&A pie, according to preliminary data from Thomson Reuters (publisher of peHUB).

Private equity firms have sponsored approximately $233 billion worth of deals so far this year, which represents nearly a 70% decrease in volume from last year’s $765 billion tally. It’s also the lowest annual total since 2003, when just $140 billion worth of PE-sponsored deals were transacted.

For contrast, the global M&A market has “only” shrunk by a 29.8% rate between 2007 and 2008 — meaning the private equity’s piece of the action has dropped from around 18.35% to around 8 percent.

It’s important to note that deal volume is not necessarily indicative of a market’s health or infirmity, as a goodly portion of last year’s $765 billion was spent foolishly. But still, it’s striking how much faster private equity has descended than it ascended — and its decreased percentage of global M&A certainly reflects some significant loss of influence.

*** I read a bunch of books while in Costa Rica, but the one that will stay with me was The Forever War by Dexter Filkins. It’s a non-political view/memoir of the Iraq and Afghanistan wars, from a reporter who spent years in both theaters. Takes a few pages to engage, but then can’t be put down. One of the most insightful, courageous and self-aware pieces of journalism I’ve ever read.

*** Let me add my voice to the chorus of kudos for TPG Capital, which recently agreed to reduce the management fees on its new fund, and to let limited partners out of up to 10% of their capital commitments. Some critics have written that TPG should have cut deeper, but that’s being fairly picky.

I’ve been asking LPs about TPG’s fund size for months, and not one had expressed a belief that it would be reduced. It’s one thing to cut a fund target due to a difficult fundraising environment, they said, but that same environment makes dry powder doubly-valuable. No way it voluntarily gives any up. They were all wrong.

The question now is if those mistaken LPs will use TPG’s move as leverage against other mega-buyout funds with significant reserves, much like they did with bloated VC funds several years ago.

*** Quiz Time: Cash4Gold, a company whose name really says it all, has quietly raised venture capital funding. Do you know from whom?

*** Publishing Note: No PE Week Wire tomorrow, due to the New Year’s holiday. But we’ll be back on Friday, and then really at full-speed next week. Have a great eve…

Top Three

Irving Place Capital Management and Oaktree Capital Management have agreed to acquire Chesapeake Corp., a Richmond, Va.-based maker of paperboard and plastic packaging. The deal is valued at $485 million, and is being facilitated by Chesapeake’s recent filing for Chapter 11 bankruptcy protection.

KKR Financial Holdings LLC (NYSE: KFN) said that it has received a listing standards notice from the New York Stock Exchange, for having fallen below the Exchange’s continued listing standard. KKR Financial said it would work to rectify the deficiency, and that it has a six-month grace period in which to do so.

Matt Blunt, the outgoing Governor of Missouri, has agreed to join Solamere Capital as a senior advisor. Solamere is a Boston-based buyout firm looking to raise $200 million for its debut fund. Its founding partners include Tagg Romney, Spencer Zwick, John Miller and Eric Scheuermann.

VC Deals

XenoPort Inc. (Nasdaq: XNPT) has agreed to sell $40 million worth of common stock and warrants via a registered direct offering. Maverick Capital is leading the deal, with Venrock also participating. Both firms have previously bought and sold XenoPort shares, including Venrock as an early-stage backer.

Buyout Deals

Royston Run-Off Ltd., an indirect subsidiary of Enstar Group Ltd. (Nasdaq: ESGR), has completed its acquisition of Unionamerica Holdings Ltd. from St. Paul Fire and Marine Insurance Company. The $341.3 million deal was partially financed by $49.1 million in private equity from J.C. Flowers & Company.

PE Exits

American Greetings Corp. (NYSE: AM) has agreed to acquire rival Recycled Paper Greetings Inc. The deal includes around $55 million in 7.375% notes due 2016 and up to $18.4 million in cash. This is in addition to the $44.2 million of RPG debt that American Greetings acquired earlier this year. RPG has entered Chapter 11 bankruptcy protection to facilitate the sale, and had been acquired in 2005 by Monitor Clipper Partners.

César SA has sold its Halloween costume and décor unit, Disguise Inc., and a related Hong Kong entity to JAKKS Pacific Inc. (Nasdaq: JAKK) for $28.3 million. César is a portfolio company of France-based Butler Capital Partners.

Firms & Funds

Aberdeen Asset Management has agreed to acquire Credit Suisse’s fund management arm in an all-share deal valued at £250 million.

Draper Fisher Jurvetson is targeting $600 million for its tenth early-stage fund, according to a regulatory filing.

Freeman Spogli & Co. has set a $1.5 billion target for its sixth fund, according to LBO Wire. The consumer-focused firm raised $1 billion for its fifth fund in 2004.

Human Resources

Brian Bode is leaving his executive director post with UBS Investment Bank, where he had been a placement agent for private equity real estate funds. No word yet on his future plans. Prior to joining UBS in August 2005, Bode had been with Atlantic Pacific Capital.