PE Week Wire: Wednesday, January 14, 2009

Last week, we got word that a Boston-area venture firm was informally shopping one of its hottest portfolio companies to other VC firms. Not shopping the whole thing, mind you, but just the venture firm’s stake. So I called one of the firm’s managing partners, who was understandably cagey in his response.

“We’re always talking to other firms about our companies. Sometimes we call them, and sometimes they call us. And we’re obviously scouring other firms’ portfolios, to see if there’s anything there that we might want to express interest in.”

My point here isn’t to report on the specific situation (still not quite comfortable enough, despite the non-confirmation confirmation), but rather to suggest that venture capital may finally be getting around to recognizing sponsor-to-sponsor sales as a viable exit avenue. It’s what helped buyout firms begin their gold rush earlier this decade, and may be venture’s last best hope for juicing wilted returns.

“If you look at buyout transaction and liquidity data since 2000, you’ll find that about half of the buyout proceeds came from sponsor-to-sponsor sales,” explains Ken Sawyer, a managing director with direct secondaries firm Saints Capital. “VCs have got to get a clue, and realize that they have a third leg for liquidity.”

To date, it’s not something VCs have done much of. Sure there have been the occasional sponsor-to-sponsor sales and uses of direct secondaries firms like Saints, plus some situations where VCs (and company employees) sell stock as part of follow-on financing rounds. But that’s all been insignificant compared to what the buyout folks have done, and has almost always involved non-influence stakes.

The buyout and venture markets obviously aren’t apples to apples. For example, venture deals are typically more broadly syndicated on the equity side, which could make sponsor-to-sponsor sales more difficult. But that’s manageable. The larger issues, Sawyer suggests, are structural. For example, buyout investing often requires more back-end infrastructure than just a partner and an associate with sector expertise. Some firms have already begun to build this, but most have not. Buyside firms also would have to get more comfortable with lower return expectations (2x rather than 10x), while sell-siders would need to get over their conditioned bias toward and IPO or trade sale.

I have to think this is coming. The only question is whether it will be sooner or later.

*** Sign of the Times: Kleiner Perkins Caufield & Byers is very concerned about the lack of liquidity options for current portfolio companies, and is taking steps to ensure that it doesn’t get caught short of cash.

The landmark VC firm is currently raising annex funds for its eleventh (2004) and twelfth funds (2006), in order to have cash on hand in case it needs additional follow-on capital. It also has reopened fundraising for a pair of funds initially closed last year: The $700 million Fund XIII and the $500 million Green Growth fund. Moreover, the Green Growth fund is now open to limited partners that have not previously invested with Kleiner Perkins, which is a pretty big deal from a legacy access perspective.

Kleiner obviously isn’t commenting, although we hear that most of this is expected to wrap up soon.

*** Yesterday I mentioned that many private equity firms seem to be rushing out of China faster than they rushed in. Some of you took issue with that, and I’ll deal with it more in a subsequent column. In the meantime, some quick private equity transaction data for China investments, from Thomson Reuters:

2005: $231.1 million

2006: $5.02 billion

2007: $1.88 billion

2008: $1.3 billion

*** Not quite sure what to make of this yet, but I’ve found a regulatory filing for a company that lists eBay founder Pierre Omidyar as an executive. I’d heard rumors that he was engaged in a new venture, and this may well be it.

The company is called Peer News Inc., but is operating as Ginx. There is very little publicly-available information but, from what I can tell, Ginx looks a lot like Twitter. There’s sure to be some big differences, and maybe one of the trial users can fill us in…

In addition to Omidyar, the company’s management roster includes Randy Ching, a longtime eBay executive who most recently was general manager of global classifieds. The board includes Mike Mohr, a senior advisor to Omidyar Network (which is listed as an investor). According to the filing, Peer News has raised around $2 million.

Top Three

Boston-Power Inc., a Westborough, Mass.-based developer of lithium-ion batteries, has raised $55 million in fourth-round funding. Foundation Asset Management led the round, and was joined by return backers Oak Investment Partners, Venrock, GGV Capital and Gabriel Venture Partners. The company has now raised around $125 million in total VC funding since 2005.

Pelican Products Inc., a Torrance, Calif.-based maker of protective cases and lighting systems, has acquired Hardigg Industries Inc., a maker of rotational-molded transport and storage cases. The transaction is valued at approximately $200 million. Pelican Products is a portfolio company of Behrman Capital.

Sheldon Trainor, Merrill Lynch’s former head of Asia investment banking, is planning to launch his own private equity fund. He will continue to serve as an advisor to Merrill’s new owner Bank of America.

VC Deals

Singulex Inc., an Alameda, Calif.-based developer of biomarker diagnostic systems, has raised $19 million in fifth-round funding. Jafco Co. led the round, and was joined by return backers OrbiMed Advisors and Fisk Ventures. The company has now raised around $50 million in total VC funding since 2002.

Chiral Quest Corp., a Monmouth Junction, N.J.-based developer of chiral solutions for the pharmaceutical industry, has raised $13 million in Series B funding. Participants included Infinity I-China, Kleiner Perkins Caufield & Byers, the China Spring Fund and JAIC.

MD-IT, a Boulder, Colo.-based provider of medical documentation services and software for physician offices and ambulatory clinics, has raised $11 million in Series B funding from J. Burke Capital Partners.

Nurien Software, a Seoul-based provider of social networking and online gaming services, has raised $10 million in Series A-1 funding. Return backers include Northern Light Venture Capital, Globespan Capital Partners, New Enterprise Associates and QiMing Venture Partners. The company had raised $15 million in April 2008.

WaterHealth International Inc., an Irvine, Calif.-based provider of water purification and disinfection technology, has secured more than $10 million for the first close of its Series D round, which is expected to total $20 million. Return backers Dow Venture Capital and SAIL Venture Partners co-led the tranche.

InterMed Discovery, a Dortmund, Germany-based natural product lead-discovery company, has raised €7.44 million from Biotropics Malaysia Berhad. The equity infusion is part of a larger strategic partnership between the two companies.

Ubicom Inc., a Sunnyvale, Calif.-based provider of communications processor and software solutions, has raised $7 million in fifth-round funding. Return backers include August Capital, Mayfield Funds, Levensohn Venture Partners, Lehman Brothers Venture Partners and Investcorp Technology Partners. The company has now raised nearly $140 million in total VC funding since 1997.

FirstDocs Inc., a Westwood, Mass.-based legal process automation company, has raised around $3 million in Series A funding led byFoundry Group, according to a regulatory filing. Foundry had disclosed the investment earlier this month, but without a dollar amount.

United Sample, an Encino, Calif.-based provider of online sample solutions for the market research industry, has raised $3 million in Series B funding. Greycroft Partners led the round, and was joined by return backer DFJ Frontier.

Buyout Deals

Austin Ventures and TGF Management have acquired Sterling Foods Ltd., a San Antonio, Texas-based supplier of baked goods to the food service and retail industries. No financial terms were disclosed.

Bay Grove Capital has acquired Seafreeze Cold Storage from Toyo Suisan Kaisha Ltd. No financial terms were disclosed. Seafreeze is the largest public refrigerated warehouse company in the Port of Seattle.

Hanover Partners has acquired Handi Quilter LLC, a North Salt Lake City-based maker of branded quilting machines, portable frames/tables, computerized quilting systems and quilting accessories. Tuckerman Capital provided leveraged financing, while Handi Quilter senior management also participated. No pricing terms were disclosed.

Northern Lights Ventures has acquired a minority equity stake in Seizert Capital Partners, a Birmingham, Mich.-based investment management firm. No financial terms were disclosed.

Allied Carpets, Britain’s second-largest flooring retailer, reportedly has held preliminary talks with turnaround firm Hilco, and is expecting first-round buyout bids next month. The company is currently owned by Tapis Saint-Maclou of France.

PE Exits

Emerging Capital Partners has sold its minority stake in SOMDIAA SA to the company’s majority shareholders for approximately $26 million. This represents a 2x return on ECP’s initial investment, which was made in September 2003. SOMDIAA produces sugar, flour and animal feed in Central Africa.

Quest Software Inc. has acquired the technology assets of MonoSphere Inc., a Redwood City, Calif.-based maker of storage capacity management software. No financial terms were disclosed. MonoSphere had raised over $38 million in total VC funding, from firms like Lightspeed Venture Partners, Intel Capital, Pinnacle Ventures, Velocity Interactive Group and Benchmark Capital.

PE-Backed M&A

Rally Software Development Corp., a Boulder, Colo.-based provider of on-demand application life cycle management solutions, has acquired 6th Sense Analytics Inc., a Morrisville, N.C.-based provider of on-demand automated metrics collection and analysis solution for development organizations. No financial terms were disclosed. Rally Software has raised over $35 million in VC funding, from firms like Mohr Davidow

Ventures, Boulder Ventures, Mobius Venture Capital and Vista Ventures. 6th Sense had raised around $6.5 million from Core Capital Partners and InterSouth Partners.

Firms & Funds

Calera Capital (f.k.a. Fremont Partners) has closed its fourth fund with $700 million in capital commitments, according to LBO Wire. The San Francisco-based buyout firm had been targeting $1.25 billion. MVision served as placement agent.

Human Resources

Kathleen McGinty has joined Element Partners as an operating partner. She is the former head of Pennsylvania’s Department of Environmental Protection and the White House Council on Environmental Quality. She also had been considered as a candidate to run the EPA under Barack Obama.

Bessemer Venture Partners has promoted both Stephen Kraus and Subu S.V. to the position of vice president. Kraus worked in the firm’s healthcare practice out of Wellesley, Mass., while S.V. focuses on India from the firm’s Mumbai office. The firm also has promoted Vishal Gupta to director of the India investment team.

Canaan Partners has promoted Alok Mittal and Izhar Shay to general partner, and promoted Warren Lee to venture partner.

David Wathen, a onetime general partner with Questor Management Co., has been named president and CEO of TriMas Corp. (NYSE: TRS). He most recently served as president and CEO of North American Operations for Balfour Beatty Inc.

GTI Group has promoted Ruzgar Barisik to partner. He originally joined the firm in 2006 as a principal.

John Baldo has joined Cantor Fitzgerald & Co. as senior managing director and head of national fixed-income sales, for the firm’s debt capital markets group. He previously was with UBS, as a managing director and head of U.S. structured products.