Jon Moulton of Alchemy Partners got PE tongues wagging yesterday, by saying that “it really would not be surprising in this recession if 30% of portfolio companies in the mid-market buyout firms actually failed.” He then softened it a bit, by adding that mid-market funds would “still come out better than mega-funds, because they had less debt going in.”
Moulton’s initial comment is startlingly sobering, but the follow-up is conventional wisdom that began forming while the good times were still rolling. Specifically, this notion of mid-market responsibility vs. mega-market irresponsibility — as if mid-market firms were putting down 25% on 30-year fixed mortgages, while mega-market firms were buying up McMansions with no-money down option ARMs. There’s some truth to it, but much less than we might think.
Specifically, let’s take a look at Standard & Poor’s data for 2007 – private equity’s most active year on record, with $765 billion in transaction volume. It shows that purchase price multiples for mid-market deals (<$50m in target company EBITDA) were at 9.3x EBITDA, compared to 9.8x EBITDA for large-market deals (>$50m in target company EBITDA). The gap is there, but it’s small and arguably less significant than the fact that both figures are well above historical norms.
We see the same thing in terms of leverage multiples (including both senior and subordinated debt). Mid-market deals came in at approximately 5.78x EBITDA, while large-market deals were at around 6.19x EBITDA. Ditto for equity contributions, which were 32.14% for mid-market deals and 30.28% for large-market deals.
All of this reminds me that while mid-market firms were talking about their responsibility in 2007, they also were talking about market saturation. Seems the competition helped drive up prices, just like it did in the large market.
That said, there are two counterpoints worth emphasizing. First, the S&P data could be a bit skewed, because it includes small-cap deals on the mid-market figures, while mixing large-cap and mega-cap deals in the other set. Exacerbating this situation is the probability that small-cap deals are underrepresented in the initial sample (since many of their bonds wouldn’t go in for S&P rating), while almost all the mega-market deals would be included.
Second, the (multiple) multiples gap expanded significantly in 2008 — with purchase price multiples for large-market deals coming in at 9.5x EBITDA, while mid-market deals dropped down to 8.3X EBITDA. It’s possibly Moulton was talking more about 2008 deals than 2007 deals, although 2008 volume didn’t hold a candle to the 2007 horde.
I’ve posted the S&P data in slideshow form, if you’re interested in more detailed figures. Just go here.
*** VentureWire this morning reported that Michael Raab will leave New Enterprise Associates, when it finishes raising its thirteenth VC fund later this year. In the meantime, he’ll transition from a partner to a venture partner role.
Semi-sequitur: NEA is one of the few firms out there that operates with an annual budget, instead of a pre-determined management fee. This means that, each year, NEA determines how much money it will require for operations, and then requests that amount from its limited partners. I wonder how the current economic situation has affected NEA’s 2009 budget, from both the request and granting points-of-view. Maybe that’s something for me to work on today…
*** A trio of former Aldus Equity executives, including firm co-founder Marcellus Taylor, have formed a new Dallas-based firm called LEA Advisors. None of the principals are talking yet, but word is that the firm will be a fund-of-funds and co-investment platform focused on emerging managers. Taylor is still listed as a partner on the Aldus website, but he gave up his ownership interest in January of last year, and has since served in a consul! tant role. His LEA partners are Kevin Sample and Wayne Green.
*** Self-Promotion Alert: I’m scheduled to be on CNBC tomorrow morning at 6:45am, to discuss private equity regulation.
Top Three
BAA has received at least six indicative bids for the acquisition of London Gatwick airport, although all ar! e believed to be below the £2 billion asking price. Bidders reportedly include Global Infrastructure Partners, Ontario Teachers and Pension Plan/3i Infrastructure, Citi Infrastructure Investors/Vancouver Airport Services/John Hancock Life Insurance, Babcock & Brown/RREEF, Manchester Airport Group/Borealis and Hochtief AirPort. Abu Dhabi Investment Authority has dropped out.
TaiGen Biotechnology Co., a Taiwan-based drug developer whose lead candidate is a stem cell mobilizer, has raised $37 million in Series C funding. Backers include MPM Capital, National Development Fund, YFY group, Taiwan Sugar Corp., Yao-Hwa Glass Management Commission and Taiwan Global BioFund.
Wall Homes Inc., an Arlington, Texas-based homebuilder, has filed for Chapter 11 bankruptcy protection. According to the filing, Warburg Pincus holds 73.11% of Wall Homes’ outstanding common stock, and 81.55% of its outstanding preferred stock. The company’s largest unsecured creditor is AFCO Credit Co. Download the bankruptcy filing.
VC Deals
Dataupia Inc., a Cambridge, Mass.-based provider of enterprise computing data management solutions, has raised an undisclosed amount of Series B-1 funding. A regulatory filing indicates that the round was for nearly $10 million, and closed last quarter. Dataupia had previously raised around $30 million from Fairhaven Capital Partners, Polaris Venture Partners and Valhalla Partners.
eIQnetworks Inc., an Acton, Mass.-based provider of security and compliance management, has raised $10 million in its first round of institutional funding led by Venrock.
Neuralitic Systems Inc., a Montreal-based developer of a marketing information service portal for mobile operators, has raised $10 million in Series B funding, according to The Globe & Mail. Backers include BlackBerry Partners Fund, BDC Venture Capital and Vertex Venture Capital. www.neuralitic.com
NonStop Riot, a Hollywood, Calif.-based music branding agency, has raised an undisclosed amount of Series B funding from North Venture Partners.
CoalTek Inc., a Tucker, Ga.-based developer of clean coal technology, is looking to raise $50 million in fourth-round funding, according to a Clean Technology Insight interview with CoalTek CEO Chris Poirier. It previously raised over $60 million, including a $33 million Series C round, from firms like Lightspeed Venture Partners, Warburg Pincus, Draper Fisher Jurvetson, Element Partners and Braemar Energy Partners. www.coaltek.com
Buyout Deals
DFW Capital Partners has sponsored a recapitalization of Venio LLC, a New York-based provider of asset recovery services. No financial terms were disclosed, except that Praesidian Capital Investors provided approximately $16.5 million of debt.
Four Seasons Health Care, a UK-based care homes operator, has received a six-month extension from its lenders, in order to negotiate an agreement over its massive debt load. A sale or debt-for-equity swap or are the two most likely options. Both Advent International and Blackstone Group are considered possible bidders in a sale scenario.
Irving Place Capital Management and Oaktree Capital Management have received U.S. Bankruptcy Court approval for their planned $485 million acquisition of paperboard and plastic packaging maker Chesapeake Corp.
Permira has sent capital call letters, in order to raise $917.8 million for its $3.6 billion take-private buyout of UK security business NDS, which is being done in partnership with News Corp.
Pfingsten Partners has acquired the assets of Aviation, Power & Marine Inc., a Boynton Beach, Fla.-based distributor of aeroderivative gas turbine engine parts and related services. No financial terms were disclosed. Farlie Turner & Co. advised the seller.
PE-Backed Bankruptcy
Silicon Navigator Corp., a Cupertino, Calif.-based developer of electronic design automation (EDA) software, filed for Chapter 7 bankruptcy protection last October. It had raised over $10 million in VC funding from firms like ITU Ventures, Gefinor Ventures and Intel Capital. Download the bankruptcy filing.
Specialty Motors Holding Corp., a Michigan-based auto supplier backed by Sun Capital Partners, has filed for Chapter 7 bankruptcy protection. The company’s subsidiaries include Von Weiss.
PE-Backed IPOs
Stallion Oilfield Services Inc., a Houston, Texas-based provider of well-site support, construction and logistics services to oil exploration and production companies, has withdrawn registration for a $400 million IPO. It had planned to trade on the Nasdaq. This is the second time Stallion has canceled a proposed IPO, previously having done so in 2006. Carlyle/Riverstone is the company’! s largest single shareholder. www.stallionoilfield.com
PE Exits
Riverbed Technology (Nasdaq: RVBD) has agreed to acquire Mazu Networks, a Cambridge, Mass.-based provider of enterprise network security solutions. The deal is valued at approximately $25 million in cash, plus the possibility of up to $22 million in earn-outs. Mazu Networks has raised over $47 million in VC funding since 2000, from firms like Greylock Partners, Benchmark Capital, Matrix Partners, Pilot House Ventures, StarVest Partners and Symantec Corp.
PE-Backed M&A
Compliance 360 Inc., an Alpharetta, Ga.-based provider of SaaS enterprise compliance solutions, has acquired Tavilo Inc., a provider of technology that allows third-party data to be mined, examined and analyzed. No financial terms were disclosed. Compliance 360 has raised around $4.25 million from Fulcrum Ventures and individual angels.
Dydacomp has acquired LaGarde (a.k.a. StoreFront.net), a Kansas City-based provider of ecommerce solutions for small and mid-sized businesses. No financial terms were disclosed, although the Kansas City Business Journal places the sale price at approximately $2.78 million. Milestone Partners helped sponsor the acquisition, with Dydacom lenders Churchill Financial and Madison Capital participating on the debt side. LaGarde had raised around $7.5 million from Shasta Ventures, before going bankrupt last fall.
S*BIO Pte Ltd. of Singapore has granted San Diego-based Tragara Pharmaceuticals a global exclusive license to develop and commercialize multi-kinase inhibitor SB1317. Under terms of the agreement, S*BIO is eligible to receive up to $112.5 million in payments, including both up-front fees and earn-outs. S*BIO has raised over $26 million from firms like Aravis Capital, Bio*One Capital, Lacuna Apo BioTech Fund and Zurcher Kantonalbank. Tragara Pharma has raised $40 million from Domain Associates, ProQuest Investments, Morgenthaler Ventures, Oxford Biosceince Partners and Mitsubishi International Corp.
Firms & Funds
Angelo Gordon & Co. is targeting $3 billion for its seventh distressed debt fund, according to LBO Wire. It closed its sixth fund just last year with $2 billion. www.angelogordon.com
CDC Group has made two commitments to Asia-focused funds: $10 million to Kendall Court Mezzanine (Asia) Bristol Fund, which is targeting $150 million for investments in Southeast Asia; and $30 million to Centras Private Equity Fund, which is raising $75 million to invest in SMEs in Central Asian countries like Kazakhstan.
Jacob Ballas Capital India, a Dehli-based private equity fund, has raised $440 million for its third fund. Its cornerstone LP is New York Life Investment Management.
Newstone Capital Partners is targeting $900 million for its second fund, according to LBO Wire. The mezzanine fund has offices in Dallas and Los Angeles, and is run by former TCW/Crescent Mezzanine pros Tim Costello and John Rocchio. www.newstonecapital.com
Human Resources
Win Neuger reportedly has resigned as chief investment officer for AIG, although he will continue to retain his title as CEO and chairman of AIG Investments, which is being readied for a sale.
Mikael Dahl has joined EQT Partners, after having served as co-head of Citigroup’s European financial entrepreneurs group. www.eqt.se
TA Associates has promoted both Hythem El-Nazer and James Hart from vice president to senior vice president.
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