Most private equity pros believe that if you do right by your LPs today, then they’ll do right by you when it comes time to raise the next fund. It’s a sensible equation, but is also subject to a giant sinkhole: What if there isn’t going to be a next fund?
That seems to be the dilemma facing Cypress Group, a New York-based buyout firm that is basically running out the string. Cypress raised $2.35 billion for its second fund in 1999 — a very heady number for its time – but has not successfully returned to market since. Most of the firm’s troubles have been lousy returns for both Funds I and II, and it’s been additionally stung by a series of high-profile personnel defections (including co-founder James Singleton and former president William Spiegel).
Cypress also had some troubles investing all of its Fund II capital in the allotted time period. Early last year, the firm asked LPs for an investment period extension. Such amendments are usually majority-rules, but Cypress allowed dissenters to stop funding – with the understanding that they couldn’t participate in new deals, and would be diluted if existing portfolio companies raised follow-on rounds. This was doing right by LPs, and most agreed to the extension.
Fast forward to this past September, and Cypress called down $120 million in new capital. It was designated for a series of follow-on investments, and came shortly before the extended investment period was set to expire (which happened last week). Cypress invested about half the money, but held off on two final deals because of what a source refers to as “timing issues.”
This is where we get to a buyout firm behaving badly. Most firms in this situation would either return to un-invested capital to LPs, or request yet another investment period extension. Cypress, however, has given LPs the following choice: (a) Let us hold onto the money until we choose to invest it; or (b) We’ll return the money to LPs, but only with a new agreement that we can recall it at will.
I’m not arguing that any of this violates Cypress’ limited partnership agreements (which I have not seen), but rather that it is an egregious example of bad faith. It’s almost as if Cypress is holding the money hostage, and is only willing to lend it back to its rightful owners.
So why would Cypress do this? CEO Jim Stern declined to be interviewed, but here is the prevailing theory from multiple LP sources: Cypress so far has collected approximately $50 million in carried interest on Fund II, but currently is far enough underwater that it can’t even see its hurdles. That would mean a brutal clawback, and a make-good on its promise to track down former partners for their share of the cash.
The only way around it – save for negotiation – would be to throw extra cash at existing portfolio companies, in the hopes that one of them becomes an unexpected floatation device.
It’s a strategy that makes sense as economic theory, but wouldn’t pass muster in most pragmatic biz school classrooms. Unless, of course, everyone acknowledges that the business in question doesn’t have a future…
*** Just throwing this out there: What are cleantech VCs going to do with their portfolio companies that require project financing? I’m talking about the electric vehicle and biofuel production plays that initially raised big equity capital to develop technology, with an assumption that they could then tap banks to actually build pricey production facilities. Are they somehow immune from the credit crunch, or are the VCs about to face a very uncomfortable choice?
*** Yesterday we published a pair of VC-authored editorials, on which presidential candidate would be better for the venture market. For whatever it’s worth, the Obama piece received about 10% more pageviews. No idea what that actually means. So, to be safe, tomorrow we’ll launch our latest, and last, reader poll on presidential preference. If you didn’t read them, here is the McCain piece and here is the Obama piece.
*** Self-Promotion Alert: Tonight I’ll be speaking at ACG Boston’s Big Deal event at the Taj, which is for senior private equity and investment banking pros. It’s mostly a networking mixer, and folks whose titles are VP or above can get registration info by emailing info@acgboston.org.
Top Three
Greatwide Logistics Services, a Dallas, Texas-based provider of third-party logistics, has filed for Chapter 11 bankruptcy protection. Investcorp and Hicks Holdings had acquired a majority stake in the company for $730 million in late 2006, with seller Fenway Partners retaining a minority position. In its bankruptcy filing, the company reported $600 million in debt. Greatwide also announced a deal to be acquired by a group of its first-lien secured lenders, including affiliates of Centerbridge Capital Partners and D. E. Shaw.
Mail.com Media Corp., an El Segundo, Calif.-basedoperator of digital media portals, has raised $35 million in Series D funding at a pre-money valuation of approximately $109 million. Quadrangle Capital Partners, an affiliate of Quadrangle Group, led the round, and was joined by WI Harper Group and Novel TMT Ventures.
Stone Arch Capital, a Minneapolis-based mid-market buyout firm, has secured nearly $170 million in capital commitments for its second fund, and hopes to close on its $200 million target by year-end.
VC Deals
Like.com, a San Mateo, Calif.-based operator of a visual search engine for online shopping, has raised $32.7 million in Series C funding. Menlo Ventures led the round, and was joined by Crosslink Capital and return backers BlueRun Ventures, Bay Partners, Leapfrog Ventures. The company has now raised around $54.5 million in total VC funding since 2004. TechCrunch reports that the Series C valuation was in excess of $100 million. www.like.com
SiliconBlue Technologies, a Sunnyvale, Calif.-based developer of low-power field programmable gate array technology for consumer applications, has raised $24 million in Series B funding. New Enterprise Associates led the round, and was joined by return backers BlueRun Ventures and Crosslink Capital.
Neuroptix Corp., an Acton, Mass.-based developer of a non-invasive eye test for early detection of Alzheimer’s Disease, has raised $18.5 million in Series B funding. Inventages led the round, while Rockport Venture Partners served as placement agent.
AdMob, a San Mateo, Calif.-based mobile advertising marketplace, has raised $15.7 million in Series C funding. Sequoia Capital’s Growth Fund led the round, and was joined by Accel Partners. The company had previously raised $18.6 million from Accel and Sequoia.
Silicon Hive BV, a Dutch supplier of semiconductor IP, has raised $7 million in new VC funding. Intel Capital led the round, and was joined by return backers New Venture Partners and TVM Capital.
Antenova Ltd., a Cambridge, UK-based provider of antennas and RF antenna modules, has raised $6.5 million in new VC funding. Azini Capital Partners led the deal, and was joined by return backers Spark Ventures, First Ventures, Herald Ventures and Loudwater Investment Partners. The company has now raised over $40 million in total VC funding since its 1999 inception.
Brightstorm, a San Francisco-based online learning network for teens, has raised $6 million in Series A funding from KTB Ventures.
UnitedLex Corp., an Atlanta–based provider of legal consulting, technology and outsourcing, has raised $6 million in Series B funding. Canaan Partners led the round, and was joined by return backer Helion Venture Partners.
Sutus Inc., a Vancouver-based maker of an integrated communications device for office management, has raised C$2 million in new VC funding from BDC Venture Capital and a fund managed by Growthworks Capital. The company has also secured C$2.5 million in venture debt from MMV Financial and named Mike Donnell as its new CEO. Donnell previously ran New Global Telecom.
AudioMicro.com, a Sherman Oaks, Calif.-based crowd-sourced marketplace for commercial music licensing, has raised an undisclosed amount of Series A funding led by DFJ Frontier.
Madhouse Inc., a Shanghai-based mobile advertising company, has raised an undisclosed amount of funding from Nokia Growth Partners. The company had previously raised $11.5 million from firms like Jafco Investment, Venture TDF and Gobi Partners.
Buyout Deals
Austin Ventures has acquired three companies to launch Port Logistics Group, a Houston, Texas-based platform provider of warehousing, distribution and transportation services in U.S. port cities. No financial terms were disclosed. PLG will be led by Bob Stull, former president and CEO of trucking company Roadway Express.
MTS Health Investors has acquired DNA Diagnostics Center Inc., a Fairfield, Ohio-based DNA testing lab. No financial terms were disclosed. The seller was company founder Richard Lee.
Nissan Motor Co. has proposed to buy around 20% of U.S. automaker Chrysler, according to The Detroit News. Cerberus Capital Management holds 80% of Chrysler, but is reported to still favor a merger with General Motors.
Northstar Pacific and Farallon Capital are among the firms interested in acquiring a stake in Indonesian coal miner Bumi Resources, in a deal that could be worth over $1.5 billion.
TPG Capital and Global Infrastructure Partners may be restarting conversations with Asciano Ltd. (AX: AIO), the Australian port and rail operator that in August rejected an A$2.9 billion buyout offer from the two firms. That bid was valued at A$4.40 per share, whereas Asciano’s stock has since dropped below A$3 per share.
Windjammer Capital Investors has made a $25 million follow-on investment in BBB Industries, a Mobile, Ala.–based supplier of remanufactured and new starters and alternators for the vehicle aftermarket. Windjammer had originally sponsored a recapitalization of BBB Industries in June 2007.
Cameron Hughes Wine has raised an undisclosed amount of mezzanine funding from Bacchus Capital Management, a San Francisco-based provider of mezz and equity capital to wineries and wine businesses.
PE Exits
Akamai Technologies (Nasdaq: AKAM) has agreed to acquire Acerno, an aggregator of online shopping and purchase data for advertisers, from i-Behavior. The deal is valued at approximately $95 million in cash. I-Behavior will continue to run its offline marketing business, and has raised over $8 million in VC funding from firms like JEGI Capital, Angel Investors LP, Morningside Ventures and Stockton Ventures.
Integrated Device Technology Inc. (Nasdaq: IDTI) has acquired substantially all the assets of San Jose, Calif.-based video processing technology provider Silicon Optix. No financial terms were disclosed. Silicon Optix had raised nearly $120 million in VC funding since 2001, from firms like Canaan Partners, InterWest Partners, RBC Capital, Polaris Venture Partners, Apax Partners, Focus Ventures, iD Ventures America, Primaxis Technology Ventures and Origin Ventures.
PE-Backed M&A
GlobalLogic Inc., a Vienna, Va.-based provider of outsourced software product engineering services, has acquired InterObject, an Israel-based software product engineering company. No financial terms were disclosed. GlobalLogic has raised nearly $50 million in VC funding from firms like Sequoia Capital India, New Atlantic Ventures and New Enterprise Associates.
Firms & Funds
The Indiana Public Employees’ Retirement Fund has increased its private equity target allocation from 8% to 10%, according to LBO Wire. The system manages approximately $15.7 billion, and had a 4.2% exposure to private equity as of June 30. www.in.gov/perf
Human Resources
Sohil Chand has joined the Mumbai office of Norwest Venture Partners as a managing director. He previously was an executive director in Goldman Sachs’ Asian Special Situations Group.
Andrés Ebhardt has joined European fund-of-funds manager CAM Private Equity as a partner. He previously worked in private banking for J.P. Morgan.
Steven Marder has joined Avista Capital Partners as an industry advisor, with a focus on the digital media sector. He is the former CEO of Eurekster Inc., where he remains as chairman.
Rob Solomon has joined Technology Crossover Ventures as a venture partner, with a focus on the Internet sector. He is the former CEO of comparative travel search engine SideStep.
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