peHUB Wire: Friday, April 16, 2010

At approximately 10:05 am ET yesterday morning, the political aspirations of Steven L. Rattner were pronounced dead. An autopsy revealed an overdose of hubris, and a deficiency of caution.

In a 27-page document released to the public, the New York Attorney General’s office lays out a narrative in which Rattner fought to secure business for the brother of New York’s chief investment officer, on the advice of now-indicted “finder” Hank Morris. Specifically, Rattner had one of his portfolio companies (since defunct) sign a DVD distribution deal for the brother’s film – “Chooch” – over the objections of portfolio company management.

Once the DVD distribution deal was signed, Rattner retained Morris as a “placement agent,” in order to secure fund commitments for his private equity firm (Quadrangle Group). Morris helped Quadrangle raise $100 milli! on from the New York State Common Retirement Fund, even though one of Quadrangle’s legitimate placement agents – Monument Group – only had been able to secure between $25 million and $50 million. This occurred without Morris setting up or attending any meetings with NYCRF on Quadrangle’s behalf.

Morris also helped Quadrangle secure $75 million from New York City, in part via a deal with another placement agent named Julio Ramirez, who last year pled guilty to securities fraud.

As a follow-up, the CIO’s brother helped put Rattner in touch with potential investors on the West Coast. These included Elliott Broidy, who sat on the board of the Los Angeles Fire & Police Pension Fund. That system gave Quadrangle $10 million. Broidy has since pled guilty to felony charges of rewarding official misconduct.

Ramirez, Broidy, CIO David Loglisci and Quadrangle Group all have been cooperating with the investigation. ! Yesterday, Quadrangle agreed to pay $12 million in penalties ($7m to N Y, $5m to SEC), and called the actions of its former partner “inappropriate, wrong, and unethical.”

Finally, there is this:

“In or around 2006, as Alan Hevesi was running for re-election as Comptroller, Morris called Rattner and expressed to him that he and Hevesi wanted Rattner to be helpful in his re-election efforts. Morris added that others whose funds had received investments were also making contributions. When Rattner explained he had a policy against making contributions to officials with oversight over investments, Morris told him he should contribute money indirectly, by getting a third party to make the contribution.

Thereafter, Rattner asked a Democratic donor he knew to contribute to Hevesi. That person and his wife each subsequently gave approximately $25,000 to Hevesi for New York.”

That’s the official story. Now some more color and thoughts:

1. Quadrangle has been desperate to strike the Cuomo deal since the middle of last year, in order to put this sordid mess behind it. Its problem was that Cuomo didn’t want Quadrangle without Rattner, thus further straining the relationship between the firm and its onetime partner. Not sure why Cuomo changed his tune, but a source tells me that today’s settlement was “on the AG’s timetable, not Quadrangle’s.”

I’m told that Rattner and remaining Quadrangle execs have not held one-on-one talks for at least the past three months, after having spent several preceding months trying to work out a joint settlement. One source suggests that Rattner – reportedly holed up in Tom Lee’s office within New York’s GM building – didn’t like the financial terms proposed by Quadrangle. Another believes that Rattner is playing a strategic waiting game, hoping that C! uomo’s expected gubernatorial run will cause the pay-to-play investigation to peter out.

Rattner is not tipping his hand, except for a brief statement (via counsel) that he “does not agree with the characterization of events released today, including those contained in Quadrangle’s statement.”

2. Quadrangle believes that its explicit disassociation from Rattner could help the firm remain as a going concern. Its $2 billion second fund is approximately 80% called down, and LPs expect another fundraising drive to kick off sometime later this year – probably with a more modest target of between $700 million or $1 billion. The bridge-building began last year, but will go into hyperdrive next week, when Quadrangle holds its annual LP meeting. I hope it kicks off with a special screening of Chooch, but my guess is the wounds are still a bit too fresh.

One LP I spoke with last night believes that Quadrangle’s ultimate fate will be based on fund perform! ance, not Rattner’s actions. CalPERS reports that Quadrangle’s second fund had an IRR of 4.7% through the end of Q3 2009. Could be interesting to watch Quadrangle raise at the same time as M/C Venture Partners, which has a fairly similar strategy…

3. The Monument Group and Helix Associates should be pissed off. They are legitimate placement agents that raised almost all of Quadrangle’s second fund, save for the shady stuff with Morris. By signing Cuomo’s code of conduct, Quadrangle is tacitly agreeing with Cuomo’s sentiment that placement agents are a highway to corruption. I know the code only refers to the solicitation of business from public pension systems, but the overall thesis is: Placement agents bad.

4. Quadrangle agreed to repay a total of $12 million. My understanding is that the entire total will come “from the general partner,” and not via fund offsets or management fee offsets. Basically, the remaining Quadrangle execs are cutting checks from their own bank accounts (yes, accounts t! hat got fat on LP fees – but this is about as good as one could expect).

5. Much of what Cuomo bases his narrative on appears to be email correspondence between Morris and Rattner. It’s one thing to be corrupt. Quite another to be stupid. Dear future scumbags: Email never disappears!

6. The next shoes to drop here are Rattner and Hevesi. Stay tuned, and have a great weekend…

Top Three

Venture capitalists invested $4.7 billion into 681 U.S. companies during the first quarter of 2010, according to MoneyTree data released today by PricewaterhouseCoopers, the National Venture Capital Association and Thomson Reuters (publisher of peHUB). This represents a decrease in both deals and dollars from the preceding quarter — by 18% and 9%, respectively — but an increase over the first quarter of 2009.

Lightyear Capital has agreed to sell its majority stake in The NAU Group, a provider of crop insurance in the U.S., to a unit of Australia’s QBE Insurance Group. The deal is valued at $565 million, plus a special dividend at closing.

FleetCor, a Norcross, Ga.-based provider of branded fuel cards, has filed for a $500 million IPO. It plans to trade on the NYSE, with J.P. Morgan and Goldman Sachs serving as co-lead underwriters. The company reports $354 million in 2009 revenue, compared to $341 million in 2008 and $264 million in 2007. Its 2009 net income was $89 million, down from $97 million in 2008. FleetCor shareholders include Summit Partners, Bain Capital, Advent International, Advantage Capital, Nautic Partners, HarbourVest Partners and Performance Equity Management.

VC Deals

Foundation Medicine, a Cambridge, Mass.-based personalized cancer medicine startup, has raised $25 million in Series A funding led by Third Rock Ventures., a San Francisco-based peer-to-peer lending marketplace, has closed its Series D round with $14.7 million. It previously announced that it had signed term sheets to raise between$13.3 million and $15.8 million. New backers TomorrowVenturesand CompuCredit Holdings Corp. were joined by existing shareholders Accel Partners, Benchmark Capital, Omidyar Network, DAG Ventures and Volition Capital (fka Fidelity Ventures). Prosper previously raised over $40 million.

OnFocus Healthcare Inc., a Nashville, Tenn.-based provider of web-based enterprise performance mana! gement solutions for the healthcare services market, has raised $3 million in Series C funding. Clayton Associates led the round, and was joined by Limestone Fund, Tri-Star Technology Fund, NCN Angel Fund, and return backers Solidus Co., Kestrel Asset Management and Heritage Group Holdings.

Daily Grommet, a Lexington, Mass.-based operator of a curated online marketplace and video review site, has raised $3.4 million in Series A funding. Backers include angelsJean Hammond, John Landry, Nancy Peretsman, Jill Preotle and Gerry Laybourne. Seed backer Launch Capital also participated.

AppFirst yesterday launched its SaaS-based application performance monitoring solution. It also said that it is backed by an undisclosed amount of capital from Fi! rstMark Capital and First Round Capital. The company disclosed $1 mill ion in equity funding last June, via a regulatory filing.

Milyoni Inc., an Alamo, Calif.-based developer of a Facebook app that allows retailers and direct merchants to sell their products within Facebook, has raised an undisclosed amount of seed funding from ATA Ventures and Thomvest Ventures.

Where I’ve Been, a Chicago-based social travel network, has raised an undisclosed amount of VC funding from Lightbank, a new investment vehicle formed by Groupon founders Eric Lefkofsky and Brad Keywell.

Buyouts Deals

Lone Star Funds has received shareholder approval to acquire hotel owner and operator Lodgian Inc. (NYSE: LGN) for approximately $270 million (including assumed debt). Under terms of the agreement, Lodgian stockholders would receive $2.50 per share.

RFID Invest, an investment firm focused on RFID technology, has acquired InSync Software Inc., a San Jose, Calif.-based maker of RFID and sensor-based application software. No financial terms were disclosed. InSync had raised over $12 million in VC funding from firms that include Intel Capital and Rustic Canyon Partners.

Three Rivers Operating Co., an Austin, Texas-based upstream oil and gas company, has raised an undisclosed amount of private equity funding from the Riverstone/Carlyle Energy and Power Funds. Three Rivers also announced that it would purchase certain assets of Chesapeake Energy in the Permian Basin of West Texas and Southeast New Mexico.

Welsh, Carson, Anderson & Stowe has agreed to acquire a majority stake in GlobalCollect, an Amsterdam-based provider of local e-payment solutions for international customer not-present channels. The seller is General Atlantic. No financial terms were disclosed.

PE-Backed IPOs

NeoPhotonics, a San Jose, Calif.-based maker of optical components using laser-reactive deposition, has filed for a $115 million IPO. It plans to trade on the Nasdaq under ticker symbol NPTN, with J.P. Morgan and Deutsche Bank Securities serving as co-lead underwriters. The company reports $155 million in 2009 revenue, compared to $133 million in 2008 and nearly $96 million in 2007. Its 2009 net loss was $6.8 million, down from $28 million in 2008. NeoPhotnics has raised over $240 in VC funding, including a 2004 recap round. Shareholders include Oak Investment Partners, Draper Fisher Jurvetson, Concord Ventures, International Finance Corp. and ATA Ventures.

Niska Gas Storage, a Gridley, Calif.-based owner and operator of natural gas storage assets in North America, has set its IPO terms to 17.5 million common units being offered at between $19 and $21 per unit. It p! lans to trade on the NYSE under ticker symbol NKA, with Goldman Sachs and Morgan Stanley serving as co-lead underwriters. Niska Gas is majority-owned by the Carlyle/Riverstone Global Energy and Power Funds.

PE Exits

Permira yesterday dismissed market speculation that it is looking to sell its control stake in publicly-traded fashion house Hugo Boss.

Firms & Funds

Golub Capital BDC Inc. (Nasdaq: GBDC) traded up 1.4% in its first day of trading, after pricing its IPO at $14.50 per share. The mid-market lender raised around $103 million via the offering.

Human Resources

Vedika Bhandarkar has agreed to join Credit Suisse as its head of India investment banking, a position he previously held with J.P. Morgan.