peHUB Wire: Friday, April 3, 2009

Kleiner Perkins is on the verge of having a massive crater in its energy portfolio, but it has nothing to do with cleantech. Instead, the trouble involves Terralliance, a stealthy oil and gas exploration company that quietly raised $295 million in equity funding from KP and others.

We’ve learned that Terralliance has fired its founding CEO, laid off around 80% of its workers, closed offices and is desperately trying to renegotiate a massive debt-load. If it can’t get the last piece done, then Terralliance might itself become a fossil fuel.

“It’s all about restructuring the debt, but the lender doesn’t seem too eager to bail out the equity guys,” says a source familiar with the situation. “[The lender’s] feeling is, hey, the product works.”

That product is software that supposedly makes it easier and cheaper to locate oil and gas. Terralliance then uses the software to do its own exploration, rather than simply selling it to third parties. Here is how the company explained it, in a draft private placement memorandum from 2007 (don’t worry if your eyes glaze over, mine did):

“Terralliance is an exploration and production (E&P) company in the upstream oil and gas (O&G) industry. Over the past 7 years, Terralliance has invented, perfected and proven two new technologies that precisely map underground oil and gas deposits in 3 dimensions, and has undertaken using these technologies as the basis for an international exploration program. We call the two technologies Direct Hydrocarbon Mapping (DHM), and Seismic Energy Spectral Analysis (SESA). With DHM and SESA, Terralliance is able to dramatically reduce the risk that the exploration projects it undertakes fail for lack of commercial concentrations of hydrocarbons. Terralliance has proven its ability to locate and produce commercial concentrations of oil and gas in new exploration areas with over 93% success. In short, we replace the imaginations of geologists about where! to drill for new hydrocarbons – historically right 20% to 30% of the time (even when addressing extensively and narrowly studied areas) – with an impartial, repeatable scientific process, which is right over 90% of the time.”

It was this technology that convinced Kleiner Perkins to invest an initial $10 million in March 2004 at a $40 million valuation (the company had previously been self-funded). One year later, Kleiner Perkins and Goldman Sachs invested another $35 million at a $125 million valuation. Then came the motherload in August 2006, when Terralliance raised $250 million at a $910 million valuation. That deal included Kleiner Perkins, Goldman Sachs, DAG Ventures and Ithmar (Dubai-based PE firm). A Fortune article from last summer also lists Passport Capital as an investor, but they aren’t mentioned anywhere else (and declined to confirm or deny their involvement).

The aforementioned PPM was seeking to raise a Series D round in excess of $1 billion, with a $50 million minimum investment. That round never closed, but Terraliance did secure a large debt package that included some sort of convertible securities.

Since then, however, something went horribly awry. Sources say that founding CEO Erlend Olson spent “like a drunken sailor,” made exploration and extraction promises he couldn’t keep (one source vigorously disputes the 93% success claim) and that the investors — namely Kleiner Perkins – were ”shocked” by the initial results of a recent audit.

The board quickly showed Olson the door (it’s unclear if there will be future legal action), and began moving to stem the damage. One response was to lay off approximately 80% of the company’s workforce, and to close several offices. According to a fairly recent company backgrounder, Terralliance had a “core staff” of 62 and offices in five different countries — including its Newport Beach, Calif. headquarters and an ”international new ventures” office in Kuala Lumpur.

“A lot of the work Terralliance was doing could be easily outsourced, like the exploration fieldwork,” a source says.

Terralliance and its venture backers also want to renegotiate the company’s debt, but it’s tricky. The lenders apparently believe that, if the company can’t survive under its current capital structure, that the best bet for recovery could be an asset sale or other type of liquidation (that’s really me surmising, as I haven’t spoken to the lender, or even been able to identify it). Terralliance also is seeking new equity capital as an alternative, but so far has been unsuccessful.

All of this, of course, makes it look like the VC investors were either asleep at the wheel, or perhaps duped (shades of Entellium?). KP’s reps were John Doerr and Joe Lacob, while Goldman’s were Joe DiSabato and Ken Pontarelli. Also on the board was private investor Ken Foster (former CEO of Newfield), while Colin Powell is listed among its advisors.

A spokeswoman for Kleiner Perkins declined comment, and a message left at Goldman Sachs has not been returned. I’d call the company, but its phone number isn’t publicly-available (Terralliance’s website is bare-bones, to say the least).

Since we first broke this story last night at peHUB, some folks are beginning to come out of the woodwork with more info. If any of it checks out, I’ll be sure to post an update.

Top Three

FleetCor Technologies, a Norcross, Ga.-based provider of branded fuel cards, has acquired CLC Group Inc., a Wichita, Kansas-based provider of lodging management programs to businesses. No financial terms were disclosed. The seller was Nautic Partners, while FleetCor is owned by Advent International, Bain Capital and Summit Partners.

Lilliputian Systems Inc., a Wilmington, Mass.-based developer of fuel cells for wireless electronic devices, has raised $28 million in fourth-round funding. Stata Venture Partners and Altira Group were joined by return backers Kleiner Perkins Caufield & Byers, Atlas Venture, Fairhaven Capital and Rockport Capital Partners. The company has now raised around $90 million.

William Drewry has joined Diamond Castle Holdings as an operating partner and chairman of media investments. He previously was a managing director in the global media group of UBS Investment Bank. Before that, he was global head of media equity research for Credit Suisse.

VC Deals

Sepaton Inc., a Marlborough, Mass.-based provider of tapeless data storage and security solutions, has raised $15 million in Series F funding. Focus Ventures led the round, and was joined by return backers like HarbourVest Partners, JVP, Menlo Ventures and Valhalla Partners.

Swoopo, an auction site that combines ecommerce with entertainment, has raised $10 million in second-round funding. August Capital led the round, and was joined by return backer Wellington Partners. Swoopo had previously raised $4 million.

Traversa Therapeutics Inc., a La Jolla, Calif.-based provider of RNAi delivery technologies, has raised $5 million in Series B funding. Morningside Venture Investments led the round, and was joined by fellow return backers Mesa Verde Venture Partners. It had previously raised $2 million.

Actelis Networks, a Fremont, Calif.-based provider of carrier Ethernet-over-copper solutions, has raised $4.76 million in new VC funding, according to a regulatory filing. It had previously raised around $165 million over six rounds since 1998. Backers include Global Catalyst Partners, Dupont Capital, Carlyle Venture Partners and ATA Ventures.

Socialtext Inc., a Palo Alto, Calif.-based provider of enterprise wiki software, has raised $4.5 million in Series D funding. Return backers include Draper Fisher Jurvetson and Omidyar Network. The company also laid off six of its 40 workers, according to VentureBeat.

Buyout Deals

Pamplona Capital Management has acquired TMD Friction, a bankrupt German brake-pad maker that had been acquired by Montagu Private Equity in 2001 for €776 million. No financial terms for the deal were disclosed, except that TMD management will receive a minority equity stake.

Patriarch Partners won an auction for the assets of bankrupt Polaroid Corp., with a $59.1 million bid. It beat out rivals Genii Capital, Hilco Consumer Capital and Ritchie Capital.

Deltek Inc. (Nasdaq: PROJ), a Herndon, Va.–based provider of enterprise applications software for project-focused businesses, has filed for a $60 million rights offering. New Mountain Capital, the company’s largest shareholder, has said it intends to participate.

PE Exits

Candover has hired Goldman Sachs to find a buyer for Wood Mackenzie, a UK-based energy consultancy. The firm is seeking at least £650 million, according to the FT.

PE-Backed M&A

DuBois Chemicals Inc., a Racine, Wis.–based maker of specialty chemicals and solutions for manufacturing problems and lean initiatives, has acquired Blendco Systems LLC, a Bristol, Penn.-based maker of car wash detergents, waxes and other specialty cleaning products. No financial terms were disclosed, except that leverage was provided by TriState, KeyBank and US Bank. DuBois Chemicals is a portfolio company of The Riverside Company.

EduK Group, a post-secondary educational institution in Puerto Rico, has acquired Florida Technical College, which offers associate’s degrees and diplomas in the Orlando area. No financial terms were disclosed. EduK Group is a portfolio company of Leeds Equity Partners.

PE-Backed Busts

Big 10 Tire Stores Inc., a Mobile, Ala.-based tire retailer, has filed for Chapter 11 bankruptcy protection. It has over 100 stores in Alabama, Florida and Georgia, and was acquired in 2006 by Sun Capital Partners.

Codon Devices, a Cambridge, Mass.-based synthetic biology company, is shutting down after failing to raise new funding, according to The Boston Globe. The company had raised over $31 million from firms like Alloy Ventures, Flagship Ventures, Khosla Ventures, Highland Capital Partners, Tactics II Ventures and Kleiner Perkins Caufield & Byers.

Firms & Funds

Chaterhouse Capital Partners has held a €4 billion final close on its ninth fund, according to LBO Wire. It had originally targeted €6 billion, while €4 billion matches the total of Charterhouse’s eighth fund (raised in 2006).

Siguler Guff has closed its third distressed fund-of-funds with $2.4 billion in capital commitments. peHUB had previously reported that the firm had secure $2.3 billion, against a $1.5 billion target.

Unitas Capital, an Asian private equity firm previously known as CCMP Capital Asia, has closed its Tokyo office.

Human Resources

Michael DeMane has joined Thomas, McNerney & Partners as a Minneapolis-based senior advisor. He spent the past eight years in various executive roles with Medtronic Inc., most recently as chief operating officer.

David Karnstedt has been named president and CEO of Efficient Frontier, a Sunnyvale, Calif.–based provider of search engine marketing technology and services. He most recently was an executive-in-residence with Redpoint Ventures, which is an investor in Efficient Frontier. Before that, he was senior vice president of North American sales for Yahoo.

Charles Duff has joined Emissary Capital Group, a merchant bank focused on China and India, as a managing director and head of capital markets. He previously was CEO of Mint Capital Partners, a New York-based merchant bank focused on the biotech and healthcare sectors.