peHUB Wire: Friday, January 22, 2010

President Obama yesterday outlined some proposals designed to limit risk-taking on Wall Street. For our purposes, here is the operative section:

“We should no longer allow banks to stray too far from their central mission of serving their customers. In recent years, too many financial firms have put taxpayer money at risk by operating hedge funds and private equity funds and making riskier investments to reap a quick reward.

And these firms have taken these risks while benefiting from special financial privileges that are reserved only for banks.

Our government provides deposit insurance and other safeguards and guarantees to firms that operate things. We do so because a stable and reliable banking system promotes sustained growth, and because we learned how dangerous the failure of that system can be during the Great Depression.

But these privileges were not created to bestow banks operating hedge funds or private equity funds with an unfair advantage.

When banks benefit from the safety net that taxpayers provide, which includes lower cost capital, it is not appropriate for them to turn around and use that cheap money to trade for profit. And that is especially true when this kind of trading often puts banks in direct conflict with their customers’ interests.”

It’s meaty political populism, and a bunch of econ pundits argue that it even could lead to cogent policy. That Obama made the statement in the midst of Goldman’s earnings call is evidence that someone in the White House still cares about theatrical one-upsmanship. What it all means for private equity, however, is extremely unclear.

Most, although not all, major banks still have large private equity operations. Goldman Sachs sponsors the massive GS Capital Partners, J.P. Morgan manages One Equity Partners, Citi’s umbrella covers such groups as Metalmark Capital, Merrill Lynch has an eponymous unit, Credit Suisse maintains the DLJ Merchant Banking legacy and so on. And then there are the scores of funds-of-funds, secondary funds and strategic venture groups that many of these banks also operate.

At first glance, it would appear that Obama is proposing that all of the above be divested. Certainly not something most banks would want to do, but there is at leas! t some logistical precedent for banks spinning out their private equity groups into independent entities. Metalmark, for example, originally was an in-house unit at Morgan Stanley before going independent and subsequently getting scooped up by Citi.

But it may become much more complicated than that (and not just because most historical spinouts have included new — or continued — cornerstone investments from the former parent).

At the end of his statement, Obama mentions “customers’ interests.” In a corresponding press release, the White House added: “The President and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.”

This is where it gets tricky. Goldman and other firms would almost certainly argue that their private equity activities are i! n their customers’ interests. Moreover, many of their commitments to p rivate equity come from “feeder” pools set up for the expressed purpose of letting a bank’s customers have private equity exposure. Would Obama’s proposal drain such pools, or allow them to continue while only banning investments that originate from a bank’s balance sheet?

(Note: A bunch of the same questions also apply to the hedge fund requirement, but there is one important distinctions vis-à-vis systemic risk: PE is almost unable to spark a “run” on the bank, because investors are not allowed to pull out their money midstream.)

More questions: Would Obama ban all bank-managed private equity activity, arguing that 20% carried interest off client-funded PE funds is unfair gouging? Would it grandfather in existing commitments that have not yet been called down? And, if not, how would third-party LPs react to cornerstone investors essentially disappearing (maybe this is where all that excess secondary fund capital can go)? Oh, and would such a move effectively ! level the playing field for financial sponsor groups, by ending co-investment conflicts?

Actually, that final question is perhaps the most important, because it illustrates how Obama (as proxy for Paul Volcker) doesn’t actually want to pull banks out of private equity. He just wants to ban them from the “equity” part.

Goldman, et. all would still be allowed — in fact, encouraged — to provide leveraged loans to private equity deals. Kind of odd, in that banks have arguably lost far more on PE-related debt than on PE-related equity over the past two years. Moreover, they’ll still make zillions from PE-related advisory/auctioneer work.

Hopefully we’ll get more clarity in the coming days and weeks… In the meantime, let me know your thoughts.

Top Three

Aircell, an Itasca, Ill.-based provider of in-flight WiFi access, has raised $176 million in new private equity funding. No investor information was disclosed. The company previously around $75 million, from firms like Sycamore Ventures, GE Commercial Finance, New World Equities, BGC Investments and Blumenstein Thorne Information Partners.

Nine partnerships set up by J.C. Flowers to acquire a 26% stake in HSH Nordbank in 2006, have filed for bankruptcy. The partnerships hold the HSH Nordbank stock on behalf of investment trusts, whose beneficiaries limited partners in J.C. Flowers Fund II.

Venture capitalists invested $17.7 billion into 2,795 deals for U.S.-based companies in 2009, according to MoneyTree data released today by PricewaterhouseCoopers, the National Venture Capital Association and Thomson Reute! rs (publisher of peHUB). That’s a 37% dollar decrease and 30% deal dec rease from 2008, and represents the lowest volumes since 1997. Read more…

VC Deals

The Tanfield Food Co., a UK-based maker of all-natural food products, has raised £4 million in growth equity funding from Inventages Venture Capital.

Hello Music, a developer of technology to connect independent musicians with music industry execs, because we believe that all great music deserves to be heard, has raised $4 million in VC funding from KVG Partners.

QD Vision, a Watertown, Mass.-based developer of nanotech-based products for solid state lighting and displays, has raised $3 million in VC funding from DTE Energy Ventures. Last month, t! he company announced $10 million in fourth-round funding from return backers North Bridge Venture Partners, Highland Capital Partners and In-Q-Tel.

Buyouts Deals

The Blackstone Group, via GSO Capital Partners, has agreed to take over management of nine leveraged loan and high-yield bond funds from Allied Capital Corp. The funds have assets of $3.2 billion, and are currently managed by Allied portfolio company Callidus.

Cedar Fair LP (NYSE: FUN) management has been sued by a shareholder, over the amusement park operator’s recent agreement to be acquired by Apollo Management for $2.4 billion.

Lone Star Funds has agreed 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.

Global Mart Ltd. is selling its majority stakes in two Chinese supermarkets, in a deal expected to fetch around $73 million. Bidders include Standard Chartered Private Equity and Chinese conglomerate Fosun Group.

PE-Backed IPOs

Cellu Tissue Holdings, an Alpharetta, Ga.-based maker of household and industrial paper products, raised $107.9 million in its IPO. The company priced 8.3 million shares at $13 per share, compared to plans to sell 7.8 million shares at between $15 and $17 per share. Its initial market cap is around $262 million. The company will trade on the NYSE under ticker symbol CLU, while Goldman Sachs and J.P. Morgan served as lead underwriters. Weston Presidio sold around 4.77 million shares in the offering, cutting its ownership stake from 84.1% to 49.3 percent.

PE-Backed M&A

Caprion Proteomics Inc., a provider of proteomics-based service to the pharma and biotech industries, has acquired the biomarker services unit of PPD Inc. (Nasdaq: PPDI). No financial terms were disclosed. Caprion Proteomics is a portfolio company of Great Point Partners.

Firms & Funds

Castle Harlan has secured around $800 million in capital commitments for its fifth fund, according to LBO Wire. A final close is expected later this quarter.

ICICI Venture, a VC unit of Indian lender ICICI Bank, is raising up to $800 million for a new India-focused fund. This includes between $150 million and $200 million from non-Indian sources. It already has secured $350 million in domestic commitments.