peHUB Wire: Friday, June 18, 2010

I recently accused limited partners of cognitive dissonance; refusing to invest (much) this year despite acknowledging that the best returns are borne of recessions.

But perhaps I was too harsh. Too hasty. Perhaps LPs are sitting on their hands because they recognize that this post-recession is different.

Private equity firms typically generate out-sized returns from post-recessionary markets because there is an abundance of bargains, which can be easily exploited. Buy low, sell high.

This year, however, valuations rebounded much faster and stronger than anyone expected. So much so, in fact, that some PE pros are concerned that they’re trapped inside of a mini-bubble.

How come? The primary culprit is private equity overhang, which Cambridge Associates estimates at around $425 billion. Many firms raised big funds in 2006 and 2007, were credit crunched out of investing! over the next two years and now are staring down the end of their investment cycles with a pocketful of cash.

Rather than lose it, these firms are trying to use it.

“We’re between a rock and a hard place,” a PE pro told me in Chicago. “Either we keep not investing — which means we ultimately hand back capital — or we stay, fight and pay a bit too much. Even some of the deals that began as proprietary have become competitive.”

Exacerbating the situation is the fact that corporate America is sitting on $1.84 trillion in cash, up a record 26% from last year. This means that if financial sponsors opt not to compete for a particular deal, there’s a good chance that strategics will.

“LPs shouldn’t ever try to time the market, since there can be such a long lag from fund commitment to when the money actually gets invested,” says an LP. “But, they obviousl! y do try to time it and, for those people, these ridiculous valuations are a good reason to wait.”

*** Small piece of news out of a panel I moderated yesterday at Buyouts Chicago: Bruce Rauner said that his firm, GTCR, is gearing up to raise its tenth fund. I asked if there would be any term changes prompted by new taxes/regulations, and he said “no.” GTCR raised $2.75 billion for its ninth fund in 2009.

Top Three

Pacific Biosciences, a Menlo Park, Calif.-based DNA gene sequencing company, has raised $50 million in Series F funding fromGen-Probe Inc. (Nasdaq: GPRO). The company also raised an undisclosed amount of funding from existing shareholders. Pacific Biosciences previously raised around $253 million from Monsanto, the Wellcome Trust, Sutter Hill Ventures, Deerfield Management, Intel Capital, Morgan Stanley, Redmile Group, T. Rowe Price, Mohr Davidow Ventures, Kleiner Perkins Caufield and Byers, Alloy Ventures, Maverick Capital, AllianceBernstein, DAG Ventures, Teachers’ Private Capital and Blackstone Cleantech Venture Partners.

Dow Chemical Co. has completed the sale of its Styron plastics unit to Bain Capital for $1.63 billion. Dow retained a 7.5% equity position, although it had an option to retain up to ! 15 percent.

Solyndra Inc., a Fremont, Calif.-based provider of solar energy systems for commercial rooftops, has canceled its proposed $300 million IPO. In a filing with the SEC, Solyndra cited “adverse market conditions.” The company has raised over $500 million in VC funding, from firms like Argonaut Ventures (35.74% ownership stake), U.S. Venture Partners (10.19%), RockPort Capital Partners (7.5%), CMEA Ventures (6.81%) and Redpoint Ventures (5.94%).

VC Deals

Aquinox Pharmaceuticals Inc., a Vancouver-based small-molecule drug company focused on cancer and inflammatory disease, has raised US$25 million in Series B funding.Ventures West Capital led the round, and was joined by fellow return backers Johnson & Johnson Development Corporation, Baker Brothers Investments and BC Advantage Funds Ltd. New investor Pfizer Venture Investments also participated.

Affirmed Networks Inc., a Waltham, Mass. stealth telecom startup, has secured $10.89 million of an $11.52 million funding round, according to a regulatory filing. Backers include Charles River Ventures and Matrix Partners. The company was founded by Sonus Networks vets Harris Fishman and Hassan Ahmed. It d! oes not yet have a public website.

SafetyWeb, a Denver-based company that helps parents monitor their childrens’ social networking activity in real-time, has raised $8 million in new VC funding. Battery Ventures led the round, and was joined by First Round Capital.

Ace Metrix, a New York-based provider of real-time television advertising analytics, has raised an undisclosed amount of strategic funding from WPP. A recent regulatory filing indicates around $2.24 million in new equity, although it’s unclear how much (if any) of that came from WPP. Ace Metrix previously raised around $6 million from Leapfrog Ventures, Palomar Ventures and Hummer Winblad Venture Partners.

Buyouts Deals

A U.S. bankruptcy court judge said that the auction for hotel chain Extended Stay was fairly run. Centerbridge Partners won the deal with a $3.9 billion offer, but losing bidder Starwood Capital had objected.

IK Investment Partners has agreed to acquire a majority stake in Scandanavian dental care company Norwegian Colosseum Dental. No financial terms were disclosed.

KKR has! agreed to acquire Intelligence Ltd., the recruitment services subsidiary of Japan’s Usen Corp., for approximately $356 million.

PE-Backed IPOs

HiSoft, an IT outsourcing company in the Chinese cities of Beijing and Dalian, has filed for an IPO of 7.4 million American depository sharesbeing sold atbetween $11 and $13 per share. It plans to trade on the Nasdaq under ticker symbol HSFT, with Deutsche Bank Securities serving as lead underwriter. Shareholders include Granite Global Ventures(22.6% pre-IPO stake),International Finance Corp. (11.9%), Jafco Asia Technology Fund (8.2%), Draper Fisher Jurvetson (8.2%), Tian Hai International(7.8%), Intel Capital (7.8%) and GE Capital (7.2%).

Motrici! ty Inc., a Bellevue, Wash.-based provider of mobile marketplace management solutions, raised $50 million in its IPO. The company sold just 5 million shares at $10 per share, after originally filing to sell 6.75 million shares at between $14 and $16 per share. After failing to price on Wednesday night (as expected), the company lowered its target to 5.87 million shares being offered at between $10 and $11 per share. The company has raised over $365 million in VC funding, from Advanced Equities, Carl Icahn, New Enterprise Associates, Technology Crossover Ventures, Massey-Burch Capital, Noro-Moseley Partners, Intel Capital, Qualcomm Ventures, Sienna Ventures, TriState Investment Group and Wakefield Group.

PE-Backed M&A

Consona Corp., Indianapolis-based provider of enterprise customer management and process solutions, has acquired Compiere Inc., a provider of cloud-based, open-source ERP and CRM software. No pricing terms of the all-stock deal were disclosed. Consona is owned by Battery Ventures and Thoma Bravo, while Compiere had raised venture capital from New Enterprise Associates.

Firms & Funds

Citigroup is looking to raise more than $3 billion for new private equity and hedge fund efforts in 2010, according to Bloomberg,

Human Resources

Neil Schaefer has joined GenNx360 Capital Partners as a vice president. He previously was with Friend Skoler & Co.

John Soden and Craig Cook have joined the healthcare group of Houlihan Lokey. Soden will serve as a San Francisco-based managing director, and previously was with Thomas Weisel Partners. Cook will be a London-based director in charge of European healthcare services, and previously was with Lydian Capital.

Ford Tamer, who recently stepped down as an operating partner with Khosla Ventures, has been named CEO of Telegent Systems Inc., a Sunnyvale, Calif.-based provider of mobile TV solutions. Telegent recently withdrew registration for ! a$230 million IPO, andhas raised around $50 million in VC funding since from New Enterprise Associates, Walden International, Index Ventures and Northern Light Venture Capital.

Bertrand Theaud has joined the Shanghai office of law firm Winston & Strawn LLP, as a partner focused on M&A and private equity transactions. He previously was a partner with DLA Piper.