peHUB Wire: Friday, June 19, 2009

Rain keeps falling, KKR begins backtracking on its un-IPO and the Senate’s SBIR compromise is woefully insufficient. In other words, it’s time for some Friday Feedback.

First up are a couple of responses to yesterday’s modest proposal, in which I suggested that LP advisory boards should include a couple of “at-large” seats that could be held by smaller LPs. Aaron writes: “Conceptually I like the idea of having smaller LPs on the advisory board of a fund, but in practice I am not sure that this would always work. Often times if an investor is committing smaller amounts to a fund they have fewer human resources to be on an advisory board. An LP must be selective about which advisory boards to participate in because of the time commitment and potential legal liability.”

Brad: “Another suggestion is to have an entirely different advisory board from fund to fund. Often we see an issue, such as a crossover investment, come to an advisory board vote, but if the boards of both funds in question are largely made up of the same LP reps, they usually vote to approve (it doesn’t really matter which pocket their capital comes out of). This leaves perhaps the 3 or 4 new investors in only one of the funds with little or no influence on an issue that is important to them, but not the other LPs.”

Anon: “I don’t see any value add by including smaller LPs on advisory boards. The advisory boards tend to contain LPs from state plans, corporate plans and endowments from the US, Europe and Asia. There are plenty of diverse discussions from this highly skilled and diverse group.”

*** On Tuesday, I suggested that the Obama Administration’s threshold for PE/VC assets under management might be around $1 billion, in terms of firms being required to register. Since then, however, various reports have suggested that the working AUM threshold is actually $30 million (which mirrors a Senate proposal). Maxwell writes: “While the cost of registration imposed on the major constituents of the PEC wouldn’t necessarily be that great — many may already have to register as an investment adviser because they have too many investors to meet an exemption under one of the 3C exemptions anyway — but for a firm with, say, $35 million under management (unlikely to bring down the economy without really, really significant leverage), the costs could be significant.Such a firm is presumably only making $700,000 in total asset management revenue a year, even if it is getting 2% fees.”

I agree with you Maxell, and let me clearly opine that a $30 million threshold would be absurdly low. Plenty of $30 million-ish VC funds have collapsed and it hasn’t made a lick of macro economic difference (individually or collectively). That said, let me also be on record as supporting the broad classification that lumps together venture capital, private equity and hedge funds. It is indeed unfair to non-leverage-using venture capitalists or growth equity investors, but also is an unavoidable injustice (albeit one that could be largely abated by a higher threshold). Firms will game the system if they’re allowed to self-define (and some – like Warburg Pincus and Battery Ventures — would legitimately have multi-definitional disorders). And if you only use leverage as a requirement, won’t that discourage “real” VC firms from using venture debt, even if it’s in the best interest of a portfolio company?

*** Two replies to my suggestion that LPs should take advantage of GP/LP power dynamic shifts, by demanding alterations to existing fund terms. Anon: “The proper time for any partner to register their input regarding which terms are deemed to be fair are during the fund formation phase. Changing the rules of the game after agreeing to terms and signing the document is not only out of bounds, but in most every case, not permitted by Limited Partnership Agreement. I agree you should vote with your dollars. However, if a GP formed a fund with targeted returns of 20 – 30% and a 20% carry, but then upon delivering 40 – 50% returns decided to increase the carry to 30%, surely all would cry foul. Same concept, different perspective.”

Ahmad: “GPs who’ve had the foresight to temper the pace of their capital deployment have sometimes been rewarded very well for their prudence (take THL V which was a big fund at the time, did almost nothing for a couple of years, then made a killing). I think many LPs have seen things play out that way, and have the bitter aftertaste of some 2006-2007 funds investing their capital in half the number of years they said it would take. Overall LPs should not overreact to 2-4 quarters of severely limited investment activity. That said the GP should be honorable by determining whether or not they really CAN deploy the funds over the IP, and make amends if they can’t (terminating the IP, reducing committed capital, or reducing their fees). LPs are paying attention and when it’s time to consider re-upping they will remember how the GP acted.”

*** Let’s end with this email, which came after I wrote about Steve Pagliuca’s attempt to buy the Boston Globe: “Enough already about Boston newspapers, Boston basketball teams, Boston, Boston, Boston. Jeez. You’re so Boston-centric that you mention last year’s NBA title on the day that other publications were talking about this year’s NBA title. You know, other towns have had papers threaten to go out of business and local VCs buy sports teams. It may seem like today’s story about The Boston Globe has something to do with VC and PE — but it doesn’t. Leave that to the mainstream press and concentrate on covering your beat — while you’re at it, try to look west from time to time. You should be slapping yourself.”

Have a great weekend…

Top Three

NTK Holdings Inc. (Nortek), a Providence, R.I.-based maker of ventilation, air conditioning and heating products, said that it is analyzing its capital structure “in light of current economic conditions.” It has retained both The Blackstone Group and Weil, Gotshal & Manges as advisors. THL Partners acquired NTK from Kelso & Co. in 2! 004, and held a 66.48% equity stake as of late 2007, when NTK canceled a proposed $690 million IPO.

Tribune Co. has reopened Chicago Cubs sales talks with an investor group that includes Mark Utay (Clarion Capital Partners) and Leo Hindery (InterMedia Partners). Tribune continues negotiations with the original Ricketts family buyers.

The Ford Foundation has hired Sherif Nahas, previously with the University of Virginia Investment Management Co., as head of private equity and natural resource investments. He succeeds Eric Doppstadt, who has been promoted to chief investment officer.

VC Deals

Lumavita AG, a Swiss developer of anti-infectives for women’s health, has raised CHF 6 million ($5.53m) in new Series A funding. The round total is now CHF 24 million ($22m). HealthCap led the tranche, and was joined by return backer Endeavour Vision.

Optimum Energy LLC, a Seattle-based provider of energy-efficient HVAC solutions, has secured a $4.5 million VC funding commitment led by Columbia Pacific Advisors.

Collecta, a real-time search startup, has raised nearly $2 million in VC funding from True Ventures.

Zerista, a Denver-based provider of software for conferences and trade shows, has raised an undisclosed amount of seed funding led by Kickstart Seed Fund.

Buyout Deals

21 Partners has made a voluntary public tender offer for RGI SpA, a listed Italian provider of software, consulting and outsourcing services. The offer is being made in partnership with company founder Paolo Benini.

Almatis, a German aluminum products company, has secured a “standstill period” from its creditors, as both sides continue to negotiate restructuring of the company’s debt. Dubai International Capital bought Almatis in 2007, based by a $970 million leveraged loan arranged by UBS and Arab Banking Corp.

Charterhouse Capital Partners has agreed to acquire UK energy research firm Wood Mackenzie from Candover for £553 million.

JC Flowers & Co. is among the expected bidders for Nan Shan Life, the Taiwan life insurance unit of AIG. The deal is expected to be worth upwards of $2 billion.

J.F. Lehman & Co. is in talks to buy marine services business Drew Marine from Ashland Inc. (NYSE: ASH), according to LBO Wire. The deal would include more than $70 million in debt financing, including $20 million in mezzanine notes arranged by Babson Capital. The more senior debt is being arranged by CIT and BNP Paribas.


Fortunoff Holdings LLC will have its intellectual property auctioned off this coming Tuesday, after yesterday’s scheduled auction was delayed due to a power outage. The housewares and jewelry retailer had been owned by NRDC Equity Partners, prior to filing for bankruptcy in February.

The Minneapolis Star Tribune has filed a plan to exit Chapter 11 bankruptcy sometime this fall. Under the proposed plan, the newspaper would emerge with $100 million and debt and be wo! rth between $118 million and $144 million (including real estate value). Current owner Avista Capital Partners would have its equity stake wiped out.

Orkla (Oslo: ORK) has agreed to acquire Indalex Inc., a Lincolnshire, Ill.-based maker of soft alloy aluminum extrusion products, out of Chapter 11 bankruptcy. The deal’s underlying enterprise value is approximately $95 million. Sun Capital Partners had bought Indalex in 2005 from Honeywell for $425 million.

PE-Backed M&A

Veodia Inc., a San Mateo, Calif.-based provider of online video broadcasting solutions, has acquired ScreenToaster, a free browser-based service designed to capture screen activity along with audio for playback in flash players. No financial terms were disclosed. In 2007, Veodia raised an $8.3 million Series A round from Clearstone Venture Partners, D.E. Shaw and individual angels like iParadigms chairman Steven Berger.

PE Exits has acquired SnapTell Inc., a Palo Alto-based provider image recognition-based mobile marketing solutions. No financial terms were disclosed. SnapTell had raised just under $4 million in VC funding from JK&B Capital and New Enterprise Associates.

Exar Corp. (Nasdaq: EXAR) has acquired Galazar Networks Inc., an Ontario, Canada-based fabless semiconductor company. No financial terms were disclosed. Galazar had raisedaround C$30 million in VC funding since 2001, from firms like Skypoint Capital Corp., VenGrowth Capital Partners, Katsura Investments, Desjardins Venture Capital Group, RBC Capital Partners and Goldman Sachs.

Human Resources

Gregory Barger has joined NewSpring Capital as a principal focused on mezzanine investing. He previously was a managing director with Calvert Street Capital Partners.

Bill Drehkoff has joined Chicago-based buyout firm Linden LLC as a principal. He previously was a vice president with The Edgewater Funds, and began his principal investing career when he joined the founding partners of Linden at First Chicago Equity Capital.

William Rifkin, former chairman of global M&A for Merrill Lynch, has joined JPMorgan Chase & Co. as vice chairman of M&A.