peHUB Wire: Friday, June 25, 2010

This summer was supposed to represent a regulatory tipping point for private equity, as U.S. and European legislators pledged to close tax loopholes and reduce perceived systemic risk.

PE firms would be forced to register their funds, and provide additional disclosures. Carried interest would be taxed as ordinary income. U.S. banks would be required to divest private equity holdings, while European institutions would effectively be banned from serving as limited partners in North American or Asian funds.

It was almost as if regulators had discovered a speck of residual shine on private equity’s Golden Age, and were determined to dull it down.

But a funny thing happened on the way to the reckoning: Many of the proposed changes — including some that many PE pros have accepted as fait accompli — are being watered down, postponed or abandoned.

Take the situation in Europe, for example. I wrote last week about how EU regulators were reconciling a pair of directives ! that could severely limit the ability of European institutions to inve st in private equity or hedge funds domiciled outside of the EU. The proposals also included possible leverage and compensation caps, plus loads of new disclosure mandates (including one that would require “taken-private” companies to continue providing public financial reports for two years).

European regulators had given themselves until the end of this month to reach agreement, but Reuters reported yesterday that the talks have “collapsed.” Now, the next-earliest vote will come in September, although there is no indication of serious movement on the key issues of contention (including a so-called passport, which would allow a PE firm to gain access to all EU institutions by satisfying the regulatory requirements of a single EU member).

Back here at home, things are no more certain. The much-discussed change to carried interest tax treatment is tied up in a so-called Job Extenders bill that appears to be on “death’s door.” Even if it were to somehow be revived, Congress long ago gave up the ghost of treating carried interest as ordinary income — instead proposing a hybrid structure in which some carried interest would continue to be treated as capital gains (still waiting for an elected official to explain that concession as anything other than an attempt at political expediency).

And then there are the PE-specific provisions included in the larger financial reform package, which passed through committee just hours ago. The final deal includes some tougher Volcke r Rule language in terms of timing, and will prohibit bank sponsorship of private equity funds. But it will not go the extra mile of banning bank investment in third-party PE or hedge funds. Instead, Congress will allow banks to invest up to 3% of their capital into such vehicles, so long as the commitment represents less than 3% of the fund’s total commitments.

Finally, there is fund registration. PE funds with more than $150 million in committed capital will be required to register, although the costs will be relatively low if a fund is that large. Venture capital funds, on the other hand, were completely excluded (even those with $1 billion+). Still no official word on how “private equity” or “venture capital” will be defined, except that the SEC will tell us later. In other words, this isn’t going into effect tomorrow.

Look, it’s possible that the winds of change will boomerang in the upcoming days, weeks or months. Europe could get its misguided act together, Congress could further strengthen Volcker before passage and the Job Extenders bill could be saved (or perhaps carried interest taxation finds its way into other legislation). But, as of this moment, private equity should be beaming with unexpected optimism.

*** The answer to Thursday’s quiz question was Bloom Energy. More on that later today at peHUB.

*** Thomson Reuters today released preliminary Q2 data on M&A and private equity deal-making. Get it here.

*** I’m taking some R&R for part of next week in San Juan, Puerto Rico. Looking for restaurant and ” things to do” suggestions…

*** Have a great weekend…

Top Three

Boston-Power Inc., a Westborough, Mass.-based developer of lithium-ion batteries, has raised $60 million in Series E funding. Foundation Asset Management and Oak Investment Partners co-led the round, and were joined by fellow return backers Venrock and Gabriel Venture Partners. The company has now raised around $185 million in total VC funding since 2005.

CVC Capital Partners has acquired a 28% stake in amusement park operator Merlin Entertainments, for £630 million. As part of the deal, The Blackstone Group has reduced its holdings in Merlin from 52% to 34%, and Dubai International Capital has sold its entire stake.

Smart Technologies Inc., an Alberta, Canada-based maker of interactive technology products for learning and collaboration, has filed for a $730.71 million IPO. It plans to trade on both the Nasdaq and the TSX, with Morgan Stanley, Deutsche Bank and RBC Capital Markets serving as co-lead underwriters. The company reports $648 million in revenue for the fiscal year ending March 30, 2010, with net income of $142 million. It had a net loss of $106 million on $468 million in revenue during the prior year. Apax Partners acquired Smart Technologies in 2007. Intel Capital also is listed as a significant shareholder.

VC Deals

Palantir Technologies, a Palo Alto, Calif.-based developer of analytics platforms for financial and intelligence clients, has raised $90 million in Series Dfunding at a $735 million valuation, according to TechCrunch. Existing shareholder The Founders Fund led the round, and was joined by Youniversity Ventures, Glynn Capital, Ulu Ventures, Jeremy Stoppleman andBen Ling. No mention of existing shareholders In-Q-Tel or Reed Elsevier Ventures. The company previously raised around $82 million.

Triggit, a San Francisco-based developer of media-buying solutions using real-time bidding, has raised $4.2 million in Series A funding co-led by Spark Capital and Foundry Group.

Sneaky Games, an Austin, Texas-based social gaming startup, has raised an undisclosed amount of first-round funding led by Liahona Ventures.

Buyouts Deals

Catterton Partners announced a deal to acquire a majority stake in Uppy’s, a Chester, Va.-based convenience store chain. No financial terms were disclosed. peHUB first reported on the news in April.

CVC Asia-Pacific has decided not to join KKR on a joint bid for Australia’s Healthscope, which means KKR will be bidding alone.

Origo Partners has agreed to acquire a 10.5% stake in Chinese recycling company Jinan Eco-Energy Technology, in exchange for $6.65 million. Origo has an option to acquire an additional 20% stake for $3.65 million.

RoundTable Healthcare Partners has acquired a control position in Aqua Pharmaceuticals LLC, a West Chester, Penn.-based specialty dermatology pharma company. No financial terms were disclosed.

PE-Backed IPOs

Affinia Group Holdings Inc., an Ann Arbor, Mich.-based provider of aftermarket products for light and commercial vehicles, has filed for a $230 million IPO. It plans to trade on the NYSE under ticker symbol AFN, with J.P. Morgan and Barclays Capital serving as co-lead underwriters. Shareholders include The Cypress Group, OMERS, Northwestern Mutual Life Insurance Co. and CalSTRS.

Fabrinet Inc., a Thailand-based provider of foundry services to optical component, module/subsystem and optics OEMs,raised $85 million in its IPO. The company priced 8.5 million shares at $10 per share, which was below its proposed range of between $12 and $14 per share.It willtrade on the NYSE under ticker symbol FN, while Morgan Stanley and Deutsche Bank Sercurities served as co-lead underwriters. Shareholders include H&Q Asia Pacific (58.3% pre-IPO stake), JDS Uniphase! Corp. (6.5%) and J.F. Shea Co. (6.5%).

SciQuest Inc., a Cary, N.C.-based provider of on-demand supply and procurement software, said in a regulatory filing that it plans to trade on the Nasdaq after pricing its IPO. It had originally filed in March to trade on the NYSE. SciQuest plans to raise $75 million, with Thomas Weisel Partners serving as lead underwriter. Shareholders include Trinity Ventures, Intersouth Partners and River Cities Capital Funds.

PE Exits has agreed to acquire Vendio Services Inc., a San Mateo, Calif.-based provider of ecommerce services. No financial terms were disclosed. Vendio Services has raised around $40 million in VC funding since its 1999 inception, from firms like Sequoia Capital, Technology Crossover Ventures, CMGI @Ventures, MVC Capital, Lighthouse Capital Partners, Angel Investors, Argus Capital Group and Stanford University.

HM Capital Partners has completed its sale of Canadian local search and directories publisher Canpages to Yellow Media, a subsidiary of Yellow Pages Income Fund. The C$255 million deal included C$75 million in cash and C$150 million in mandatory exchangeable promissory notes of Yellow Media.

PE-Backed M&A

Playdom, a MountainView, Calif.-basedsocial gaming company, has acquiredHive7, which builds games played on Facebook and other social networks. No financial terms were disclosed. Playdom has raised $80 million in VC funding, including $33 million earlier this week. Backers include Bessemer Venture Partners, Steamboat Ventures, New World Ventures, New Enterprise Associates, Lightspeed Venture Partners and Norwest Venture Partners. Hive7 had raised venture capital from True Ventures.

RGB Networks, a Sunnyvale, Calif.-based provider of network video processing solutions, has acquired RipCode Inc., a Dallas-based provider mobile IP video solutions. No financial terms were disclosed. RGB Networks has raised over $52 million in VC funding, fromAccel Partners, Comcast Interactive Capital, Kleiner Perkins Caufield & Byers, Focus Ventures and Institutional Venture Partners. Ripcode had raised around $38 millionfrom Granite Ventures, Hunt Ventures, El Dorado Ventures, Vesbridge Partners and ATA Ventures.

Firms & Funds

DFJ Mercury has closed its second fund with $70 million in capital commitments. The Houston, Texas-based firm makes seed-stage and early-stage investments in IT, advanced materials and bioscience companies. It had raised $30 million for its debut fund, including an initial close and subsequent annex vehicles.

New Energy Capital is raising up to $100 million for a new fund that will focus on cleantech infrastructure opportunities, according to a regulatory filing. The Hanover, N.H.-basedgroup also has added Curt Whittaker, head of the energy practice group at law firm Rath, Young and Pignatelli, as a part-time director.

The University of New Hampshire has partnered with a group of local entrepreneurs to launch a nonprofit business accelerator named the New Hampshire Innovation Commercialization Center.

Human Resources

Eckart Walther has joined Accel Partners as an entrepreneur-in-residence, according to TechCrunch. He previously was with LiveOps and, before that, was with Yahoo as group vice president of product management for search. He is not yet listed on the Accel