peHUB Wire: Friday, September 11, 2009

Last summer, Boston Scientific agreed to sell a portfolio of 53 venture capital investments to Saints Capital for approximately $100 million. It was the largest-ever direct secondary sale of healthcare interests, but peHUB has learned that the process was almost derailed by a separate suitor that didn’t actually have the money to back up its offer.

That bidder was Omega Funds, a healthcare-focused direct secondaries shop with offices in Boston and Switzerland. Kind of ironically, Omega Funds is actually a fundless sponsor, which means that it doesn’t have an existing pool of capital from which to draw. The firm is currently embroiled in a legal tête-à-tête with some of its former employees and advisors – it’s sued them for alleged breaches of noncompete agreements – which is where! details of the busted Boston Scientific bid first emerged.

In a response to Omega’s original complaint, defendants Nessan Bermingham and Arthur Rosenthal both submitted affidavits claiming that Omega boss Ottello Stampacchia had claimed that Omega had “oversubscribed” financing commitments to purchase the Boston Scientific direct portfolio (an indirect portfolio of LP interests was sold separately to Paul Capital). They both also say that those representations proved to be false.

peHUB has confirmed with third parties that Omega, which had first approached Boston Scientific a year earlier about selling some assets, had the winning bid but was ultimately unable to cut a check.

There are two things, however, I’m unsure about: First, I do not know the size of Omega’s bid, except that it was higher than what Saints ultimately paid. Second, I do not know if Omega had legit commitments that fell through, or did not have said commitments! in the first place. In support of the former, Omega has bought 30 por tfolios in the past five years (usually does so quietly, no website or other PR). Plus, the economy turned very sour as this auction progressed.

In support of the “commitments fell though” argument, defendant Bermingham (a former VC with Atlas Venture) writes that Omega won a subsequent auction that it also was unable to finance. He doesn’t identify the deal, but we’ve identified it as a sale of 3i stakes that ultimately went to Apposite Capital (note: Omega did buy some 3i assets in a separate deal). A source more sympathetic to Omega says that this situation was different from Boston Scientific, in that Omega reduced its bid after funding some problems during due diligence (as did Apposite, however, another fundless sponsor that received financing from VCFA Group).

What really amazes me in all this is how tenuous the commitments to a fundless sponsor apparently can be and/or the lack of seller due diligence. I’m told that fundless sponsors are basi! cally the norm in direct secondaries, with just a small handful of dedicated exceptions (Saints, W Capital, Vision Capital, etc.). The Boston Scientific debacle was perhaps the largest direct secondary to fail due to a lack of financing, but apparently it is not unusual on smaller deals. “Most of the fundless sponsors mean well, but they often leave big messes to clean up,” said a funded sponsor.

As for the noncompete lawsuit, a judge late last month denied Omega’s bid for a preliminary injunction. The issue now will likely go to a non-jury trial in Boston on October 19. The main issue is be whether or not the defendants are using proprietary methods learned at Omega, or whether Omega’s special sauce isn’t actually so special.

I expect to write more about the noncompete angle of this case early next week, as part of a broader p! iece about how other PE firms are using noncompetes (particularly firm s that have done layoffs). If you’ve got any relevant info to share on this, please get in touch with me (confidentiality assured).


Please take a moment today to remember the thousands of innocents murdered eight years ago. In particular, the private equity community lost Brian Dale of Blue Capital Management, Chris Mello of Alta Communications and David Retik of Alta Communications. May they not be forgotten…


Top Three

Abbott (NYSE: ABT) has agreed to acquire Evalve Inc., a Menlo Park, Calif.-based provider of devices for minimally invasive repair of cardiac mitral valves. The deal includes a $320 million up-front payment, plus another $90 million in possible earnouts. Evalve has raised over $100 million in VC funding from firms like ABS Ventures, Abbott, Delphi Ventures, New Enterprise Associates and Split Rock Partners.

Rue21, a Warrendale, Penn.-based youth clothing retailer, has filed to raise $125 million via an IPO of common stock. BoA Merrill Lynch, Goldman Sachs and JPMorgan are serving as co-lead underwriters. The company plans to use some of the proceeds to pay down debt, which totaled $29.2 million as of August 1. Apax Partners holds a 63.4% ownership stake, while BNP Paribas holds a 23.6% stake.

The Westly Group next week is expected to announce the closing of its second fund, with more than $100 million in capital commitments. The Menlo Park, Calif.-based venture capital firm focuses on cleantech companies.

VC Deals

DisplayLink Corp., a Palo Alto, Calif.-based fabless semiconductor manufacturer that focuses on network displays, has raised $8 million in fourth-round funding, according to a regulatory filing. The company previously raised around $51 million, from Atlas Venture, Balderton Capital, DAG Ventures and DFJ Esprit.

QSecure Inc., a Los Altos, Calif.-based developer of electronic-powered credit cards, hassecured $5.25 million of a $10.25 million fourth round of VC funding, according to a regulatory filing. The company previously raised, from firms likewhich include Allegis Capital, Societe Generale, UMC Capital and Worldview Technology Partners.

Akorri NetworksInc., a Littleton, Mass.-based provider of management software for the virtualized data center, has secured $5 million of a $5.89 million VC round, according to a regulatory filing. The company previously raised over $45 million from Matrix Partners, North Bridge Venture Partners, Sigma Partners and BlueStream Ventures.

Gear6, a Mountain View, Calif.-based developer of storage caching solutions, has secured $4 million of a $12.69 million Series A-1 round (including convertible securities), according to a regulatory filing. raised $10 million in new VC funding. Thecompany previously raised over $24 million from firms like Horizon Ventures, U.S. Venture Partners and InterWest Partners.

Arginetix Inc., a Baltimore-based developer of small molecule inhibitors of arginase, has raised secured $4.6 million of ! a $17.5 million Series B round, according to a regulatory filing. $2.3 million in first-round funding. Ithad previously raised $2.3 million fromQuaker BioVentures, MedImmune Ventures, Red Abbey Venture Partners, Maryland Health Care Product Development Corp. and Acidophil LLC.

OpenQ, aproviderof CRM biotech software, has raised an undisclosed amount of equity funding from Grotech Ventures. VentureWire puts the round about at $2.5 million. OpenQ has offices in the U.S. and France., an online answer engine run by Paul Pedersen, has raised $1.2 million in VC funding, according to a regulatory filing. No investors were named.

Venrock has agreed to buy approximately $10 million worth of common shares in! drug company Durect Corp. (Nasdaq: DRRX), at $2.25 per share. Read more…

Buyouts Deals

Asahi Brewery is denying reports that it is in talks to buy Orangina Schweppes Group, from Blackstone Group and Lion Capital. Suntory Holdings is considered the primary suitor for the Japanese beverage maker, which could fetch upwards of $3.8 billion.

Cotton Creek Capital has acquired Waste Partners of Texas, a Dallas-based provider of solid waste collection, sweeping, portable sanitation and related services in the Southwestern U.S. No financial terms were disclosed for the deal, which was followed by a bolt-on acquisition of Texas Toilets of Texas.

IDFC is denying an Economic Times report that it plans to buy BP’s wind power assets in India for approximately $134 million.

Extended Stay Inc. has agreed to an investigation into a 2007 buyout of the company, and a subsequent bankruptcy filing. Lightstone Group bought the discount hotel chain from The Blackstone Group two years ago for approximately $8 billion.

PE-Backed IPOs

Dollarama Inc., a Montreal-based discount retailer, has filed to raise more than C$250 million via an IPO in Canada. Bain Capital holds an 80% ownership stake. Lead underwriters include RBC Dominion Securities, CIBC World Markets and Credit Suisse Securities (Canada).

Myer, an Australian department store chain owned by TPG Capital, is planning to raise up to $2.6 billion via an IPO in Australia before year-end.

PE-Backed M&A

California Products Corp., an Andover, Mass.-based maker of architectural coatings, has acquired the customer base and certain assets of Louisville, Ky.-based Progress Paint Manufacturing Co. No financial terms were disclosed. California Products is a portfolio company of Apollo Capital Management.

Evolva SA, a Swiss biotech company that uses a genetic chemistry platform to developer small molecule drugs, has agreed to go public via a reverse merger with Arpida Ltd., which is listed on the Swiss stock exchange (SIX: ARPN). Evolva has raised around $20 million in VC funding from firms like Novartis Venture, Aravis, Sunstone Capital and Dansk Innovationsinvestering. It also plans to raise another CHF 25 million from new and existing investors.

The Outsource Group Inc., a St. Louis-based provider of receivables management services to the healthcare industry, has acquired Medstandard Inc., aHouston, Texas-based provider of patient screening and Medicaid eligibility services. No financial terms were disclosed.Outsource Group is owned by ClearLight Partners.

Smilebox Inc., a Redmond, Wash.-based provider of multimedia expressions technology, has acquired Preclick Corp., a Seattle-based provider of digital photo software for companies like Wal-Mart, Cosco and SanDisk. No financial terms were disclosed. Smilebox has raised $12 million in VC funding from firms like Bessemer Venture Partners and Frazier Technology Ventures. Preclickhad raised$1.6 million from LORE Associates, Mid-Atlantic Angel Grou! p, Robin Hood Ventures and SJF Ventures.

Trustwave Corp., an Annapolis, Md.–based provider of on-demand data security and payment card industry compliance management solutions, has acquired Vericept Inc., a Denver-based provider of provider of data loss prevention and IP protection solutions. No financial terms were disclosed. Trustwave raised $10 million from FTV Capital in 2004, while Vericept had raisednearly $70 million since 2000 from firms like Sigma Partners, Chicago Growth Partners, Globespan Capital Partners, Visa Inc. and Sequel Ventures.

Firms & Funds

The Carlyle Group is raising its third Asia buyout fund with a target of $3 billion. It closed its predecessor fund in mid-2006 with $1.8 billion.

Goldman Sachs added The Blackstone Group (NYSE: BX) to its “Americas conviction buy list” and raised its price target from $16 per share to $18 per share.

Inflexion Private Equity, a UK-based mid-market buyout firm, has closed a new co-investment fund with £75 million in capital commitments. It will invest alongside a £165 million fund raised in 2006.

Human Resources

Pete Kight, founder and former CEO of CheckFree Corp. has joined mid-market investment firm ComVest Group as a managing partner.

Luca Destito has joined Investindustrial. He previously was a partner with lnvestitori Associati.

John Ausura and Steve Contardi have joined Navigation Capital Partners as executives-in-residence. They will focus on acquiring a contract manufacturing company for green cleaning products — a search process in which NCP is partnering with Brookwood Associates.