peHUB Wire: Friday, September 17, 2010

The National Weather Service warned NYC to expect “hail up to nickel size” yesterday, Congress again threatened to pelt the industry with higher taxes on carried interest, and Third Rock Ventures proved health care VC has plenty of life left in it.

In other words, time for Friday Feedback, and first up is last Thursday’s guest column by Georganne Perkins of fund-of-funds manager Fisher Lynch Capital. Perkins made a case for sticking with venture capital in its hour of need, despite less than respectable returns over the last three decades.

George Writes: “Nice middle of the road story that takes no real stance and suggests that just hanging in as an LP will be worthwhile. It won’t. Venture has systematically turned subprime exactly because of some the reasons you mentioned. Innovation does not become valuable by some tweaking in-market by VCs that makes it mysteriously become successful. (Haven’t they done that for the last 20 years? How is that working for you?) Innovation can only become successful when it attaches to large-scale macro-economic behavior. And venture can only succeed when GPs deploy the appropriate risk to the pursuit of that significant upside. And how you define upside requires GPs that have more relevant experience than sitting on the sideline managing mon! ey with ten levels of diversification of risk…”

Mike Writes: “I share [Perkins’s] enthusiasm for venture, and am convinced that we are now looking at the opportunity of a generation. I do, however, see different reasons for the asset class’s poor historical returns. Investment returns in venture are produced at the intersection of the underlying performance of the portfolio company and the decisions of the VC driven by year-of-fund-life considerations. When a VC sees an incredible opportunity in a prospective investment, the VC first must answer the question: “What year of life is my fund in?” The answer to that will determine to a large degree the actions of the VC. Th! is is relevant because the academic research shows that venture returns are negatively correlated with capital inflows…”

Also hitting a nerve was a recent post by reporter Joanna Glasner on a prescription for mending venture capital by InLab Ventures. The firm, investing from a $6 million starter fund, recommends taking a more scientific approach to due diligence. It also advocates aligning limited and general partner interests more closely.

Nathan Writes: “I’m skeptical that such a vigorous/rigorous DD process will generate better investments. I think there will be an “adverse selection problem,” in that “hot” startups will not have the patience for a pre-screening questionnaire, a 30 day review process, etc. Thus, only startups that are really, really desperate for capital will stick it out and be willing to jump through that many hoops. In addition, we’re talking about a $6m starter fund here, which implies small rounds and very early stage companies; what startups at that stage have robust IP, accounting, exit strategies etc. already worked out and subject! to serious scrutiny? Anyway, will be an interesting one to watch.”

*** The Outlier: According to the Reuters PE/VC Partnership Agreements Study 2010-2011, more than one in four US buyout funds, and just under one in five US venture funds can amend their partnerships without LP permission to reflect changes in how carry is taxed provided it doesn’t impact LP economics. Could come in handy.

***Quiz Answer. Which buyout firm plans to exit the remaining four companies from its vintage 1998 fund in the next 12-18 months? Aurora Capital Group, in LA.

***Trivia Quiz Answer. Which PE placement agent once won The New Yorker’s cartoon caption contest? Paul Denning, of Denning & Co. Contest #76.

Top Three

It’s back. Yesterday Senate democrats revived a proposal to raise the tax rate on carried interest. Under the plan, 75 percent of carried interest would be taxed as regular income, and the remaining 25 percent as capital gains. However, only half of carried interest earned from assets held for more than five years would be subject to regular income taxes, an apparent effort to encourage longer holding periods. Today, carried interest is taxed as capital gains.

Carlyle Group may buy a stake in a hedge fund manager. It is also looking to raising two new debt funds and a $1 billion pool to buy small companies, Bloomberg reported. The news wire said, citing people briefed on the plans, that one of the potential hedge fund manager targets has as much as $5 billion in assets.

3i Group PLC’s Jonathan Russell, one of the firm’s top dealmakers, is leaving. His departure is part of a reorganization that will merge the firm’s buyout and growth capital divisions. Russell was head of buyouts and responsible for more than €5 billion ($6.5 billion) worth of funds. He worked for 3i for 24 years.

VC Deals

Eddingpharm (Cayman) Inc. closed a $24 million Series B financing. The round was co-led by OrbiMed Advisors Caduceus Asia Partners Fund and Domain Associates. Sequoia Capital China Growth Fund also participated in the financing. Eddingpharm is a specialty pharmaceutical marketing company focused on China. It plans to use the capital for ! in-licensing of drugs from suppliers, to co-develop prescription drugs and to seek potential M&A opportunities.

Penny Auction Solutions Inc. signed an agreement to receive a $10 miilion equity line of credit from Kodiak Capital Group LLC. Penny Auction plans to use the capital to establish operations and begin offering services early next year.

Bloomspot closed a Series A round of funding and secured $9 million. The round was led by Menlo Ventures. True Ventures and Harrison Metal also participated in the financing. Other investors that took part in an initial seed round, which closed March 2009, include Silicon Valley executives Jeff Weiner, Erik Blachford and Brad Garlinghouse. Bloomspot is a flash sale service focused on luxury hotels, restaurants and spas.

InstaMed raised $6 million in growth capital. The financing came from existing investors who with this round have invested a total of $22 million. Backers of the Philadelphia, Pa.–based provider of a healthcare payments network and platform include Osage Partners, Ashby Point Capital, NJTC Venture Fund, U.S. Bank, N.A. and a private equity group in Newport Beach, Calif.

Astute Networks Inc. said it received a significant capital investment from Tallwood Venture Capital. Financial terms were not disclosed. The San Diego, Calif.-based provider of storage solutions for network applications plans to use the funding to expand its existing customer base and to secure additional design wins for its Advanced Telecommunications Computing Architecture storage products.

Buyout Deals

Catterton Partners sold a controlling stake in its portfolio company Heartland Recreational Vehicles LLC to Thor Industries Inc. for more than $200 million in cash and stock. Heartland will continue to operate under the same name and will maintain its current brand portfolio.

TDC A/S, a private equity-backed Danish telephone company, is close to a deal to sell Swiss unit Sunrise to buyout firm CVC Capital Partners, six people familiar with the matter said on Thursday. The deal puts Sunrise’s enterprise value at about 3.3 billion Swiss francs ($3.3 billion), four of the people said, making it one of the year’s largest leveraged buyouts. A deal is likely to be announced on Friday, some of the people added.

K-Sea Transportation Partners LP completed its agreement with KA First Reserve LLC. K-Sea Transportation sold 2.8 million more convertible preferred units for $15 million. The transactions raised $100 million in exchange for a total of 18.4 million convertible preferred units. KA First Reserve is a partnership between First Reserve and Kayne Anderson Capital Advisors that previously agreed to invest $100 million in K-Sea Transportation Partners L.P. in exchange for the 18.4 million units.

Jones Energy acquired certain oil and natural gas properties primarily in Ellis County, Okla. for of $33 million. The properties have a current daily production rate of 530 BOE and an incremental 6,700 MBOE attributable to identified drilling locations. Metalmark Capital made its initial investment in Jones Energy in December 2009.

Navigation Capital Partners of Atlanta’s James Brown Contracting Inc. acquired Schrader Trucking Co. Inc., a Jefferson City, Tenn.-based dry van truckload carrier. Schrader has 95 trucks and 201 trailers. It operates in the Southeast as well as in the Midwest, Mid-Atlantic, Texas and Canada.

VMware Inc. is in advanced talks to buy Novell Inc.’s Linux operating system business, the Wall Street Journal reported on Thursday, citing people familiar with the matter. The paper reported that private equity-backed software company Attachmate Corp. could buy some or all of Novell’s remaining assets.

PE-backed M&A

Nando’s Group Holdings Ltd. agreed to acquire Clapham House Group Plc. Its proposal values the British restaurant operator Clapham at £30.4 million ($47.5 million). Nando’s is owned by private-equity firm Capricorn Ventures International. Capricorn already owns about 27 percent of Clapham.


SouFun Holdings Ltd. said late Thursday that it had priced 2,933,238 American depositary shares at $42.50 each. Each ADS represents four Class A ordinary shares of the company. SouFun will begin trading Friday on the NYSE under the ticker “SFUN.” Underwriters on the deal have the option to buy another 439,986 ADS’s. Current major shareholders of SouFun include IDG Venture Capital and Telstra. After the IPO, General Atlantic and Apax Partners will become major shareholders. SouFun! is a real estate Internet portal and home furnishing and improvement website in China.

PE Exits

Navis Capital Partners said on Friday it has sold Malaysia-based rubber products maker Linatex to British engineering firm Weir Group. Financial terms were not disclosed.

Firms & Funds

Standard & Poor’s assigned its ‘A’ senior unsecured debt rating to Blackstone Holdings Finance Co. LLC’s senior unsecured debt due March 15, 2021. The notes are fully and unconditionally guaranteed by Blackstone Group LP and Blackstone Partnerships. S&P said the rating is based on the asset-manager’s business model, stable recurring revenue streams, diverse businesses, a strong balance sheet, and a high level of transparency in the guarantor partnerships.

Evercore Partners Inc.’s offering of about 2.64 million Class A common shares was priced at $27.50 a share. The investment banking advisory firm plans to sell about 2.56 million of the securities, which would provide approximately $67 million in proceeds to Evercore. Goldman, Sachs & Co. and Evercore Group L.L.C. are acting as the joint book-running managers.

Human Resources

Wicks Group of Cos. LLC named Carl Fazio chief financial and operating officer of its portfolio company Antenna Audio. Fazio is a seasoned financial and operating executive with over 25 years of experience in the information and media industries, Wicks said.