peHUB Wire: Friday, September 4, 2009

Has the private equity pay-to-play phenomenon achieved its manifest destiny, stretching its corrupt arm all the way to Sacramento?

At issue is Charles “Chuck” Valdes, a CalPERS board member who currently is under investigation for accepting campaign contributions from businesses that later secured investment business from the pension system (which happens to be the nation’s largest).

“There was an audit of Mr. Valdes’ campaign committee, as required by law,” explains Roman Porter, executive director of the California Fair Political Practices Commission. “Theresults of that audit then caused our enforcement division to open up an investigation. That investigation is ongoing at this point, and I cannot provide further comment on it.”

Pension & Investments reported earlier this week that Valdes’ benefactors included Alfred Villalobos, a former CalPERS board member an! d Los Angeles deputy mayor. Upon leaving the CalPERS board in 1995, Villalobos formed a fund placement group called ARVCO, which regularly seems to find itself in the headlines for backroom political dealings.

In May, it was revealed that ARVCO used former Bronx borough president Fernando Ferrer to help secure a commitment from a New York state pension system, without publicly disclosing Ferrer’s involvement. Closer to home, Villalobos has a particular aptitude for securing investments from CalPERS. There was the time in 1996, for example, when ARVCO secured a $100 million commitment from CalPERS for Hicks Muse Tate & Furst, even though the CalPERS private equity staff had been publicly opposed (CalPERS later sold the fund position in a secondary sale).

In ! fact, retaining ARVCO has been close to a slam dunk for securing fund commitments from CalPERS. The system has invested in seven of the eight opportunities presented by ARVCO between 2002 and 2008, according to a document obtained by peHUB (find it here). The wins include commitments for three funds from Apollo Management totaling $2.45 billion, plus CalPERS’ purchase of a 10% stake in Apollo itself (originally valued at around $600 million). Other successful ARVCO clients included an affiliate of Aurora Capital ($400m from CalPERS) and Pacific Corporate Group ($500m).

To be clear: There has been no finding that Valdes violated any laws, and the California Fair Political Practices Commission is not investigating Villalobos or ARVCO. CalPERS has declined comment.

A few other notes:

• We have not been able to independently confirm that Valdes received campaign contributions from Alfred Villalobos, but have received documents from the CA Secretary of State showing contributions by Carissa Villalobos, who serves as ARVCO’s general counsel. We’ve posted them to peHUB.

• The California Fair Political Practices Commission is a government organization, but not one with the ability to impose anything beyond a $5,000 fine per violation. State prosecutors do sometimes use these violations as bases for criminal prosecutions, although the violations are only treated as misdemeanors. This is not to say, however, that other criminal investigations can’t – and don’t – occur independently.

• Sources familiar with the situation tell me that there is more to this story than what has come out so far. And considering that these same sources first told me about ARVCO and the CalPERS board more than a year ago, I tend to believe them.

Top Three

NTK Holdings Inc. (Nortek), a Providence, R.I.-based maker of ventilation, air conditioning and heating products, said that it will file for bankruptcy protection as part of a restructuring agreement with its lenders. THL Partners acquired NTK from Kelso & Co. in 2004, and held a 66.48% equity stake as of late 2007, when NTK canceled a proposed $690 million IPO.

Archipelago Learning Inc., a Dallas-based provider of online education tools and services, has filed for a $75 million IPO. It plans to trade on the Nasdaq under ticker symbol ARCL, with BoA Merrill Lynch serving as sole underwriter. Providence Equity Partners acquired a majority stake in Archipelago Learning in January 2007, for $84.5 million.

American Capital has reached forbearance agreements with some of its lenders.

VC Deals

Fluidigm Corp., a South San Francisco-based provider of integrated fluidic circuits for the life sciences market, has raised $10.7 million in convertible financing. The move comes approximately one year after the company canceled a planned IPO, which was designed to raise upwards of $85 million. The company previously raised nearly $200 million in total VC funding since 1999, from firms like Bio*One Capital, Versant Ventures, EuclidSR Partners, InterWest Partners, Alloy Ventures, InterWest Venture Partners and Lilly Ventures.

MashLogic, a Menlo Park, Calif.-based provider of a browser extension that provides contextual information on websites, has raised $2.5 million in new VC funding, according to a regulatory filing. Kittu Kolluri, a partner with New Enterprise Associates, is listed as a new board member. David Cowen, a partner with existing MashLogic backer Bessemer Venture! Partners, is also listed. MashLogic announced in early June that it had raised $500,000 in angel funding from Bessemer, Scott Kurnit, Reid Hoffman, Gil Penchina and Jeff Clavier.

Daktari Diagnostics Inc., a Boston-based developer of point-of-care diagnostics for infectious diseases, has raised $2.8 million in Series A funding. Backers include Partners Innovation Fund, Mass Medical Angels, Norwich Ventures, Launchpad Venture Group, Hub Angels Investment Group and Boston Harbor Angels.

Buyouts Deals

AXA Private Equity reportedly is considering a bid for the power distribution and transmission unit of French nuclear group Areva. Toshiba is planning to offer $5 billion.

One Equity Partners and South Korea’s SkyLake Incuvest are among those short-listed to buy Nortel Network’s stake in LG-Nortel, according to South Korean media reporters. Sony Ericsson and Alcatel Lucent also are on the list. Goldman Sachs is managing the process.

Pacific Plaza Health and Living, a Costa Rican private healthcare complex, has raised an undisclosed amount of funding from Aureos Capital’s Emerge Central America Growth Fund.

PE-Backed M&A

Boundless Network Inc., an Austin, Texas-based promotional merchandising company, has acquired Virginia-based distributor PromoCorp. No financial terms were disclosed. Boundless has raised VC funding from firms like Austin Ventures and Silverton Partners.

Cloud Packaging Solutions, a portfolio company of Cameron Holdings, has acquired Toll Packaging Group LLC, a Gibson City, Ill.-based contract packager of food and consumer products. No financial terms were disclosed.

PE Exits

HMV Group has agreed to acquire a 50% equity stake in 7digital, a UK-based provider of digital media delivery solutions. The deal is valued at £7.7m in cash, and represents a mildly profitable exit for 7digital backers Balderton Capital and Sutton Place Managers.

LEO Pharma AS has agreed to acquire Peplin Inc. (ASX: PLI) for approximately US$287.5 million in cash. Peplin raised a $24 million PIPE last October from GBS Venture Partners, Asia Union Investments, MPM Capital, New Enterprise Associates and Orbis Funds Management.

Firms & Funds

Cisco Systems has committed $32 million to an $80 million VC fund being managed by SkyLake Incuvest & Co., with a focus on South Korea.

Graham Partners has closed its third fund with $515 million in capital commitments, according to LBO Wire. The Newton Square, Penn.-based buyout firm had been targeting $650 million, after raising $615 million for its second fund in 2005 (including a $150m co-investment vehicle).

Pacific Point, a new South Korean private equity firm, plans to acquire assets from the country’s defense contractor sector. Read more…

Human Resources

Jon Moulton yesterday stepped down as head of Alchemy Partners, the UK private equity firm he founded in 1997. Read more…

Bill Sharpe and David Santoni have left Lazard Middle Market. Sharpe was a managing director and COO, while Santoni was a managing director. Calls to Lazard Middle Market for comment were not returned.

Caroline Chabrerie has joined Proskauer Rose as a partner in the firm’s Paris office. She will focus on private investment fund formation and related transactions, and previously was with SJ Berwin. Also coming over from SJ Berwin is senior associate Christophe Baert.