peHUB Wire: Monday, February 1, 2010

A few quick notes as I settle back into the home office (before heading back to NYC):

*** Question for discussion: History shows that the best private equity returns come from investments made in economic downturns. Lower purchase prices, less buy-side competition, etc. Not a state secret, and something that was raised repeatedly by LPs and GPs during a panel I moderated last Friday at Columbia B-School’s conference.

So, shouldn’t we currently be seeing a boom in private equity fundraising? I know not every dollar raised in 2010 gets invested in 2010, but a bunch of it could… Instead, we see LPs twittering their thumbs on the sideline, and GPs either unable to raise or warned against heading out into a frigid market.

I guess fearful hearts have overwhelmed logical heads…

*** Kudos to First Round Capital, which last week launched what it calls the Entrepreneur’s Exchange Fund. It basically allows portfolio company execs to contribute a small piece of stock they own in their company, into a pool of small stakes in other First Round portfolio companies. In other words, each First Round entrepreneur has an economic interest i9n the success of other First Round entrepreneurs.

I think it’s a great idea, and I’m not just saying that because First Round is a sponsor of Wednesday night’s peHUB Shindig in NYC (it’s buying the “first round” of drinks). More importantly, it’s an innovative idea. VCs talk lots about innovation when it comes to technology, but way too little when it comes to their own industry…

*** Just asking: How long until we see a secondary firm create a team to take over troubled GPs in the buyout space? Yes, it would be hard to get LP supe! rmajority consent, but doesn’t it just make sense for the growing number of LBO firm walking dead?

*** Thoughts on three recent IPO filings:

1. When I looked at the Vringo’s S-1, my first thought was that it had $36 million in revenue for the first nine months of 2009. Then I looked a bit closer, and realized it was just $36,000. Why on earth is this an IPO candidate? A biotech can pull off such paltry numbers – pre-revenue, waiting for final clinical approval – but a provider of video ring-tone services?

2. GlassHouse Technologies last week refilled to go public, about a year after withdrawing its original S-1 due to market conditions. One big difference is that GlassHouse now plans to trade on the NYSE instead of the Nasdaq. Pretty surprising for a VC-backed storage company looking to raise just $75 million. Seems like NYSE is recognizing economic reality, and fighting for offerings it used to mostly ignore.

3. I’m sorry, but Tesla is simply a ridiculous IPO candidate. It’s shipped fewer than 1,000 cars to date, and its much-ballyhooed profitability lasted just long enough to secure government loans. Now it’s back in the red, and doesn’t anticipate profitability until its Model S is released (2k orders so far, each w/ $5k deposits), but that isn’t until 2012 (assuming no delays). I love the idea of electric cars, but not the idea of an IPO driven by hype over balance sheet (if this becomes the next Chrysler – circa 1970 – I’ll be glad to eat my words).

*** Last week, Matt McCall announced that he had left DFJ Portage in order to become a partner with New World Ventures. I had been hearing talk for nearly a year that Portage no longer planned to make new investments or raise a new fund, and both McCall and fellow Portage partner Ed Chandler confirmed the shutdown during separate phone conversations.

Chicago-based Portage will continue to manage its existing portfolio, including participation by McCall.

Top Three

Tesla Motors, a San Carlos, Calif.-based maker of electric vehicles, has filed for a $100 million IPO. The company reported a $31.5 million loss for the first nine months of 2009, down from a $57.3 million loss during the same period in 2008. It said to expect continued losses until it begins making “significant” deliveries of its Model S, which is not expected until 2012. The company has raised over $220 million in VC funding from firms like Draper Fisher Jurvetson, Daimler AG and VantagePoint Venture Partners.

HCA on Friday reported $7.61 billion in Q4 revenue, up 4.7% from $7.27 billion of revenue in the fourth quarter of 2008. It also! announced a $1.75 billion dividend for its shareholders. The hospital operator was taken private in 2006 for around $31 billion, by Bain Capital, KKR and Merrill Lynch Private Equity.

Citigroup plans to spin off its $10 billion Citi Private Equity unit, according to Bloomberg. The move was prompted by a need to cut debt, and was conceived prior to President Obama’s proposal to limit financial risk-taking by banks.

VC Deals

Pearl Therapeutics, a Redwood City, Calif.-based drug developer focused on respiratory disorders, has raised $15 million in Series C funding from return backersClarus Ventures, New Leaf Venture Partners and 5AM Ventures. It previously raised around $35.5 million, plus $8 million in venture debt.

Columb Technologies Inc., a Campbell, Calif.-based developer of recharge solutions for electric cars, has raised $14 million in Series B funding. Voyager Capital and Rho Ventures co-led the round, and were joined by Siemens Venture Capital and Hartford Ventures. Columb previously raised a $3.75 million Series A round led by Estag Capital.

Yodle Inc., a New York-based provider of local online advertising and lead generation, has raised $10 million in Series D funding. JAFCO Ventures led the round, and was joined by return backers Bessemer Venture Partners, Draper Fisher Jurvetson, Draper Fisher Jurvetson Growth and MentorTech Ventures. The company previously raised around $28 million.

Diffusion Pharmaceuticals, a Charlottesville, Va.-based developer of a drug candidate for enhancing oxygen diffusion,has raised $5.9 million in new VC and convertible note financing from undisclosed investors. It has now raised over$11.6 million in total funding.

Buyouts Deals

Aricent, a communications equipment maker, has raised an undisclosed amount of equity funding from Delta Partners. The company was acquired last September for $255 million from Flextronics, by KKR, Sequoia Capital, The Family Office and The Canadian Pension Plan Investment Board.

Huntsman Gay Global Capital has sponsored a recapitalization of T&D Solutions LLC, an Alexandria, La.-based power line maintenance and construction company. No financial terms were disclosed.

Lightyear Capital has acquired three broker-dealers from the ING Advisers network: El Segundo, Calif.-based Financial Network Investment Corp.; Denver-based Multi-Financial Securities Corp.; and St. Cloud, Minn.-based PrimeVest Financial Services Inc. No financial terms were disclosed. The companies will now operate under the name Cetera Financial Group.

Marlin ! Equity Partners has acquired the assets of CompassLea rning Inc., an Austin, Texas-based educational technology company that provides supplemental curriculum software to educators and students in grades K-12. No financial terms were disclosed. The seller was The Readers Digest Association, via a bankruptcy auction.

Permira reportedly plans to bid for UK furniture retailer DFS, which is being valued in excess of £500 million. Other likely suitors include Advent International and Cinven.

Home Foods Market, a Norwood, Mass.-based maker of frozen foods for both retail and foodservice customers, has secured $22 million in subordinated debt from Key Principal Partners. The deal was used to refinance the company’s existing debt and for working capital.

PE-Backed IPOs

Douglas Dynamics Inc., a Milwaukee-based maker of snow plows and salt spreaders for light trucks, has filed for a $150 million IPO. It plans to trade on the NYSe, with Credit Suisse and Oppenheimer&Co. serving as co-lead underwriters. The company reported net sales of $125.2 million for the first three quarters of 2009, down 5.8% from the same period one year earlier. Shareholders include Aurora Capital Group (68.65% pre-IPO stake), Ares Corporate Opportunities (33.03%) and the GE Pension Trust (15.23%).

Travelport, a New York-based travel services company owned by The Blackstone Group, has set its London IPO terms to between 382 million and 528 milli! on shares being offered at between 210 pence and 290 pence. The deal would value Travelport at $3.13 billion, were it to price in the middle of its offering range.

PE-Backed M&A

Monarch Natural Gas, a portfolio company of Metalmark Capital Partners, has agreed to buy most of the Riverbend midstream assets of Gasco Energy (NYSE Amex: GSX), for $23 million in cash. The deal includes related salt water evaporative facilities.

Professional Healthcare, an acquisition platform sponsored by Mainsail Partners, has acquired Home Health Services Inc., a St. George, Utah-based provider of home nursing and hospice services. No financial terms were disclosed.

Summit Materials, an acquisition platform in the building materials market, has acquired Hinkle Contracting Co. of Paris, Kentucky. No financial terms were disclosed. Summit was formed last fall by The Blackstone Group, Silverhawk Capital Partners and former BHP Billiton CEO Charles Goodyear. It has up to $780 million in capital commitments, and previously acquired Hamm Inc.

UPEK Inc., a Berkeley, Calif.-based developer of silicon-based fingerprint security solutions, has offered to merge with AuthenTec Inc. (Nasdaq: AUTH). The stock-for-stock merger would result in each company’s shareholders owning a 50% stake in the combined company, with AuthenTec backers also to receive a $40 million cash dividend. UPEK has rai! sed over $38 million in VC funding since being spun out of STMicroelec tronics NV (STM) in 2004. Shareholders include Sofinnova Ventures, Sofinnova Partners, Diamondhead Ventures, Earlybird Venture Capital, Partners Group and EDBV Management.

PE-Backed M&A

Dot Hill Systems Corp. (Nasdaq: HILL) has completed its previously-announced acquisition of Cloverleaf Communications Inc., a Southborough, Mass.-based developer of heterogeneous storage virtualization and unified storage technologies. The deal was valued at around $12 million, including $2.5 million in cash. Cloverleaf had raised nearly $15 million in VC funding from firms like Genesis Partners, BancBoston Ventures and Hyperion Partners.

SAIC (NYSE: SAI) has agreed to buy the online interactive virtual environment product line (Olive) of Forterra Systems Inc., for an undisclosed amount. Forterra has raised around $65 million in VC funding from firms like GC&H Investments,Sutter Hill Ventures, JVP, In-Q-Tel and Stanford University. Late last month, it reportedly laid off approximately half of its workforce, in anticipation of a sale.

Firms & Funds

Kuwait Investment Authority (KIA) last year invested about $750 million in BlackRock (NYSE: BLK), as disclosed by KIA managing director Bader al-Saad during a television interview.

Human Resources

Will Kohler has agreed to join Summerhill Venture Partners as a partner in the firm’s Boston office, after having spent the past six years with Prism VentureWorks.

Steven Berger has been named vice chairman and CFO of Weld North, a consumer-focused investment platform recently launched by KKR and former Kaplan CEO Jonathan Grayer. Berger is the former head of Lehman Brothers Merchant Banking, and most recently was founding partner of Richmond Park Partners.

Marten Mickos, former CEO of MySQL AB, has joined Index Ventures as an entrepreneur-in-residence. He also serves in a similar position with Benchmark Capital.

GMT Communications Partners has promoted Natalie Tydeman to partner and Vikram Krishna to principal. Tydeman joined the European private equity firm in 2007 as a senior associate, after having run business development for Fremantle Media. Krishna joined in 2005 as a portfolio reporting analyst.