PEHUB Wire: Monday, February 2, 2009

The sky is gray, I’m back in the home office and Cardinals fans are still waiting for a review of that last play. In other words, it’s time for some Monday Mouth-Off.

Most of last week’s email was in reply to the Radically Reinventing Venture Capital column. An LP writes: “This is an interesting approach and could work if a single LP has access to a single high performing proven blue chip VC. On the other hand, would a superstar VC want to be beholden to a single LP? Maybe in this market – capital is really scarce.”

Bill: “I believe a lone VC would have trouble creating the “portfolio effect” that is key to VC returns. I don’t imagine a single partner would have the manpower to digest enough leads, do enough diligence, etc to distill the wheat from the chaff in order to make enough investments to find that single home-run that makes the fund and counterbalances the multiple write-offs. You could argue that the LP would realize this effect one step up the ladder, as they would employ multiple VCs. However, that really raises the barrier to entry for VC investments, as an LP could not invest in VC without incurring the significant headache of basically assembling their own VC firm, and performing due diligence on lots of lone wolf VCs. This is the reason VCs have organized into firms and operate as they do tod! ay – LPs are willing to pay for someone else to have all that overhead in order to create the portfolio effect.”

Brian: “Sounds like the suggestion is really: Close lots of VC shops. Have the newly-free GPs try to latch onto a single LP for whom they will do proprietary deals. The others get out of the industry. What you’re asking for in that sense is smarter LPs to not give money to people who are doing a bad job, which they have so far proven unable to do (or else you wouldn’t be looking for suggestions to radically change VC).”

Roy: “In a partnership model the group often tries to gain exposure to a variety of trends or industry sub segments. If the VC was focused more on their individual record, they would focus more on the actual company they were investing in than gaining exposure to trends, something that would benefit the LPs, VCs and companies.”

Exec Recruiter: “One of the issues that needs to be tackled is VC compensation and incentives. In the “radical” plan you provided, your VC took a compensation scalping all the way down to a base salary of $1M before achieving any results. No wonder people think the model is flawed. How many of these same VCs compensate the CEOs of their portfolio companies anything that approaches this? Their CEOs are expected to kill themselves for $200-300k per year until they can generate a return. Even then, they are sitting behind VC preference and might have an upside on no more than 4-7% of the common shares. What’s wrong with this picture and why do LPs continue to think this is reasonable?”

RVC: “The elephant in the room is that there is still fundamentally too much money going into venture. Changing the way that money gets allocated will not fix the problem. The system simply will not support the level of capital in terms of great entrepreneurs, customer adoption or acceptable exits, except in periodic bubbles. The structure proposed could address the overcapitalization issue, but only if universally adopted.”

*** Anthony tackles a different topic: “Did you see the Cash4Gold ad during the Super Bowl? I guess we now know where some of that venture capital investment went.” Yes Anthony, I did. So what arte we thinking? Around $3 million for the spot, plus fifty bucks for Ed McMahon and MC Hammer? If you haven’t seen it, I’ve posted it in peHUB First Read.

Top Three

The Carlyle Group has sued Neil Shen, a founding partner of Sequoia Capital China, for allegedly wreaking Carlyle’s planned investment in a Chinese medical research firm. Carlyle is requesting $206 million in damages. In other Sequoia Capital China news, Shen’s fellow co-founding partner, Zhang Fan, has left the firm.

CVC Capital Partners has agreed to sell its 22% stake in Post Danmark to the Danish government, conditional on the closing of a merger between Post Danmark and Sweden’s Posten AB. CVC also announced that it would buy Post Danmark’s 25% stake in Belgian postal services provider De Post-La Poste, for €373 million. CVC already holds its own 25% position in De Post-La Poste.

OpenTable Inc., a San Francisco-based operator of an online restaurant reservation system, has filed for a $40 million IPO. It plans to trade on the Nasdaq, with Merrill Lynch serving as lead underwriter. OpenTable reports that it had around $41 million in revenue for the first nine months of 2008, with a $150,000 net income loss. It raised around $110 million in VC funding between 1999 and 2003, from firms like Benchmark Capital (26.42% pre-IPO stake), Impact Venture Partners (17.5%), IAC/Interactive Corp. (10.88%) and Integral Capital Partners (7.51%).

VC Deals

Arcxis Biotechnologies, a Pleasanton, Calif.-based developer of pathogen detection devices for use in clinical molecular diagnostics, has held a first close on its Series B funding round. No financial terms were disclosed. Claremont Creek Ventures led the tranche, and was joined by Kaiser Permanente Ventures and Alafi Capital.

Mochila, a New York-based online content marketplace, has raised an undisclosed amount of Series C funding led by return backer The Greenspun Corp. Other existing shareholders include Belo, Charles River Ventures, Mission Ventures and Jerry Colonna. The company has raised $30 million in total VC funding.

Siemens Venture Capital has agreed to acquire a 20% stake in Maxxtec AG, a German provider of waste-heat systems and organic rankine cycle modules for biomass and industrial applications. The deal is valued at approximately €10 million, and is SVC’s first transaction from its new growth capital practice.

Buyout Deals

Contech LLC, an auto parts maker owned by Marathon Asset Management, has filed for Chapter 11 bankruptcy protection.

MatlinPatterson has completed its $250 million PIPE investment in Flagstar Bancorp Inc. (NYSE: FBC), the largest publicly-held savings bank based in the Midwestern U.S. Flagstar also announced that it had received $266.6 million from the U.S. Treasury’s TARP Capital Purchase Program, and another $5.32 million from management.

PE-Backed IPOs

MagnaChip Semiconductor LLC, a South Korean maker of analog and mixed-signal semiconductor products for high-volume consumer applications, has withdrawn registration for a $575 million IPO, citing “unfavorable market conditions.” It had planned to trade on the NYSE, with Goldman Sachs, UBS and Credit Suisse serving as co-lead underwriters. The company was formed in 2004, via the $828.2 million carve-out of Hynix Semiconductor’s non-memory semiconductor operations, by Citigroup Venture Capital, CVC Asia Pa! cific Ltd. and Francisco Partners.

PE Exits

Allux Medical Inc., a developer of minimally-invasive devices for the treatment of upper airway and dermatological inflammatory diseases, is being managed by turnaround/shutdown firm Sherwood Partners, according to its website. VentureWire first reported the news. Allux Medical has raised around $12.2 million in VC funding since 2004, from firms like Prospect Venture Partners, Three Arch Partners and Venrock.

First Reserve Corp. has agreed to sell a 10.75% equity interest and pro-rata funding obligation in Longview Intermediate Holdings to Siemens Financial Services. No financial terms were disclosed for the deal, which is expected to close within 60 days. Longview is part of GenPower Holdings, a power generation platform formed in October 2006 by First Reserve and GenPower LLC.

Lyceum Capital has sold SPI Group Ltd., a UK building services company, to Npower, a subsidiary of RWE Group. No financial terms were disclosed.

Firms & Funds

Vision Capital, a UK-based secondaries firm, has closed its seventh fund with €680 million in capital commitments.

Henderson Group (LSE: HGGH) has agreed to acquire New Star Asset Management (LSE: NSAM).

Human Resources

Robert Gillespie has joined Evercore Partners as a London-based senior managing director in the firm’s advisory business. He is the former vice chairman of UBS Investment Bank.

Gwyneth Ketterer reportedly is leaving Irving Place Capital, where she serves as chief operating officer and as a senior managing director. Private Equity Online reports that she plans to teach at Columbia University’s Business! School, although it’s unclear if that would be a fulltime position.

Peter Nachtnebel has agreed to join Advent International, as a Prague-based member of the firm’s Central & Eastern Europe team. He previously was with UniCredit Markets & Investment Banking, as a managing director and head of financial sponsors and leveraged finance for Central & Eastern Europe.

Cadwalader, Wickersham & Taft LLP has named John Rapisardi as co-chairman of the firm’s financial restructuring department.

Genstar Capital has promoted James Nadauld to principal. Nadauld joined the firm in 2004 as a senior associate, and was later promoted to vice president. He focuses on the healthcare sector, and currently serves on the board of Genstar portfolio companies Oncure Medical Corp. and Univita Health Inc.