peHUB Wire: Monday, February 23, 2009

I respect Tom Friedman. Hell, I envy him. But the man has taken temporary leave of his senses, by repeatedly arguing that some sort of venture capital bailout is in order.

First, he penned a piece arguing that VC-backed cleantech companies were” dying like flies,” due to a lack of capital. I’ve repeatedly written about the lack of project finance for the handful of VC-backed startups that need it (mostly facility-heavy electric vehicle and biofuel producers), but Friedman vastly overstates the problem. Moreover, he fails to note that a number of firms rushing in to fill the void, including Blackstone, C Change, CMEA and Kleiner Perkins.

Then came a follow-up column, in which he wrote:

“You want to spend $20 billion of taxpayer money creating jobs? Fine. Call up the top 20 venture capital firms in America, which are short of cash today because their partners — university endowments and pension funds — are tapped out, and make them this offer: The U.S. Treasury will give you each up to $1 billion to fund the best venture capital ideas that have come your way.”

Who on earth is advising Tom Friedman on the venture capital market? Yes, limited partners are hurting for cash. But almost no institutional investor has defaulted on a capital call, and certainly not to the “top 20 venture capital firms in America.” If anything, LPs are still desperate to get into these best of breed firms (since most everyone else is underwater). Moreover, venture capital investing is still at a very healthy level. Sure there will be fewer dollars disbursed this year than last, but it’s not a reflection of capital constraints at the top VC firms. Perhaps ! it reflects a bit more caution — and certainly reflects lowered valuations — but new deals are being done each day.

Finally, Friedman doesn’t at all address the real issue for venture capitalists: A massive roadblock where the exit avenues used to be.

For some VC perspectives on all this, peHUB has published a pair of Vox Populi pieces. First up is Bill Gurley of Benchmark Capital, who wrote about Friedman’s first piece. Next up is Jeff Bussgang of Flybridge Capital Partners, who wrote about his more recent one.

By the way, if you’re a VC who believes Friedman is on the money, I’d love to hear from you…

*** Réal Desrochers has resigned as head of alternative investments for CalSTRS, where he oversaw over $17 billion in assets under management. peHUB has some additional details here, while a formal announcement is expected to come later today.

*** Layoff Watch: Mid-market lender Churchill Financial last Thursday let go around one-third of its staffers, leaving it with around 50 employees. Most of the cuts came on the origination side, as Churchill has been hammered by the industry-wide deal drought.

“The number of origination folks we had compared to the number of deals we had was just out of whack,” says a source within Churchill. “These were good people in a bad situation. It didn’t have anything to do with them individually… If things turn around, I’d imagine we’d jump right back into hiring mode.”

Among those given pink slips were Chicago-based managing director Kevin Murray, some senior members of Churchill’s Boston office and a mezzanine pro in Los Angeles.

*** The morning after Barack Obama was elected president, I wrote that the debate over carried interest taxation was effectively over. Obama had promised on the campaign trail to change the treatment of carried interest from capital gains to ordinary income — which in most cases would raise the rate from 15% to 35 percent – and I saw little chance that he’d go back on that word. I also assumed that most people agreed with me, until the following exchange with NVCA chief Mark Heesen, during a 5 Questions at peHUB:

Dan: One of your big issues over the past two years has been tax treatment of carried interest. Is that still a big priority?

Mark: I think it continues to be an issue, but you were dead wrong when, the day after the election, you basically said that a change to the carried interest tax was fait accompli. We got lots of calls after that column, saying “Oh my God.”

We knew it wasn’t going to happen at that point. You’ll see it brought up again, but in this environment it’s very unlikely you’ll see Congress working on issues that are not huge revenue-raisers. They will not be out there trying to slap the wrists of people they shouldn’t be slapping the wrists of, because there are more important issues to work on at this point.

Well, today’s Wall Street Journal reports that Obama will indeed include the carried interest tax change as part of the budget blueprint being unveiled later this week. The article does not make clear when the proposed change would go into effect, but I’d assume it would be either the 2010 or 2011 tax year.

Regular readers know that I support this change, and it’s probably not worth rehashing the argument. Instead, three quick points:

1. This entire issue first arose when private equity and hedge fund profits were at record-highs. Were it to be made effective for 2008 or 2009 carried interest, however, it would barely merit a rounding error.

2. The article does not say if venture capital profits would be included in the change, although I’d assume they would. The NVCA has tried cleaving itself from the buyout and hedge markets, but legislators seem unwilling to split that baby (see: Hedge Fund Transparency act).

3. I wonder if Obama’s proposal could spark a run of private equity exits. Assuming the changes don’t go into effect for 2009, there could be major incentive to sell now rather than later. Kind of like all those family businesses that went on the block last year, after it became pretty clear that capital gains tax rates would increase once the current law expires.

*** Thanks to all of you who sent birthday wishes yesterday. And a special thanks to J, who planned a surprise gathering and snared a pair of Springsteen tickets. Note to (my) boss: I may cut out a bit early on April 21.

Top Three

Marc Andreessen, co-founder of Netscape, is forming a venture capital fund with former Opsware executive Ben Horowitz. The pair have been co-investing as angels since 2007. peHUB broke the news on Friday.

Markstone Capital Partners has acquired a controlling interest in TomCar Ltd., a Rochester Hills, Mich.-based maker of off-road vehicles. No financial terms were disclosed. Markstone has named Tom McAlear, former COO of DaimlerChrysler Financial Services, as TomCar’s new chief executive.

Réal Desrochers has resigned as head of alternative investments for the California State Teachers’ Retirement System (CalSTRS), peHUB has learned.

VC Deals

IndoorDirect, an Addison, Texas-based out-of-home media network for the fast food and casual dining markets, has raised $22.5 million in Series B funding. Syncom Venture Partners led the round, and was joined by Northwood Ventures and Poseidon Enterprises. Challenger Capital Group served as placement agent.

Westec Intelligent Surveillance, a Dallas-based provider of remote video monitoring services, has raised $20 million in private equity funding. Argonaut Private Equity and Egis Capital Partners co-led the round, and were joined by existing shareholders like Clarity Partners.

Buyout Deals

Aladdin Knowledge Systems (Nasdaq: ALDN) shareholders have approved Vector Capital’s offer to buy the company for $11.50 per share, or approximately $160 million. Last year, Aladdin rejected a $13 per share offer from Vector. Wells Fargo Foothill has committed to provide leveraged financing for the buyout. Aladdin is an Israeli maker of security software.

American Greetings Corp. (NYSE: AM) has received bankruptcy court approval to acquire bankrupt rival Recycled Paper Greetings Inc. The deal has been strongly opposed by Monitor Clipper Partners, which bought American Greetings in 2006.

The Carlyle Group is leading a group interested in acquiring AIG’s aircraft leasing business (ILFC), which is valued by some analysts at around $8 billion. Another interested consortium includes Onex Corp. and Greenbriar Equity Partners. Neither KKR nor Temasek is still interested.

KPS Capital Partners has agreed to acquire Anheuser-Busch InBev’s Labatt USA unit. It also agreed to buy High Falls Brewing Co. and a perpetual license for the Seagram’s Cooler Escapes and Seagram’s Smooth brands from Pernod Ricard USA. No financial terms for any of the transactions were disclosed.

Patheon Inc. (TSX: PTI) said that a special committee determined that a US$2 per share takeover offer from JLL Partners “significantly undervalues” the company. JLL currently holds a 30% stake in Patheon, but said earlier this month that it would commence an offer for the remaining shares. Patheon is a Canadian provider of contract development and manufacturing services to the global pharmaceutical industry.

Standard & Poor’s has cut the corporate rating of Bankruptcy Management Solutions Inc. from B- to CCC+, and also downgraded part of the company’s debt. BMS is an Irvine, Calif.-based provider of hardware and support services to bankruptcy trustees and certain other fiduciaries. It was acquired in 2006 by Charlesbank Capital Partners.

Standard & Poor’s has cut the corporate credit rating of Clear Channel Communications from B to B-, and also cut its issue-level ratings. Both ratings remain on S&P CreditWatch. Clear Channel was acquired last year by Bain Capital and THL Partners.

PE Exits

China Development Bank is considering a buyout of Shenzhen Development Bank, according to local media reports. SDB shares jumped 10% on the news, before being suspended. CDB later said in a press release that it has no current plans to buy SDB, or any other bank. As of last June, Newbridge Capital held a 16.76% stake in publicly-traded SDB.

Scottish Re Group Ltd. (OTC BB: SKRRF) has completed the sale of its ING individual life reinsurance business to Hannover Ruckversicherung AG. No financial terms were disclosed. Scottish Re raised $600 million from Cerberus Capital Management and MassMutual Capital Partners in late 2006, via a placement of conve! rtible preferred shares.

Waterbury Companies Inc., a portfolio company of Wind Point Partners, has sold its CB Professional Products line of insect control products to FMC Corp. (NYSE: FMC). No financial terms were disclosed.

Firms & Funds

The Blackstone Group (NYSE: BX) said that it will release its Q4 and 2008 year-end earnings results this Friday.

BNP Paribas Investment Partners has acquired a minority equity stake in Northern Lights Ventures, a Tacoma, Wash.-based private equity firm focused on the money management industry. No financial terms were disclosed.

Human Resources

John Brakey has joined Kohlberg Kravis Roberts & Co. as a director in the firm’s Sydney, Australia office, according to LBO Wire. He previously led private equity fund-of-funds activities for Macquarie Group.