PEHUB Wire: Monday, February 9, 2009

Is private equity the new taxpayer? That seems to be the word out of Washington DC, where tomorrow morning Tim Geithner will introduce the nextest bestest bank bailout plan.

Details are still sketchy, but Geithner apparently will propose that the second half of allocated TARP funds be used to buy up so-called “toxic assets” from bank balance sheets. If that sounds familiar, it’s because that’s what the first half of TARP funds was allocated for (before Hank Paulson became a serial freelancer). The difference seems to be that Geithner wants private investors to also chip in, since the price tag will be WAY more than $350 billion. That means private equity, hedge funds and anyone else sitting on a pile of dry powder. The assumption is that such investments would come with major downside protections, as an incentive for investors who, for the most part, have eschewed the opportunity to buy said “toxic assets” on the open market.

The obvious question, therefore, is if private equity firms would want any part of this. I’m sure there are small pockets of interest – Leon Black, Chris Flowers and Wilbur Ross come to mind – but how about Bain, Blackstone, Carlyle, KKR, TPG and other mega-fund managers? It would seem that a goodly portion of them would have to buy in so that Geithner’s plan could work, because even the largest PE funds couldn’t spend more than one or two billion dollars on such an investment.

My gut feeling is that few firms will take Geithner up on his offer, although I’m making lots of calls to find out if my gut has led me astray. First, many private equity firms can’t do this type of transaction, due to restrictions in the limited partnership agreements. Second, firms with enough LPA flexibility still might hesitate, due to: (a) The continued difficulty in assessing the underlying asset prices, (b) Limited partner complaints that could cause future fundraising troubles and (c) Limited partner inabilities to meet big Q1 capital calls.

On the flipside, some cynical firms could use such an opportunity to put lots of money to work, rather than cutting fund sizes (and, by extension, cutting fee income). Plus, there’s always the possibility of some firm honestly believing that they’re getting in on the ground floor of a future high-rise. Finally, wouldn’t one have to assume that Geithner would have already gauged PE interest as part of his design work? If so, perhaps that means that he’s been met with interest… We’ll have more on this later today at peHUB, and be sure to let me know your thoughts.

*** Speaking of TARP: A Congressional oversight committee on Friday issued a report that was harshly critical of how Hank Paulson & Co. spent the initial monies, arguing that they only got around 60 cents worth of value for every dollar spent. Most of the media reports quote Elizabeth Warren, a Harvard professor who chaired the study. What they fail to note, however, is that a private equity pro was an integral part of actually valuing the purchased assets.

That pro was Adam Blumenthal, a co-founding managing partner of Blue Wolf Capital Management and former first deputy comptroller of the City of New York.

Blumenthal says that he was recruited late last year by David Silvers, associate general council of the AFL-CIO (Blue Wolf has tight union relationships). He says that the original task seemed daunting, but that it got easier once he and his two team members got to work:

“I think there’s a lot of noise around understanding these investments, but when we looked at it carefully we quickly learned that it could be done. There’s a lot of zeros on these numbers, but they’re investments in companies in exchange for preferred securities. From a private equity perspective, that’s the kind of work we do every day.”

*** Finally, President Obama on Friday signed an executive order establishing an Economic Recovery Advisory Board, which is designed to provide independent advice outside of the Beltway bubble. It’s kind of like an economic version of the Foreign Intelligence Advisory Board, which was established by Eisenhower.

Among the 15 board members are John Doerr, a venture capitalist with Kleiner Perkins, and Mark Gallogly, a former Blackstone Group pro who now runs private equity firm Centerbridge Capital. Even the limited partner community is (sort of) represented, by Yale chief investment officer David Swensen. Get the full list here.

Top Three

Puget Energy (NYSE: PSD), a regulated utility providing electric and natural gas service to the growing Puget Sound region of western Washington, has been taken private for $30 per share. The total deal was valued at $7.4 billion, including $3.2 billion in equity, $1.6 billion in leveraged financing and $2.6 billion in assumed debt. The buying consortium included Macquarie Infrastructure Partners, the Canada Pension Plan Investment Board, British Columbia Investment Management Corp., Alberta Investment Management, Macquarie-FSS Infrastructure Trust and Macquarie Bank Ltd.

diaDexus Inc., a South San Francisco-based developer of a blood test for the prediction of cardiovascular disease, has raised around $9.2 million in Series F funding, according to a regulatory filing. Listed shareholders include Scale Venture Partners, GlaxoSmithKline and Baker Brothers Advisors. The company previously raised around $170 million since 2000, from the above firms, Burrill & Co., Rho Ventures, Bain Capital’s Brookside Fund and Mosaix Ventures. This included a $40 million Series E round in late 2006.

Alinda Capital Partners has hit its $3 billion target for its second fund, which will invest in global infrastructure efforts. It plans to hold a final close in Q3.

VC Deals

GI Dynamics Inc., a Watertown, Mass.-based developer of medical devices to treat obesity, has raised $15 million in additional Series C funding. Return backers include Advanced Technology Ventures, Cutlass Capital, Domain Associates, Johnson & Johnson Development Corp., Polaris Venture Partners and Seedling Enterprises. The company secured a $30 million first tranche back in 2006, while this latest financing closed last December. GI Dynamics has now raised over $60 million in total VC funding since its 2003 inception.

Golden Gateway Financial, an Oakland, Calif.-based provider of reverse-mortgage products and services, has raised around $5 million in additional Series A funding led by Menlo Ventures, according to a regulatory filing. Menlo had previously led a $6 million first tranche.

C12 Energy Inc., a stealthy developer of carbon sequestration technology, has raised $4.5 million in VC funding, according to VentureWire. Sequoia Capital reportedly is among the investors.

OneSpot Inc., an Austin, Texas-based provider of third-party content aggregation for online publishers, has raised $4.2 million in Series A funding led by Silver Creek Ventures.

7 Billion People Inc., an Austin, Texas-based provider of web personalization software for ecommerce sites, has raised $3 million in second-round funding. SmithCo Investments led the round, which is broken out into two tranches.

Sendio Inc., an Irvine, Calif.-based provider of anti-spam solutions, has raised $3 million in Series B funding. Athenian Venture Partners led the round, and was joined by return backers Vicente Capital Partners (formerly Kline Hawkes), Shepherd Ventures and Momentum Venture Management. The company previously raised a $4 million Series A round.

Zadspace Inc., an El Segundo, Calif.-based provider of targeted advertising and product placement solutions, has raised around $1.4 million in Series A funding, according to a regulatory filing. Investors include DFJ Frontier and Gideon Hixon Fund. Zadspace is run by Todd Outten, who previously founded Kedidi Wireless and H30 Media.

M-Factor Inc., a San Mateo, Calif.-based provider of marketing analysis software, has raised an undisclosed amount of fourth-round funding. UV Partners led the round, and was joined by return backers Bay Partners, Norwest Venture Partners and U.S. Venture Partners. The company previously raised around $16 million.

People’s Music Store, a London-based online music retailer, has secured seed funding from serial media entrepreneur Paul Higgins. No financial terms were disclosed. The company also signed a partnership with British record label Beggars Group.

Buyout Deals

KPS Capital Partners is among the final bidders for Anheuser-Busch InBev’s Labatt USA unit, according to The Wall Street Journal. The deal is expected to be worth around $100 million, with beer importer C2 Imports LLC also in the running. KPS also is nearing a deal to buy privately-held brewer High Falls Brewing Co.

Thoma Bravo has increased its stake in Double-Take Software Inc. (Nasdaq: DBTK) from around 6.92% to around 8.22 percent, according to a regulatory filing. The firm now holds around 1.52 million shares, which are currently valued at around $12.6 million. Double-Take is a Southborough, Mass.-based provider of software for reducing downtime of business-critical systems.

Bad News

Fluid Routing Solutions Inc., a Rochester Hills, Mich.-based maker of fluid and fuel handling systems for automobiles, has filed for Chapter 11 bankruptcy protection. The company was formed in 2007, when Sun Capital Partners completed a carveout from Mark IV Industries Inc. Read the Chapter 11 filing here.

Ruckus Network Inc., a Herndon, Va.-based provider of digital entertainment services to college students, has ceased operations. The company had raised nearly $43 million in total VC funding since 2004, from firms like Battery Ventures, Anschutz Investment Co., Columbia Capital! , Eastward Capital, Pinnacle Ventures and Shelter Capital.

Firms & Funds

DCM-Doll Capital Management, a Menlo Park, Calif.-based venture capital firm, is targeting up to $505 million for its sixth fund, according to a regulatory filing. The firm raised $505 million for its fifth fund in 2006.

Marathon Asset Management has secured over $805 million in commitments for a Special Opportunities Fund, according to a regulatory filing. The fund is open-ended, but expects to cap commitments at $1 billion.

Human Resources

Dubai International Capital has named David Smoot chief executive officer for private equity. He joined the firm last July, after spending 11 years with Morgan Stanley. He succeeds Sylvain Denis, who has resigned. In related news, DIC said that Alan Hyslop, a managing director for private equity, also has stepped down. His duties will be fulfilled by Eric Kump.

Harvard Management Co., manager of the Harvard University endowment, announced plans to lay off 25% of its staff. This is expected to include investment staff.

Christopher Haymons has joined St. Charles Capital as a managing director in the Denver-based advisory firm’s Diversified Industries group. He previously was a senior managing director with Headwaters MB.

Jean Tardy-Joube has joined tech-focused merchant bank Qatalyst Group as a partner and head of European investment banking. He previously was head of Merrill Lynch’s European tech group, and will help San Francisco-based Qatalyst open a London office.