peHUB Wire: Monday, June 22, 2009

Venture capital outperformance is correlated to a portfolio company’s distance from a VC firm’s office, according to new research from Harvard Business School. But not in the way you might think.

Specifically, the working paper found that VC firms based in San Francisco, Boston and New York generally return more money on investments outside of their local geographies than on investments close to home. This isn’t to say that such firms do badly on their local deals – a P! alo Alto-based firm still does better on a typical Menlo Park deal than would a Cleveland-based firm – nor does it take into account organizational costs (travel, etc.). But, again, that Palo Alto-based firm will probably generate a higher return on a Cleveland-based portfolio company than on one based in Menlo Park.

The paper suggests that this differential could be caused by VC firms using higher hurdle rates for long-distance deals. Such portfolio companies may require a higher level of managerial/monitoring effort, so more thought is given before offering up a term sheet.

“A takeaway might be that firms should think very carefully about their decision-making process in terms of geographic criterion,” says HBS professor Josh Lerner, who co-authored the study with Henry Chen, Paul Gompers and Anna Kovner. “I think there’s a mental trap in saying that because a company is so nearby, it’s not as costly to do the transaction.”

The paper also found that a VC firm’s outperformance on distance deals will lessen if the firm opens a satellite office in that new location. Again, the theory is that the burden of proof has been lowered, now that the firm has a staffer nearby.

Finally, Lerner et all took a look at satellite office performance by firms based in the big three markets — SF, Boston and NYC – when they open shop in another of the big three (i.e., a Palo Alto firm expanding to Cambridge): “We thought we’d see a big difference in success, because of a home court advantage, but we couldn’t find anything along those lines.”

We’ve posted the entire working paper to peHUB, for your reading pleasure. Get it here.

*** Data Point: The largest Q1 venture capital deal was a $50 million round for Anacor Pharmaceuticals. So far in Q2, there have been six deals worth $50 million or more: Clovis Oncology ($145m), Workday ($75m), ExactTarget ($70m), Powerspan ($52m), Phoenix Services ($50m) and PhotoThera ($50m).

Not sure that will necessarily translate into a Q2 rebound from the Q1 depths, but it sure won’t hurt.

Top Three

Intertrust, the former Fortis tax-advisory business, has received first-round buyout offers from General Atlantic, CVC Capital Partners, Permira and Cinven. The company was acqu! ired by the Dutch government in October, as part of nationalization of Fortis’ local operations. The asking price for Intertrust reportedly is €350 million.

2tor Inc., a New York provider of online degree programs, has raised $10 million in Series A funding. Redpoint Ventures led the round, and was joined by Novak Biddle Venture Partners and City Light Capital.

Fidelity Investments said that it is shutting down Fidelity Equity Partners, a $500 million private equity unit. The firm’s venture capital unit will maintain operations.

VC Deals

Tumri Inc., a Santa Clara, Calif.-based provider of contextual online advertising solutions, has raised $15 million in third-round funding. Time Warner Investments led the $10 million equity tranche, and was joined by return backers Accel Partners, Shasta Ventures and Tenaya Capital. A $5 million debt commitment was secured from Silicon Valley Bank. Tumri has now raised around $30 million.

YCD Multimedia, a provider of in-store digital media solutions, has raised $12 million in Series E funding. The round includes new equity fromreturn backers Pitango Venture Capital and Arts Alliance Digital Ventures, plus the conversion of an existing bridge ! loan facility.

Doyenz, a Bellevue, Wash.-based virtualization startup, has raised $5 million in first-round funding from angel investors, according to TechFlash. It also has commitments for an additional $1.5 million, to come within the next four months. The company’s founder and CEO is Ashutosh Tiwary, who previously founded Performant (sold to Mercury Interactive for $22.5m in 2003).

Axis Three, a Belfast-based developer of predictive surgical simulation technology, has raised £2 million in new VC funding. Crescent Capital led the round, and was joined by return backers Clarendon Fund Managers and Siemens. ICON Corporate Finance helped place the round.

oneTXT, a New York-based social media payment platform, has raised $2 million in Series A funding. Metamorphic Ventures led the round, and was joined by KPG Ventures, New York Angels Fund and individual investors likeDavid Hirsch, Geoffrey Judge, Roger Ehrenberg and Mark Michel.

Presidium, a Reston, Va.-based provider of managed services for the education market, has raised $2 million in follow-on funding from Edison Venture Fund. It had previously raised $7.5 million.

CMS SupaTrak, a UK-based provider of vehicle tracking and mobile working solutions, has raised an undisclosed amount of third-round funding from the YFM Group (managed by South West Ventures Fund).

Buyout Deals

Alliance Data Systems (NYSE: ADS) will not receive a $170 million breakup fee from The Blackstone Group, after losing its appeal of a lower court verdict.

Assured Guaranty Ltd. (NYSE: AGO) shares rose as much as 5% on Friday, after the bond insurer that it would not need $361 million in offered backup funds from WL Ross & Co.

Aurora Capital Group has been trumped in its bid to buy bankrupt Norwood Promotional Products, by strategic buyer BIC Graphic. BIC’s “last minute offer” was valued at $125 million, plus approximately $37.5 million in assumed liabilities.

Bain Capital confirmed that it has agreed to acquire up to a 23% stake in Chinese home appliance retailer GOME (HK: 0493), in a deal that could be worth upwards of $418 million.

Brit Insurance (BRE.L) has offered to acquirer UK peer Chaucer Holdings (LSE: CHU) in an all-share deal worth £220.6 million. Chaucer reportedly has been in ongoing discussions about selling a minority ownership stake to Pamplona Capital Management.

Conduit Capital Partners has acquired a power generation portfolio from Basic Energy, including Jamaica Energy Partners (which Conduit sold to Basic in 2007) and a 55% share in Pedregal Power Company. No financial terms were disclosed.

Nortel Networks has agreed to sell its advanced wireless technology unit to Nokia Siemens for US$650 million, and said that it is making progress in talks to sell other businesses.

PE Exits

AirCastle Ltd. (NYSE: AYR), a Stamford, Conn.-based acquirer and leaser of commercial jet aircraft to passenger and cargo airlines, said that 37% shareholder Fortress Investment Group may sell around 30.56 million common shares in a secondary public offering. The deal could be worth upwards of $218 million.

Warburg Pincus is seeking bidders for Easycash, a German credit card payments processor, according to Bloomberg. The deal could be worth up to €300 million.

PE-Backed M&A

Amerijet International Inc., a Ft. Lauderdale, Fla.-based portfolio company of H.I.G. Capital, has acquired SRX Transcontinental Inc., a Fla.-based provider of ground handling operations in Central Asia. No financial terms were disclosed.

NeuroTherm, a Wilmington, Mass.-based medical device maker focused on interventional pain, has acquired Micron Catheter, whose product is used in an interventional pain procedure used to remove scar tissue. NeuroTherm is a portfolio company of The Cortec Group.

Firms & Funds

ABS Capital Partners, a Baltimore-based growth equity firm, has closed its sixth fund with $420 million in capital commitments. The fund has already made four investments. Limited partners include the Pennsylvania State Employees Retirement System, Partners Healthcare, Abbott Capital and WP Global Partners.

China Investment Corp. has agreed to invest around $500 million into The Blackstone Group’s hedge fund unit, according to The Wall Street Journal.

Human Resources

Phin Barnes has joined First Round Capital as a principal. He previously founded a fitness-focused videogame company.

Christine Vanden Beukel has joined Clayton Dubilier & Rice as a London-based senior managing director. She previously was with GSC Group, as senior managing director responsible for the firm’s EMEA credit activities.

Philip Dougall has resigned as a managing director of Sun Capital Partners’ European affiliate, according to LBO Wire. He will officially leave in August, after six years with the firm. He previously had co-led Lehman Brothers’ European telecom practice. No word yet on his future plans.

Eric Harnish has joined NEPC LLC as a senior consultant in the firm’s private equity group. He previously was with State Street as a vice president in the firm’s Private Edge group.

Josh Lerner, the Jacob H. Schiff Professor of Investment Banking at Harvard Business School, has joined PE consultantcy Grove Street Advisors as a senior advisor.

Dieter Rampl, chairman of Unicredit Group, has been named an independent director of KKR Private Equity Investors LP, an Amsterdam-listed affiliate of mega-buyout firm KKR.

Mohammed al-Shroogi, former head of Citigroup’s Middle East activities, has joined Investcorp to lead its operations in the Gulf region.

TVM Capital has promoted Irena Melnikova to the position of principal. She joined the firm’s Boston life sciences team last year, after serving in various roles with Life Science Insights, a subsidiary of IDC.