peHUB Wire: Monday, March 22, 2010

Yale University’s investment office last week disclosed that it had voted last June to increase its target private equity allocation from 21% to 26 percent. This came amid mounting private equity losses, but was portrayed by many media outlets as “contrarian” investment chief David Swensen sticking to his guns.

In reality, however, Swensen didn’t have much of a choice.

As of last June, Yale’s actual exposure to private equity was at 24.3 percent. That’s a major climb from 20.2% the prior year, and nearly 10 percentage points higher than Yale’s private equity allocation just four years earlier. In other words, raising the target allocation was largely an effort to reflect reality.

“But wait,” says rhetorical reader. “Why is Swensen raising the target even above current exposures, other than because he really believes in the asset class?” Well, I’m glad you asked.

The allocation increase was reported in Ya! le’s Annual Endowment Report, which you can read here. But Yale also publishes something called the Annual Financial Report, which notes the following:

Under the terms of certain limited partnership and limited liability company agreements for private equity and real estate investments, the University is obligated to remit additional funding periodically as capital calls are exercised. At June 30, 2009, the University had uncalled commitments of approximately $7.6 billion.

For context, Yale’s entire endowment was valued at just $16.3 billion as of June 30. And then it gets worse:

The University has various sources of internal liquidity at its disposal, including cash, cash equivalents and marketable debt and equity securities. If called upon at June 30, 2009, management estimates that it could have liquidated approximately $3.6 billion (unaudited) to meet short-term needs.

In other words: If all of the uncalled commitments came due on July 1, Yale would not even have been able to meet half of them.

Yale’s hope here is that private equity distributions will outpace new capital calls. The only problem, of course, is that a PE firm has more time to distribute than it does to call. As such, the school felt its best hedge is to increase its target allocation, in order to create wiggle-room — and an aura of calm — when the PE exposure inevitably grows.

Makes perfect sense. But it shouldn’t make for headlines about faith in private equity.

Top Three

Compass Advisers has launched a new principal investment unit, to be run by former DLJ Merchant Banking pro Scott Marden. It will focus on mid-market business and information services investments, and plans to target $600 million for its debut fund.

Centerbridge Partners, MAK Capital and Sankaty Advisors have completed their acquisition of bankrupt homebuilder Champion Enterprises Holdings LLC. The deal includes $50 million in new equity, with Champion’s debt load being lowered to $40 million.

Sam Pullara has stepped down as Yahoo’s chief technologist, in order to become an entrepreneur-in-residence with Benchmark Capital. In other Benchmark news, current entrpreneur-in-residence Marten Mickos is leaving to become CEO of Benchmark portfolio company Eucalyptus Systems.

VC Deals

Nodality Inc. of South San Francisco has raised $15.5 million in new VC funding. Pfizer Ventures and Laboratory Corp of America Holdingsco-led the round, and was joined by return backers Kleiner Perkins Caufield & Byers, Maverick Capital and TPG Biotech Partners. According to the TPG Biotech website, Nodality focuses on “personal diagnostics targeting cell-signaling pathway “nodes” detected in well defined cellular sub-populations from individual patients.”

Avaak, a San Diego-based provider of ultra low power wireless video networking technology, has raised $10 million in Series Bfunding. Qualcomm led the round, and was joined by return backersTrinity Ventures,InterWest Partners and Leapfrog Ventures. Avaak previously raised! $7 million.

TerraLUX Inc., a Boulder, Colo.-based developer of LED solid-state lighting products, has raised $5.6 million in Series A funding. Emerald Technology Ventures led the round, and was joined by existing backer Access Venture Partners.

Correction: Last Friday we reported that Ankeena Networks Inc., a Santa Clara, Calif.-based provider of new media infrastructure solutions, had raised around $16 million in new VC funding. That was incorrect. The company has raised $16 million in total VC funding to date.

Buyouts Deals

Arsenal Capital Partners has acquired FrontStream Payments Inc., a Nashville, Tenn.-based provider of payments products to small and medium-sized businesses and independent credit card sales organizations. No financial terms were disclosed, although VentureWire reports the investment size is $30 million. Some of the proceeds were used by FrontStream to buy Fast Transact, a provider of processing solutions for e-commerce and physical points of sale.

EQT Partners has acquired a 40% stake in Japan Home Center, a Hong Kong-based discount houseware retailer. No financial terms were disclosed. The company’s founders will retain the other 60% stake.

Metro’s department store chain Kaufhof! and Arcandor’s Karstadt chain are the subject of PE firm merger interest, according to Reuters.

Tyco International (NYSE: TYC) reportedly has put its German water-valve and flow-control unit, Tyco Waterworks, up for sale. First-round bids were due last week, with a number of private equity firms expected to have bid.

PE-Backed IPOs

Kabel Deutschland, a German cable television provider, traded flat in its market debut today. Prior to IPO, the company had been 88% owned by Providence Equity Partners, 8% by Teachers’ Pension Plan and 4% by management. Providence retained a majority stake post-IPO.

PE-Backed M&A

Advanced Circuits, a portfolio company of Compass Diversified Holdings, has acquired Circuit Express Inc., a Tempe, Ariz.-based prototype and low-volume manufacturer of rigid printed circuit boards. No financial terms were disclosed.

GoAhead Software, a Bellevue, Wash.-based providerof commercial off-the-shelf high availability software,has acquired Avantellisfrom Emerson Network Power. The deal is part of a strategic shift toward an open-source model. No financial terms were disclosed. GoAhead has raised over $40 million in VC funding from Columbia Capital, Cedar Grove Investments, Intel Capital and Voyager Capital.

PE Exits

Informatica Corp. (Nasdaq: INFA) has acquired 29West Inc., a Warrenville, Ill.-based provider of low-latency messaging solutions for financial institutions. No financial terms were disclosed. 29West had been a portfolio company of Susquehanna Growth Equity.

Water Street Healthcare Partners has agreed to sell gastrodiagnostic device company Sierra Scientific Instruments to Given Imaging Ltd. (Nasdaq: GIVN). The deal is valued at $35 million in cash, and is expected to close early next month.

Firms & Funds

Atomico Ventures, a Europe-focused VC fund run by Skype co-founder Niklas Zennström,has closed its second fund with $165 million in capital commitments. A regulatory filing from May 2009 indicated that the firm had been seeking upwards of $266 million, with Probitas Partners serving as placement agent.

Emerald Technology Ventures, a Zurich-based VC firm focused on cleantech investments, is nearing a first close on its third fund, according to Green Energy Reporter. The fund is being marketed with a €150 million target, after having raised €135 million for its second vehicle.

J.H. Whitney & Co. is targeting $750 million for i! ts seventh private equity fund, with an $800 million hard cap, according to LBO Wire.

PSource Capital plans to launch a private equity fund focused on the Chinese infrastructure market.

Human Resources

Edmund Chiang has been named a managing director on Moelis & Co.’s capital markets group. He has been a senior advisor with the firm since April 2009, before which he was with Banc of America Securities as a managing director and head of private equity placements.

Christopher Lawless has joined Hunter Wise Financial Group as a managing director in the firm’s new Oregon office. He is a former director of strategic investments for Intel Capital.

Nathaniel Robinson has joined the Virgo Capital as a vice president in the firm’s Austin, Texas office. He previously worked in Morgan Stanley’s Glob! al Technology M&A

Bill Young has joined Clarus Ventures as a venture partner in the firm’s San Francisco office. He previously was CEO of Monogram Biosciences, which was acquired last year by LabCorp. He also serves as executive chairman of Clarus portfolio company NanoString, chairman of Biogen IDEC and on the board of Theravance.