The New York Times this morning has an article about Simmons Bedding Co., the mattress maker that has agreed to prepackaged bankruptcy that will transfer ownership from one private equity firm (THL Partners) to another (Ares Management). The main thrust is that THL made money on its original investment, in part via a dividend recap that ultimately helped drown Simmons’ balance sheet.
Nothing we didn’t already know, but a good reminder that we really need to start discussing what the future of leveraged buyouts will look like in a (somewhat) recovered economy. Have PE pros been sufficiently chastened by past excess, and the intentional removal of “risk” from what used to be a “high-risk” asset class (as Steve Schwarzman once argued)? Will dividend recaps, IPO fees and the like be shunned as greed-driven cannibalism – or will! they be emulated as proper tactics for protecting LP returns and ensuring PE firm survival?
To begin, let me state that I do not believe there will be massive consolidation in the private equity market. Fund sizes may shrink from 2005-2007 levels – mostly corresponding to decreases in leverage availability – but I do not expect many notable buyout firms to fail. Lots of people point to the number of VC firms that disappeared following the dotcom bust, but few of those were VC firms of any significance (and today’s walking dead were felled by poor investing post-2001). As such, most of the firms doing tomorrow’s LBOs will be the same firms that did yesterday’s LBOs.
Next, I despise dividend recaps, fees and anything else a private equity firm uses to carve value out of its own portfolio companies. Call me naively sentimental, but I believe that PE firms should make money by selling a company for more than they bought it for. Buy low, sell higher.
The primary drivers of public company dividends are largely absent in priva te companies, and public company dividends are rarely (if at all) paid for by adding new corporate debt. IPO fees, portfolio company management fees and the like are even worse, because they often aren’t shared equitably with limited partners – although even equitable fee splits ignore the fact that PE pros already are getting paid to manage portfolio companies, via annual management fees (i.e., the double-dip).
So back to our question: Will such practices continue?
My gut feeling – and that’s all it can be at this point – is that private equity pros aren’t chastened. If banks again become willing to lard up portfolio companies, then PE pros will provide the slathering sticks. Just look at one of the NYT quotes from THL’s Scott Schoen: “We think the work we had done had positioned the company for us to reap the financial rewards that this economic cycle has taken away.”
Now Scott’s a pretty straight-shooter who probably (hopefully?) offered some deeper! self-reflection that didn’t make it into print, but the message is still that private equity itself is not to blame for the current plight of private equity portfolio companies. Some deals were bad decisions from the get-go (per usual), some valuations were absurd (per usual) – but the basic transactional structures were reasonable, as evidenced by market approval at the time (i.e., by bankers who offered to be left holding the bag).
The overall economy is to blame, not us.
Little good can come by continuing bad past practices. Well, at least for portfolio companies and their workers. The private equity firms themselves will be just fine, so long as they don’t mind some bad press.
*** I hope the above was cogent. My brain feels a bit muddled from watching so much television over the weekend (can’t wait to adopt yet another technology from 2003).
*** Event #1: Our Dallas Shindig is sold out, but you can get on the waiting list by sending me an email. We’re hopeful that some spots will open up next week. Per usual, a big thanks to sponsors Staff One, New Capital Partners and Landmark Partners.
*** Event #2: More than 100 of you have bought tickets for our Boston cleantech event, which takes place on October 27 at Bingham McCutchen. Get yours today.
Top Three
TA Associates has paid over $200 million to buy a minority stake in AVG Technologies, an Amsterdam-based provider of computer security software, from existing company shareholders. Joining TA on the deal were Benson Oak Capital and Intel Capital.
NXP Semiconductors has agreed to swap its TV and set-top box chip assets for a 60% stake in Trident Microsystems (Nasdaq: TRID). The deal includes NXP also purchasing 6.7 million new shares in Trident at $4.50 per share ($30.15m). NXP is the former semiconductor division of Philips electronics, which was bought in 2006 by KKR, Bain Capital, Apax Partners, AlpInvest Partners and Silver Lake Partners.
West Corp., an Omaha, Neb.-based provider of call center and conference call backend solutions, has filed for a $500 million IPO. Goldman Sachs and Morgan Stanley are serving as co-lead underwriters. The company was acquired in 2006 for $3.34 billion by THL Partners and Quadrangle Group.
VC Deals
Direct Flow Medical Inc., a Santa Rosa, Calif.-based developer of a minimally-invasive implant to treat heart valve disease, has secured $40 million of a $42.5 million third round of VC funding, according to a regulatory filing. The company previously raised around $35 million from firms like Johnson & Johnson Development Corp., Foundation Medical Partners, VantagePoint Venture Partners, ePlanet Ventures, EDF Ventures, New Leaf Venture Partners and Spray Venture Partners. www.directflowmedical.com
Achates Power Inc., a San Diego-based developer of fuel-efficient engine technology, has secured $12.12 million of a $20 million funding round, according to a regulatory filing. Investors include Sequoia Capital, Madrone Capital Partners, Rockport Capital Partners and InterWest Partners. www.achatespower.com
Peraso Technologies Inc., a Toronto-based developer of multi-gigabit mmWave transceivers, has raised C$10 million in Series A funding. Backers include Celtic House Venture Partners, iNovia Capital and VentureLink Funds.
QSecure Inc., a Los Altos, Calif.-based payment platform company, has raised $10 million in Series D funding. Return backers include Worldview Technology Partners, Allegis Capital, UMC Capital, and Société Générale. The company previously raised $27.25 million.
MTM Laboratories, a German maker of in-vitro devices for early detection and diagnosis of cervical cancer, has raised €7 million in additional Series C financing. This is the second time MTM has expanded the round, bringing it up to €39 million. Gilde Healthcare Partners co-led the new tranche, and was ! joined by return backers HBM BioVentures, HBM BioCapital, Wellington P artners, Mannheim Holdings, Heidelberg Innovation and Nexus Medical Partners. The company’s prior extension was led by Kuwait Investment Authority.
Causata, a San Francisco-based provider of software for optimizing customer experience and business results, has raised $4.5 million in Series A funding from Accel Partners. The round closed back in April, according to a regulatory filing. Causata founder Paul Philllips previously founded TouchClarity, which was sold to Omniture for $48.5 million in 2007.
Bluefin Labs, a Somerville, Mass.-based developer of technology for analyzing and indexing sports video, has raised an undisclosed amount of seed funding from Kepha Partners, according to Scott Kirsner. It also! has secured around $500,000 in SBIR grants.
Buyouts Deals
The Blackstone Group reportedly is in talks to buy Anheuser-Busch InBev’s theme parks, in a deal that could be reached early this week. Blackstone’s bid reportedly is between $2.5 billion and $3 billion for the parks, which include Sea World.
CVC Capital Partners reportedly has increased the equity portion of its bid for Anheuser-Busch InBev’s Central and Eastern European assets, from 50% to between 60% and 65 percent. The offer is believed for be worth a total of approximately €1.4 billion.
Lime Rock Partners has invested $55 million into ITS Group, a global provider of oilfield equipment and services, in exchange for a minority ownership position.
Plantronics Inc. (NYSE: PLT) has agreed to sell its audio entertainment group (Altec Lansing) to Prophet Equity for approximately $18 million in cash.
Quad-C Management is in talks to invest in Chicago-based Cloverhill Bakery, according to LBO Wire. The deal would include around $150 million in senior debt from Madison Capital Funding, GE Capital and BMO Capital Markets, plus junior debt from Audax Group’s mezzanine unit. www.cloverhill.com
Starwood Capital Group is leading a consortium that is expected to win an FDIC auction for the assets of failed Corus Bank. Other members of the group include TPG Capital, WL Ross and Perry Capital.
TPG Capital has completed a $98.1 million tender offer for shares inbuilding products company Armstrong World Industries Inc. (NYSE: AWI), brining its ownership stake up to 12.2 percent.
PE Exits
CDC Software Corp. (Nasdaq: CDCS) announced that it has agreed to acquire a VC-backed provider of business intelligence solutions for manufacturing. CDC did not disclose thename of the company to be acquired, nor the acquisition price.
PE-Backed M&A
Sally Beauty Holdings Inc. (NYSE: SBH) has acquired beauty products distributor Schoeneman Beauty Supply Inc. for approximately $61 million. Clayton Dubilier & Rice acquired a 48% equity stake in Sally Beauty three years ago for $575 million.
Human Resources
Joel Wheeler has joined the London office of law firm Crowell & Moring as a partner in the firm’s corporate group. He previously was with Debevoise & Plimpton.
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