peHUB Wire: Thursday, April 16, 2009

The New York kickback scandal made new headlines yesterday, after state Attorney General Andrew Cuomo filed a criminal complaint against Raymond Harding, former chair of New York’s Liberal Party, for scheming with the already-indicted David Loglisci and Hank Morris. Cuomo also coaxed a guilty plea and financial remuneration out of Barrett Wissman, a crooked former hedge fund manager. You can read more here, inc! luding the Harding complaint.

All of this got me to thinking more about the issue of raising fund capital from public pension systems, a process that often is just begging to be corrupted. Inexperienced and smaller GPs can have real difficulty getting in front of a pension system’s investment staff, because there is rarely a transparent or streamlined process.

The result is that many of these GPs hire a “finder,” which is typically a politically-connected individual who can gain access from the top-down. Most of these finders aren’t splitting their fees with the pension system’s investment staff – a quid pro quo that allegedly occurred in New York – but even the most above-board of these relationships boils down to influence peddling (from my humble perspective).

Here’s how one GP explained it: “We hire finders because there’s sometimes no other way to get our 20 minutes in front of someone from the [pension system’s] investment staff. We’re not paying the finder for the fund commitment, but just for the opportunity to make our case and then have the system or its consultant conduct due diligence on us.”

So let me make a modest proposal: Public pension systems should participate in a modified version of M&A deal-flow circuits. For the uninitiated, deal-flow circuits are structured networking events (often featured as part of industry conferences) in which a group of buyers (bankers, PE investors, etc.) get introduced to a group of sellers (CEOs, PE pros with portfolio companies to shop, etc.). Each buyer typically sits at his/her own table, and the sellers sit with them for pre-determined periods of time, before rotating to the next buyer. Kind of like financial speed-dating.

The same format could be applied to the GP/LP dynamic. Rent out a ballroom for two days, and invite senior staff from lots of public pension systems (and some private LPs too, if they’d like to participate). They would be the buyers, and would each get their own table. Then invite GPs who are actively looking to raise fund capital, with some sort of pre-qualification process to screen out the nutjobs. Then let the GPs make their 15 or 20-minute elevator pitches to the LPs. Not in order to get an immediate commitment, but just to get the face-time. Then the LPs can reflect on their meeting sheets, and determine which opportunities are worthy of further due diligence.

Most GPs can accept striking out with a particular LP. What frustrates them is when they don’t even get an at-bat.

A fund-raising circuit could assuage that frustration, and remove some of temptation to use politically-connected finders (and thus reduce both actual corruption and the appearance of corruption). It wouldn’t be a total panacea, but it would be a start.

Top Three

Rosetta Stone Inc., an Arlington, Va.-based provider of language learning software, raised $112.5 million in an IPO. The company priced 6.25 million common shares at $18 per share (above its $15-$17 offering range), for an initial market cap of around $365 million. Rosetta Stone will trade on the NYSE under ticker symbol RST, while Morgan Stanley and William Blair & Co. served as co-lead underwriters. The company was acquired in a 2006 management buyout by ABS Capital Partners (44% pre-IPO stake, 28% post-IPO stake) and Norwest Equity Partners (28.7% pre, 18% post).

Lycera Corp., an Ann Arbor, Mich.-based drug developer focused on autoimmune diseases, has raised $36 million in Series A funding. The deal is tranched-out based on milestones, with Lycera already having called down the first $10 million. InterWest Partners, ARCH Venture Partners and Clarus Ventures co-led the round, with seed backer EDF Ventures also participating.

Black Oak Partners is part of an investor group that has approached General Motors about buying the assets of GM’s Saturn brand and distribution network.

VC Deals

Dataxu, a Cambridge, Mass.-based online advertising startup, has raised just over $6 million in first-round funding, according to a regulatory filing. Backers include Atlas Venture and Flybridge Capital Partners. The company’s CEO is Michael Baker, former head of Nokia Interactive and CEO of Enpocket (acquired by Nokia).

Tribal Nova, a Montreal-based creator of of parent-friendly virtual worlds and online educational games for 3-12 year-olds, has raised C$3 million from iNovia Capital and ID Capital.

Sun Catalytix, a Cambridge, Mass.-based “solar fuel” startup, has raised an undisclosed amount of seed funding from Polaris Venture Partners (VentureExpert database lists the round amount at $700k). The news was first reported by Xconomy, which says that Sun Catalytix is looking to commercialize the research of MIT chemistry professor Daniel Nocera.

Buyout Deals

BlueGem Capital Partners has agreed to acquire a 40% stake in UK stockbroker Panmure Gordon & Co. (LSE: PMR), for £15 million.

Materis, a French construction chemicals company bought by Wendel Investissements in 2006, is asking its lenders to leveraged loan covenants and relax its repayment schedule.

Resverlogix Corp. (TSX), a Calgary-based biotech company, has sold C$24.25 million of units to NGN Capital, in a PIPE transaction.

Unison Capital will have its tender offer for at least 33.4% of Japanese wig maker Aderans Holdings approved by the company’s board of directors, according to financial daily Nikkei.

PE-Backed M&A

Century Payments Inc., a Dallas-based acquisition platform focused on the payment processing market, has acquired Birmingham, Ala.-based National Merchant Services Inc. Century Payments was formed by Austin Ventures, which committed up to $50 million. NMS is its fourth acquisition.

Fortegra Financial Corp., an insurance services company owned by Summit Partners, has acquired Bliss & Glennon Inc. from Willis HRH Inc. No financial terms were disclosed. Bliss & Glennon provides transaction-based wholesale insurance brokerage.

Prometheus Laboratories Inc., a San Diego-based drug and diagnostics company, has invested $8 million of equity into Rosetta Genomics Ltd. (Nasdaq: ROSG), as part of a licensing and collaboration agreement. Under terms of the agreement, Prometheus would receive U.S. rights to three of Rosetta’s microRNA-based cancer diagnostic tests. Prometheus currently is in registration for a $100 million IPO, and has raised around $73 million in VC funding from DLJ Merchant Banking Partners (21.4% stake), Split Rock Partners (17.4%), New Leaf Ventures! (12.5%), Apax Partners (11%) , Wachovia Capital Partners (11%) and Brentwood Venture Capital (7.5%).

TRUSTe, a San Francisco-based provider of online private information, has acquired Haute Secure, a Seattle–based maker of website scanning and anti-malware solutions. No financial terms were disclosed. TRUSTe has raised VC funding from Accel Partners, while Haute Secure was backed by Baseline Ventures, Ron Conway and Ram Shiram.

PE Exits

Macrovision Solutions Corp. (Nasdaq: MVSN) has agreed to acquire the assets of Muze Inc., a New York-based digital content management company, from Enterprise Partners Venture Capital. The deal is valued at $16.5 million in cash, and is expected to close later this month. Enterprise Partners had acquired Muze back in 2005, paying approximately $20 million in equity.

Photonera, a Sunnyvale, Calif.-based maker of photonics solutions for ultra-dense, high-speed interconnection systems, has acquired Intexys Photonics, a Toulouse, France-based manufacturer of high-speed optical modules. No financial terms were disclosed. Intexys had raised over $7.5 million in VC funding, from firms like Rhone-Alpes Creation, BNP Paribas, CEA Valorisation, IRDI, EmerTec Gestion, LC Capital and UFG Private Equity.

Firms & Funds

Al Safi, a Dubai-sponsored Islamic hedge fund platform, said that it hopes to expand into private equity by the end of this year.

Charlesbank Capital Partners has begun raising its seventh private equity fund with a $1.25 billion target, as first reported by Private Equity Insider.

Probitas Partners, a private equity fund placement agent, has opened an office in Hong Kong. It will be led by associate director Edwin Chang.

Human Resources

Xiaolu Lian has joined Unitas Capital (f.k.a. CCMP Capital Asia) as a Shanghai-based managing director. He had spent the previous 11 years with BNP Paribas.

Sara Lipscomb has been named general counsel of the U.S. Small Business Administration. She is a onetime senior vice president and general counsel for Audax Group.

The Mid-Atlantic Venture Association (MAVA) has elected three new directors: Deric Emry of ABS Capital Partners, Jonathan Perl of Boulder Ventures and Tony Ricciardella of Grant Thornton. Each director will serve a three-year term.