peHUB Wire: Thursday, April 23, 2009

New York State Comptroller Thomas DiNapoli yesterday “announced he has banned the involvement of placement agents, paid intermediaries and registered lobbyists in investments with the New York State Common Retirement Fund (CRF).” It’s great that he’s finally trying to do something, but this seems too reactionary. At the very least, it should be open to review (which it is not).

No one has beaten the drums harder on this kickback situation than me, but I can’t see how the solution is to place an umbrella ban on placement agents. The vast majority of them – at least the larger ones — are reputable organizations that allow investment firms to spend their time investing (instead of fund-raising). They also provide advisory services, including help with writing placement memoranda and identifying relevant limited partners.

So long as the chain-of-fundraising is disclosed — as I suggested yesterday — then there is no harm in having a third party represent a PE fund’s interests. After all, doesn’t New York Common Retirement Fund use a paid third party (Hamilton Lane) to do most of its due diligence?

Moreover, banning placement agents could result in New York only seeing firms that are large enough to have in-house placement teams. Not a good way to manage a divrse portfolio.

The problem in New York was corruption aided, abetted and allowed to flourish due to an embarrassing lack of oversight. The single fiduciary system also didn’t help, and it boggles my mind that DiNapoli has yet to rectify that situation after two years on the job. After all, the only other state with a similar system is Connecticut, and that state’s prison guards got to spend quality time with an ex-Treasurer and an ex-PE firm chief.

Remember, Hank Morris would have been alone in the wilderness without help on the inside. A ban on placement agents might have removed Morris from the equation, but how would it have stopped Steve Rattner or Dave Leuschen from helping out with Chooch (which was being produced by Dave Loglisci’s brothers)?

I am with DiNapoli in supporting reform to New York’s campaign finance laws, as it’s ridiculous that PE pros can donate tens of thousands of dollars to the same Comptroller from whom they’re soliciting fund commitments (yeah, I’m talking to you Messers D’Aniello, Leichtman, etc.). Not sure that public financing is the best answer (as DiNapoli does) – since it pushes the process even farther underground – but I currently can’t come up with a better one.

DiNapoli’s statement says that he has hired outside advisors — Pension Consulting Alliance and law firm Day Pitney LLP — to help come up with solutions (although they will not review the placement agent ban, which is permanent).

Let me offer up one (in addition to my earlier ones): Hire a larger investment staff. Or at least a fulltime director of private equity to replace the one who left seven months ago. New York outsources way too much of its private equity investment business, leaving too few chickens guarding its own coop. All NYSCRF needs to do is hire one fox, and all is lost.

*** A bunch of related notes:

— I want to stress that I am in no way attacking the integrity of the current NYSCRF private equity staff, whose morale right now must be lower than that of Montreal Canadiens fans (happy 100 years). In fact, I have to wonder if the lid would have been blown off this scandal earlier, if New York had some sort of whistleblower shield to protect them from ratting out their bosses. Kind of reminds me of the Ohio BWC situation, where good staffers got caught up in something not of their own doing.

— As I wrote, it’s been seven months since New York’s last private equity chief left. Yet the NYSCRF website still lists that individual as the sole contact on its Alternative Investments page. Even worse, the listed email address bounces back without any forwarding information.

I actually brought this lack of basic competence up to a NYSCRF spokesman a couple of months back, and wrote about it again yesterday (A Pl! acement Agent Walks Into a Bar…). Has it been fixed? Of course not.

—- So how do you actually pitch a fund to NYSCRF? Apparently you just call the main number, and they’ll connect you to a member of staff. Sounds like too simple to work, but it does (tried doing so this morning).

— It seems that New York City is planning to follow suit. Also, Carlyle Group announced that it would no longer use finders anywhere in the U.S. That latter part was an agreement with Cuomo, and looks like a legal olive branch.

— NYSCRF has no plans to add new investment staff at this time. They’ll just have to do more with less (something which has never worked in any context).

— The ban extends beyond placement agents, but a NYSCRF spokesman says that it will not extend to things such as the use of a third-party data room or printing company. I’m supposed to be emailed the official guidelines later today, and will post them to peHUB. From what I can tell, they are not yet on the NYSCRF website.

*** Where in the World: This evening I’ll be “lecturing” at a BU Law School class, alongside Howard Anderson. This should make my mother smile, as she always wanted me to go to law school…

*** Shameless Promotion: Larry Aragon and the editors of VCJ are putting together this year’s only Silicon Valley cleantech conference developed exclusively for venture capitalists. Register today. Discount Deadline line ends Friday and spots are filling up quickly.

Top Three

Powerspan Corp., a Portsmouth, N.H.-based developer of clean energy technologies for existing power producers, has raised $52 million in Series D funding at a pre-money valuation of approximately $150 million. The round’s first $50 million closed last summer. New backers include George Soros, Tenaska Energy Inc., AllianceBernstein and Persimmon Tree Capital. Returning shareholders include NGEN Partners, The Beacon Group, The Tremont Group, RockPort Capital Partners, Calvert, Angeleno Group, Fluor Corp. and FirstEnergy Corp.

EuroFresh Inc., an Arizona tomato grower owned by Bruckman, Rosser, Sherrill & Co., has filed for Chapter 11 bankruptcy protection. It partially blamed changes in U.S. immigration law. The company’s largest unsecured creditors include Apollo Investment Management ($76.5m in notes), Barclays Capital ($47m) and J.P. Morgan ($35m).

Chen Fan has left Standard Chartered, where he was head of private equity for the Greater China region.

VC Deals

EPS Corp., a Costa Mesa, Calif.-based developer of energy intelligence solutions for Fortune 500 companies, has raised $30 million in Series B funding. Altira Group led the round with a $10 million investment, and was joined by return backers NGEN Partners and Robeco.

Ausra, a Palo Alto, Calif.-based developer of a utility-scale solar thermal power plant, has raised $25.5 million in fourth-round funding. Backers include Kern Partners, Generation Investment Management, Starfish Ventures , Khosla Ventures and Kleiner Perkins Caufield & Byers. The company has now raised over $125 million in total VC funding.

Bonobos Inc., a New York-based men’s clothing brand sold exclusively through an online vertical, has raised $3 million in angel funding at a $15 million pre-money valuation. Angel backers include Sandwith Ventures.

Ambrx Inc., a La Jolla, Calif.-based developer of genetically-engineered protein therapeutics, has raised $10 million in new equity funding from Merck Serono SA, as part of a strategic collaboration agreement. peHUB had previously reported on the funding, based on a regulatory filing, but was unable to identify the source. Ambrx previously raised around $70 million from firms like 5AM Ventures, Aravis Ventures, CMEA Capital, Maveric! k Capital, Versant Ventures and Tavistock Life Sciences.

Buyout Deals

Bain Capital and KKR reportedly are considering separate bids for around a 20% stake in Chinese electronics retailer GOME (HK: 0493). The deal would be worth around $385 million based on current trading prices, with existing GOME shareholder Warburg Pincus also reported to have interest.

The Blackstone Group has joined an investor consortium that plans to bid for troubled BankUnited Financial Corp., according to Dow Jones. As previously reported, the group also includes WL Ross and The Carlyle Group.

Energy Investors Funds has acquired Watertown Renewable Power LLC, a 30-megawatt biomass power project currently under development in Watertown, Connecticut. The seller was Tamarack Energy Inc. No financial terms were disclosed.

A Hong Kong court has blocked the proposed $2.2 billion take-private for telecom company PCCW Ltd.

PE-Backed M&A

LogLogic, a San Jose, Calif.-based developer of log lifecycle management appliances, has agreed to buy French enterprise security company ExaProtect. No financial terms were disclosed. LogLogic has raised around $36 million from firms Focus Ventures, Sequoia Capital, SAP Ventures, Telesoft Partners, Worldview Technology Partners and Invesco Private Capital. ExaProtect had raised around $5 million from CIC Capital Prive and ELAIA Partners.

Pipeline Financial Group Inc., a New York-based provider of block execution systems, has acquired the assets of 3D Markets Inc., a provider of a block options execution system. No financial terms were disclosed. 3D Markets employees will now work at Pipeline, which has raised over $20 million from firms like GIV Venture Partners, Meritage Funds, Tudor Ventures and Venrock.

PE Exits

The Carlyle Group has sold SmartTrust, a Swedish provider of mobile device management and SIM management software, to Giesecke & Devrient. No financial terms were disclosed. Carlyle acquired a majority stake in SmartTrust in October 2002, via its Carlyle Europe Venture Partners fund. Syndicate partners included General Electric and Eqvitec Technology Fund.

Symantec Corp. (Nasdaq: SYMC) has acquired Mi5 Networks, a Sunnyvale, Calif.-based provider of anti-spyware security appliances. No financial terms were disclosed. Mi5 had raised VC funding from Band of Angels, First Round Capital and Labrador Ventures.

Firms & Funds

CapMan has agreed to acquire the 49% stake it does not already hold in Norum, a Russia-focused investment group.

Morgan Stanley posted a $578 million, or 57 cents a share, loss for the first quarter. That was larger than analyst expectations. The firm also cut its dividend.

Human Resources

Bruce McWilliams has joined U.S. Venture Partners as an executive-in-residence. He is the former CEO of miniaturization technology developer Tessera Technologies Inc. (Nasdaq: TSRA).