peHUB Wire: Tuesday, April 13, 2010

When writing about the Elevation Partners portfolio last month, I gave particular attention to its investment in Palm. As one source summed it up: “As goes Palm, as goes Elevation.”

The reason, of course, is that Elevation has invested just over 25% of its $1.8 billion fund in Palm, via a series of commitments. Such over-allocation apparently was permitted by the fund’s LPA, but it is leading Elevation down a path well-worn by other private equity firms. Basically: If you invest 15% or more of your portfolio in a single company, you are just begging to be knocked to the ground.

Remember these moldy oldies: Forstmann Little pumping $1 billion into McLeod USA (not to mention its big bet into XO Communications)? Or how about Parthenon Capital plugging around 20% of its second fund into Atkins Nutritionals (not to mention a $20m deal penalty to Summit Partners)? Or Blackstone Group investing around $3.3 billion into publicly-traded Deutsche Telekom?

And that doesn’t even include the concentrated fund strategies of groups like J.C. Flowers or Garnett Helfrich (some LPs like these because they make the GPs “sweat” more, but I’d prefer the safety of diversification).

The most recent example of an outsized investment was Andreessen Horowitz investing $50 million of its $300 million fund into Skype. It may work out – there’s already talk of a quick-flip or IPO filing – but most of the aforementioned investments also looked good a few months in.

It’s easy to understand why such large investments can severely damage a portfolio. What’s trickier to grasp is why outsized bets so often go so wrong.

Perhaps it’s because something that looks too good to be true usually is. Or maybe it’s the “pot committed” mentality, which pressures firms to throw good money after bad.

Whatever the reason, there’s strong historica! l justification for LPA provisions that prevent such deals. It’s not t he sort of thing that LPs should flinch on during negotiations…

*** Not that this should surprise you, but word is that Sequoia Capital is way oversubscribed for its new fund. As you might recall, it reportedly was looking to raise around $1 billion for a vehicle that would consolidate several (but not all) of its existing strategies (U.S., China, etc.).

Sequoia asked interested investors to provide a wide range of interest level, which led to many LPs being cut back. One investor told me that there may have been more than $4 billion of interest, with Sequoia holding out on a final close until it can finalize talks with a few sovereign wealth funds.

*** The goings-on at Bay Partners reminds me a bunch of the old ComVentures saga. Let this be a lesson to VCs everywhere: If one of your partners asks you to help force out another GP, don’t be surprised if you eventually find yourself on the short end of that same equation.

*** Dennis Miller has transitioned from a general partner to a venture partner role with Boston-based Spark Capital. He also has relocated to Los Angeles.

I’m told that Miller will continue to serve on his Spark boards and source new deals, but that he also will look at later-stage and distressed media companies that are outside of Spark’s early-stage focus.

*** This afternoon I’m speaking on a “meet the press” panel at the NVCA Strat-Com meeting in Cambridge, alongside Russ Garland of Dow Jones and Bob Budieri of Xconomy. Look forward to seeing some of you there.

*** Tomorrow night is our San Francisco Shindig, so I’ll be writing/publishing peHUB Wire from 30k feet aboard Virgin America (BOS/SFO). So preemptive apologies if it’s tardy and/or typo-filled.

Top Three

Cerberus Capital Management has agreed to acquire defense contractor DynCorp International Inc. (NYSE: DCP), for $17.55 per share (49% premium to last Friday’s closing price). The total deal is valued at $1.5 billion, including assumed debt.

Tencent Holdings (SEHK 00700) has invested $300 million into Digital Sky Technologies, a Russian Internet company that has made investments of its own in companies like Facebook and Zynga. The deal is in exchange for a 10.26% equity stake.

Jafco Ventures has secured $100 million from Japanese parent company Jafco Co. Ltd., to capitalize its fourth fund. The Palo Alto, Calif.-based firm also has hired Paul Sallaberry, most recently an executive with Veritas Software, as a venture partner.

VC Deals

ChapDrive AS, a Norway-based developer of hydraulic transmissionsystems forwind turbines, has raised €11 million in new VC funding. Viking Venture and Investinor were joined by return backers NorthZone Ventures, Hafslund Venture and Energy Capital Management (Statoil Venture).

Qcept Technologies Inc., an Atlanta-based maker of wafer inspection systems for the semiconductor manufacturing industry, has raised $10.4 million in fourth-round funding. Pittco Capital Partners led the round, and was joined by fellow new backers Imlay Investments, Jackson Capital Partners and KT Venture Group. The company previously raised nearly $25 million from firms like Siemens Venture Capital.

Beijing YiCheng Bioelectronics Technology Co. Ltd., a Chinese maker of blood glucose monitoring systems, has raised approximately $10.25 million in Series A funding from Sequoia Capital and PreIPO Capital. SSG Capital served as placement agent.

Liquiavista BV, a Dutch fabless display manufacturing company, has raised €7 million in Series D funding. Return backers include Amadeus Capital Partners, GIMV, Prime Technology Ventures and Applied Ventures.

3Crowd Technologies, a San Mateo, Calif.-based provider of management tools for cloud-based services, has raised $6.62 million in Series A funding from Canaan Partners and Storm Ventures.

AltheaDx Inc., a San Diego-based developer of companion diagnostics, has raised $6 million in Series A funding led by Telegraph Hill Partners.

SpaceClaim Corp., a Concord, Mass.-based 3D mechanical designer for the manufacturing industry, has raised $5 million in fourth-round funding. Return backers included Borealis Ventures, Kodiak Venture Partners, Needham Capital Partners, and North Bridge ! Venture Partners. The company previously raised $28 million.

VM6 Software Inc., a Montreal-based developer of IT virtualization infrastructure software, has raised $4 million in Series A funding from RBC Venture Partners and Ignition Partners.

PhosphonicS, a UK-based developer of precious metal scavenger products, has raised £3.5 million in second-round funding. Seventure Partners led the round, and was joined by return backers like Regents Park Partners. PhosphonicS is a spinout from Queen Mary University of London.

Nautilus Neurosciences Inc., a Bridgewater, N.J.-based drug eveloper focused on neurology, has ! raised n undisclosed amount of equity funding from Galen Partn ers. It previously raised over $14 million frominvestors that includedTailwind Capital Partners.

Buyouts Deals

CCMP Capital hascompleted its acquisition of a37% stake in Oklahoma City-based oil and gas producer Chaparral Energy, for $345 million.

Green Bank, a Houston-based bank focused on the middle-markets, has raised $115 million in private equity funding from Friedman Fleischer & Lowe, Harvest Partners and Pine Brook Road Partners. No one firm will own more than 24.9% of Green Bank’s common stock through the deal, which is subject to regulatory approval.

JW Asset Management has acquired Arbor Pharmaceuticals, a Raleigh, N.C.-based ped! iatric drug developer. No financial terms were disclosed.

KKR reportedly is in talks to acquire a 68% stake in Indian back-office service provider Firstsource Solutions (BO: FISO), for approximately $250 million.

Roark Capital Group has acquired Wingstop Restaurants Inc., a Richardson, Texas-based chain of more than 650 chicken wing restaurants in operation or in development. No financial terms were disclosed.

PE-Backed M&A

EducationDynamics, a provider of marketing services to the education sector, has acquired Education Connection, a resource that helps prospective students find suitable colleges, from Kaplan. No financial terms were disclosed. EducationDynamics is a portfolio company of Halyard Capital.

Mersana Therapeutics Inc. has signed an exclusive research and licensing agreement with Teva Pharmaceutical Industries Ltd., to develop and commercialize a novel fumagillin analog for the treatment of all indications, including cancer.The deal could be worth upwards of $334 million. Cambridge, Mass.-based Mersana Therapeutics has raised around $36 million in VC funding from Fidelity Biosciences, Harris & Harris Group, PureTech Ventures, ProQuest Investments and Rho Ventures.

Roll Coater Inc., a portfolio company of Willis Stein & Partners, has acquired the coil coating assets of Material Sciences Corp. The deal was valued at $10 million.

Sierra Atlantic Inc., a Fremont, Calif.-based provider of engineering solutions for Oracle products, has acquired Baytree Associates, a Charlotte-based consulting firm and Oracle solutions provider. No financial terms were disclosed. Sierra Atlantic raised $18.4 million in 1999 from Information Technology Ventures, General Electric, New Enterprise Associates and Walden International.

Firms & Funds

The Carlyle Group has closed its third Asia buyout fund with $2.55 billion in capital commitments. The firm’s previous Asia buyouts fund closed in 2006 with $1.8 billion.

Intermediate Capital Group has closed its European Recovery Fund with €843 million in capital commitments. The fund capacity rises to approximately €1.5 billion, when ICG PLC’s co-investment and third-party funds are included.

Rembrandt Venture Partners has closed its second fund with $160.5 million in capital commitments. The Menlo Park, Calif.-based firm focuses on early-stage&nb! sp;technology opportunities.

Human Resources

John Sheppard, a 20-year veteran of Coca-Cola, has joined Advent International as an operating partner. His past roles included president of Coca-Cola’s European division and vice president of Coca-Cola International.

Jonathan Lowenberg has joined Morgan Joseph & Co. as a managing director and head of private placements. He previously served in a similar position with Merriman Curhan Ford.

Carmel Ventures has promoted Gilad de Vries to vice president of digital media. He had joined the Israeli venture capital firm in late 2006 as a principal.