peHUB Wire: Tuesday, April 14, 2009

Goldman Sachs yesterday announced that it had raised $5.5 billion for its fifth secondaries fund, making it the largest such vehicle of all time. What Goldman didn’t announce, however, was that it’s already marked down the fund’s portfolio by up to 12 percent.

According to an investor letter obtained by peHUB, Goldman had called down 17% of the fund through the end of 2008 (not all $5.5b was raised yet, so it’s hard to figure out the exact dollar amount). This came via two calls: One last August and a slightly larger one last November. By December 31, however, Goldman was receiving guidance from GPs that the portfolio would be marked down between 5% and 9 percent. Once fees and expenses were factored in, the markdown deepened to between 7% and 12 percent.

The letter read, in part:

“For the approximately 17% of Vintage V that has been deployed into secondary opportunities to date we are generally enthusiastic about the quality and price of the portfolios we purchased over the second half of 2008. We believe the pricing and structure of these transactions reflected the difficult backdrop of the financial and economic environment. Nevertheless, due to the severe decline in comparable multiples, the implementation of FAS 157 and the impact of foreign currency fluctuations on some of our non-dollar denominated investments, the early guidance from the general partners is that portfolios we have purchased will be marked down…”

In other words, Goldman overpaid.

It’s understandable that portfolio values would have dropped from the August call, particularly given that many of those purchase agreements were signed several months earlier. But how is the overall portfolio down, when Goldman called down a majority of the 17% in November? Secondaries were trading well below GP marks since at least September, and both those GPs and Goldman were well aware of issues like FAS 157. Almost seems like Goldman paid par for some of the latter stuff, although that’s truly difficult to believe.

If nothing else, these numbers illustrate how the secondaries market is never a gimme, even when it should be.

*** I had a short conversation yesterday with Jim Breyer of Accel Partners, who had just been named to the board of Dell Inc. Between the time I emailed him and he called back, Accel also had been identified as one of the firms that helped StumbleUpon’s co-founders buy the company back from eBay (which acquired StumbleUpon in 2007 for $75m).

So I asked if he expected more such deals, in which a VC-backed company was bought by a big strategic and then sold back to VCs. Here was his answer: “I don’t know how many of them will be done, but do know that we have a pipeline of a half dozen such opportunities. [Accel partner] Sameer Ghandi is our point-person on a lot of them, and is joining the StunbleUpon board. From a long-term risk/reward standpoint, we like these deals if the original founders are involved.”

You can read the rest of our discussion here.

*** Speaking of eBay selling things it bought from VCs: The StumbleUpon news came on the heels of reports that Skype’s founders also were seeking to buy back their company, but with the help of private equity firms (VCs don’t have that kind of dough). Pete Lattman moved the ball forward yesterday by identifying the four firms that had teamed up to make an offer that eBay has so far rejected as too low: Elevation Partners, KKR, Providence Equity Partners and Warburg Pincus.

Worth noting that while this proposal just came to light this week, Erin has learned that PE firms were first approached by the ex-Skypees at least nine months ago. In other words, this has been in process for a long time (although the selective leaking is likely an attempt to move things along)…

*** Quote of the Day: Zach Kaplan, CEO of Chicago-based Inventables, when I asked him about the recession’s impact on his business (which is morphing into an online B2B marketplace for physical materials): “It’s been awesome… Companies are getting greater focus on what technologies and materials their companies really need, rather than being all over the place.”

*** New York Scandal: The NYT is reporting that the SEC and Andrew Cuomo are investigating whether civil charges should be brought against the private equity firms that paid “finder’s fees” to Hank Morris, in order to get access to NY Common Retirement Fund. Seems like SEC is mostly concerned with if the firms disclosed the Morris relationship, which will be hard to prove one way or the other, given that the forms were lost (read: shredded) by Morris’ alleged co-conspirator David Loglisci. I wonder if the SEC also has the authority to look into how political contributions affected fund commitments. If so, it should do so.

*** Shameless Promotion: I am pleased to welcome Coller Capital as a sponsor of The LP Congress, which is taking place on June 9 in New York City. Looks like a good group so far, with registrants from public pensions, funds-of-funds, private foundations, etc. Remember, it’s invite-only, but you can request an invite by emailing me with your name, place of work and job title.

Top Three

A123 Systems, a Watertown, Mass.-based maker of lithium-ion batteries, has raised $69 million in new VC funding. General Electric provided $15 million of the round, after investing $30 million for a 9% stake last October. A123 has now raised over $300 million, from firms like GE, Procter & Gamble, Alliance Capital, Motorola, Qualcomm, North Bridge Venture Partners, Sequoia Capital, CMEA Ventures, FA Technology Ventures, OnPoint, Carruth Ma! nagement, the Massachusetts Institute of Technology and board chairman Desh Deshpande. It also remains in registration for a $175 million IPO, and recently signed a deal to provide batteries to Chrysler’s 2010 line of electric vehicles.

eBay Inc. has sold online recommendation service StumbleUpon back to its founders, who were backed by an undisclosed amount of funding from Accel Partners, August Capital and Sherpalo Ventures. eBay originally bought StumbleUpon for $75 million in 2007.

President Obama reportedly has tapped Herb Allison to oversee the TARP program. He has served as CEO of Fannie Mae since September, before which he led TIAA-CREF.

VC Deals

Goom Radio, a New York-based online radio startup, has raised $16 million in Series A funding. Backers include Wellington Partners Venture Capital, Elaia Partners and Partech International. The company is run by former Clear Channel executive Rob Williams, and operates out of the old Z100 studios.

Imbera Electronics, a Finnish provider of module board technology for 3-D semiconductor packaging, has raised $15 million in Series B funding. Backers include NorthZone Ventures, Index Ventures and Conor Venture Partners.

Foundation Radiology Group, a Pittsburgh-based provider of diagnostic imaging professional services, has raised $10 million in first-round funding. Chrysalis Ventures led the deal, and was joined by Health Evolution Partners.

Reflex Systems Inc., an Atlanta-based provider of virtualization management and security, has raised $8.5 million in Series A funding led by RFA Management Company. This round is the final step of a reorganization for the company, which was previously known as Reflex Security. It previously raised around $18 million in 2006 and 2007, from firms like Lambda Funds and Spencer Trask Ventures.

Ravenflow, an Emeryville, Calif.-based provider of application delivery acceleration solutions, has raised $6 million in new VC funding. Return backers include Alloy Ventures, Palomar Ventures and The Roda Group. The company previously raised $14.5 million via a tranched-out Series A round.

York Telecom, an Eatontown, N.J.–based provider of visual communication services for large enterprise customers, has raised $6 million from Petra Capital Partners.

ExtraHop Networks Inc., a Seattle-based provider of network management appliances, has raised $5.1 million in Series A funding. Madrona Venture Group led the round, and was joined by Marc Andreessen and Ben Horowitz.

TalentSpring Inc., a Seattle-based provider of semantic search solutions for talent sourcing, has raised $1.6 million in first-round funding. Backers include Second Avenue Partners.

iZumi Bio Inc., a South San Francisco-based regenerative medicine company that uses induced pluripotent stem (iPS) cells, has raised $20 million in VC funding since its 2007 inception. Backers include Highland Capital Partners and Kleiner Perkins Caufield & Byers. The funding amount was disclosed in a USA Today article, about how the company has forged a partnership with Kyoto University’s Shinya Yamanaka.

Buyout Deals

Ancor Capital Partners has completed its acquisition of FCA Packaging Products LLC, a Moline, Ill.-based maker of industrial shipping containers. No financial terms were disclosed. William Blair & Co. advised FCA on the sale.

DWW Woolworth GmbH, a German department store chain owned by UK-based Argyll Partners, has filed for insolvency. The company operates 323 stores, employing around 11,000. It generated around $1.2 billion in sales for the fiscal year ending last October. Read more

Human Resources

Hassan Ahmed has joined Charles River Ventures as a senior advisor. He is the former chairman and CEO of Sonus Networks.

Jim Breyer, a partner with venture firm Accel Partners, has been named to the board of Dell Inc. (Nasdaq: DELL). He will stand for formal election at a July shareholders meeting. Breyer currently serves on the boards of several Accel portfolio companies (including Facebook), plus is a Wal-Mart director.

A.J. Brohinsky has joined KKR as a director in the firm’s portfolio operations team, KKR Capstone. He will be “responsible for leading the firm’s Lean Six Sigma efforts.” Brohinsky previously was executive vice president of SmartOps.

Eric Luftig has joined BMO Capital Markets as a managing director in the firm’s leveraged finance group. He previously held senior positions with both GE Capital Markets and CIBC World Markets.