peHUB Wire: Tuesday, April 6, 2010

I spent a bit of time yesterday perusing U.S. VC performance data from Cambridge Associates, which is available on the firm’s website. Data is through the end of Q3 2010, and is predictably depressing.

If you exclude 10-year returns (because they still include part of dotcom-delirious 2000), the net means either are negative or pathetically positive. For example, the best number would be six-year net mean IRRs, which come in at just 5.65 percent. And those are pooled. If you look instead at vintage years, it’s even worse (best one post-1998 is 3.75 percent).

All of this plays into the “VC model is broken” mantra that many now consider conventional wisdom.

I’ve gone back-and-forth on this “broken” question, but the CA data actually supports the case more than it would even appear at first blush. The aforementioned numbers were all net of fees, expenses and carried interest. And, to reiterate, they suck.

But Cambridge Associates also provides ! gross vintage-year IRR data on a sector-by-sector basis. And almost everything here is well into the black.

For example, the typical IT company investment in 2003 has produced a 17.74% IRR. Healthcare/biotech deals that same year produced an 18.87% IRR. In fact, the gross mean IRR of companies that raised venture capital in 2003 is 12.76%, from a sample of more than 1,400 such companies.

Now go back to that mean net IRR from 2003-vintage funds: It’s just 3.75 percent. And that was the best one in over a decade.

In other words, the emphasis on “VC model is broken” should be on “model.” The actual ROI from venture capital has actually been decent over the past ten years, but those riches aren’t making their way to limited partners. No wonder we’re seeing an explosion in super-angel activity.

Many VC firms have recognized the problem, and have offered more LP-friendly terms to get new funds raised. But most of these changes have been mini! mal, compared to the gross/net return gap. Ironically, some VC firms t hat have (at least verbally) proposed much more radical fee structure changes get viewed suspiciously by LPs, who think the lower GP take-home indicates lowered GP confidence.

Last year I questioned the venture capital’s survival as an “asset class.” That was probably a mistake. Plenty of people will continue to make money off of venture capital. I should have questioned its future as a “industry.”

*** Answer Key: Last month, I asked: “Can you name the well-known hedge fund firm that is scouting out for VC talent, in preparation of its first official foray into the arena?”

The correct reply was SAC Capital, which initially will fund the effort via internal capital. Not sure if this means that Steve Cohen believes in the VC asset class specifically, or just in the value of further diversification…

Top Three

Servigistics, an Atlanta-based provider of strategic service management software, has acquired Kaidara, a French provider of customer service software that relies on data mining and case-based reasoning. No financial terms were disclosed. Servigistics is a portfolio company of Marlin Equity Partners, while Kaidara has raised VC funding from firms that include Edmond de Rothschild Investment Partners, 123Venture and Galileo Partners.

Stitcher, a San Francisco-based service that lets users customize talk radio p! rogramming on their mobile devices, has raised $6 million in Series B funding. Benchmark Capital led the round, and was joined by return backer New Atlantic Ventures and angels Ron Conway and Ed Scott. The company previously raised around $1.7 million.

The Carlyle Group has held a $1.1 billion final close on its first financial services fund. The fund, led by Olivier Sarkozy, has made three investments to date: Bank of N.T. Butterfield & Son Ltd., BankUnited and Boston Private Financial Holdings, Inc. (Nasdaq: BPFH).

VC Deals

Shocking Technologies Inc., a San Jose, Calif.-based developer of voltage switchable dielectric materials, has raised $5.2 million in additional Series B-1 funding. This brings the round total to $13.2 million, and the company’s total equity funding to $30.3 million. Backers includeArch Ventures, ATA ventures, Balch Hill Capital, Vista Ventures and SkyLake Incuvest & Company.

EcoFactor, a San Carlos, Calif.-based provider of automated residential energy management software, has raised $3.5 million in new Series A funding led by RockPort Capital Partners. Claremont Creek Venture also participated, after having led a $2.4 million first close in December 2009.

Buyouts Deals

Duke Street has acquired a control position in the Marlin Group, a UK-based buyer and manager of consumer debt, with a focus on litigation-based recovery. No financial terms were disclosed.

Graphite Capital has invested an additional £24 million into Willowbrook Healthcare, a UK-based operator of nursing and dementia care homes for the elderly. Graphite invested an initial £53 million in Willowbrook back in November 2008.

KKR and GoldenTree Asset Management are among several Tribune Co. lenders seeking documents from bondholder Centerbridge Partners, related to Tribune’s stock purchases and 2007 leveraged buyout.

Littlejohn & Co. has acquired CTI Foods Inc., a Wilder, Idaho-based provider of food products to restaurant chains, from CIC Partners. No financial terms were disclosed.

Saban Capital Group and Lionsgate (NYSE: LGF) have signed an equal partnership to operate and manage Tiger Gate, an operator of pay television chann! els and a distributor of television programming and filmsin Asia. No f inancial terms were disclosed. Lionsgate formed Tiger Gate in 2008.

Teachers’ Private Capital has led a buyout of Exal Group, a manufacturer of aluminum containers. No financial terms were disclosed for the deal, which included buy-side participation from Stonebridge Partners.

THL Partners is likely to succeed in its effort to buy CKE Restaurants (NYSE: CKR) for $619 million, unless a surprise rival bidder emerges by today’s “go-shop” deadline.

PE-Backed IPOs

Alpha and Omega Semiconductor Ltd., a Sunnyvale, Calif.-based chipmaker, has filed for a $116.4 million IPO. It plans to trade on the Nasdaq under ticker symbol AOSL, with Deutsche Bank Securities and Piper Jaffray serving as co-lead underwriters. The company reports over $138 million in 2009 revenue, compared to $99 million in 2008 revenue. Shareholders include Sequoia Capital (16.1% pre-IPO stake), Pacific Venture Partners (3.4%) and Hantech International Venture Capital(2.7%)

PE-Backed M&A

Stock Building Supply, a Raleigh, N.C.-based portfolio company of Gores Group, has acquired the assets of National Home Centers Inc., a provider of building materials in Arkansas. No financial terms were disclosed.

Zapoint, a Brookline, Mass.-based provider of talent management software, has acquired Jobster Inc., a Seattle-based provider of online recruiting tools and services.No financial terms were disclosed. Zapoint has raised an undisclosed amount of Series A funding led by HFF Investments, while Jobster raised over $53 million from Ignition Venture Partners, Mayfield, Reed Elsevier Ventures and Trinity Ventures.

PE Exits

Friend Skoler & Co. has sold Accessories Marketing Inc. to Illinois Tool Works Inc. (NYSE: ITW) for an undisclosed amount. Accessories Marketing is a Grover Beach, Calif.-based maker and marketer of Slime branded products for the tire care solutions market.

L-1 Identity Solutions Inc. (NYSE: ID) has acquired the assets of Retica Systems Inc., a Waltham, Mass.-based developer of eye biometric authentication solutions. No financial terms were disclosed. Retica had raised over $8 million from Sigma Partners.

Arrow Electronics Inc. (NYSE:ARW) has agreed to acquire Converge Inc., a Peabody, Mass.-based provider of reverse logistics services. No financial terms were disclosed. Converge ha! d raised VC funding from Pharos Capital Partners.

PNC Equity Partners has sold Tangent Rail Corp., a provider of wood crosstie supply chain services to the railroad industry, to Stella-Jones Inc. (TSX: SJ). The deal was valued at approximately $165 million.

Firms & Funds

Allegiance Capital, a Dallas-basedmid-market investment bank, has opened a new office in Seattle. It will be led by new managing director Michael Sherry, who previously founded Sherry Capital Advisors.

Human Resources

Eric Kump has agreed to join The Carlyle Group as a managing director of European buyouts. He previously was with Dubai International Capital.

Ronald McMahan, founder of Global Energy Decisions and senior vice president at IHS Inc., has joined General Atlantic as a special advisor.