peHUB Wire: Tuesday, February 17, 2009

This space hasn’t always been too kind toward Bain Capital, in regards to the extraordinary fees it charges its (submissive) limited partners. Today, however, we need to give some credit where it’s due.

The Boston-based buyout firm is proposing an amendment to all of its active private equity funds, which would temporarily waive all of its quarterly management fees. Those funds would instead be available for follow-on investment in existing portfolio companies, with the fees to ultimately be paid back out of the fund’s gross profits (assuming there are some).

This strategy won’t matter much for relatively-uncalled Bain funds – like its tenth general PE fund or its third European fund – but is a big deal for a vehicle like Bain Capital IX, which is around 98% invested. Rather than using that final $160 million for fee payments, Bain would use it to inject additional equity into select existing investments.

I’m not suggesting that this is a perfect proposal for limited partners. Most of them would surely prefer a permanent fee waiver, rather than a system that ultimately could require them to pay more cash than they would under current obligations. And it may not do much to abate LP liquidity crunch issues, given that Bain will still call down capital (albeit for a different purpose).

But, with all that said, this is still a step in the right direction. More general partners need to recognize growing LP resentment with existing fee structures, particularly at big buyout firms where new deals are hard to come by. The fee structure was not originally set up to help PE pros get rich while sitting on their hands. Instead, it was supposed to help keep the lights on in order to transact deals that would be the actual wealth-makers for both parties.

During an ACG Boston panel discussion last week, I asked each panelist if his firm planned to somehow alter management fees on existing funds. They all responded negatively. They are all wrong. I’m not saying their firms should each follow the Bain deferral model, that they should do something even more LP-friendly. But they should do something.

Most VC firms that altered fee structures – or cut fund sizes – back in 2001-2003 were easily able to raise subsequent funds. Some current buyout pros argue that most VC firms that didn’t make such adjustments also raised funds. But we are not in 2003, when limited partners were flush with alternative allocations. We’re in 2009, when capital constraints will force most LPs will have to say goodbye to some of their existing managers. A little sugar now should go a long way later.

*** Twitter has raised $35 million in Series D funding, from Benchmark Capital ($21m) and Institutional Venture Partners ($14m). The micro-blogging service also raised an undisclosed amount of capital from past backers Spark Capital and Union Square Ventures, and could add even more once existing angel shareholders decide whether or not to exercise their pro rata rights at the $230 million-ish valuation. All together, Twitter is expected to have over $50 million in cash on hand (including some old VC money that has not yet been spent).

A few brief notes on this deal, based largely on a conversation with Todd Chaffee of IVP:

• IVP initiated this transaction, by Chaffee calling Fred Wilson of IVP (the two had once invested in Comscore together). Wilson said the company didn’t need new capital, but would be interested in having a West Coast investor. Twitter’s co-founders met with IVP on January 12, and signed a term sheet just four days later.

• IVP is usually a later-stage investor, and Twitter is a two-year-old company without any revenue. During the negotiations, both sides believed it would be best to bring on an additional West Coast partner with more early-stage experience. The call went out to Benchmark, largely because Benchmark has a pair of partners who helped grow Facebook (Peter Fenton as an investor, Matt Cohler as VP of product management).

• Chaffee believes there is far too much attention paid to Twitter’s current lack of revenue, given its age. He firmly believes that this is a Facebook or YouTube-type opportunity. When asked if Twitter would have revenue in one year from today, he said it would likely have “test revenue.”

• One big difference from Facebook, however, is that Twitter’s co-founders do not have the same type of control over Twitter that Mark Zuckerberg has over Facebook (where he, and he alone, can approve or veto an acquisition).

• Twitter raised seed funding from Charles River Ventures, but the firm has not participated in a subsequent round. It still has some shares, but isn’t really involved in the company beyond that.

*** I spent the weekend in Santa Cruz for a wedding (plus a rainy journey to the Mystery Spot). Just a quick – unpaid — plug for Virgin America. Fantastic service, food, price and on-board entertainment. Plus, it had Wi-Fi. I sure hope this is the future of flying…

Top Three

Offerpal Media, a Fremont, Calif.-based provider of monetization platforms for social applications, virtual worlds and other online communities, has raised $15 million in Series B funding. D.E. Shaw Ventures led the round, and was joined by return backers InterWest Partners and North Bridge Venture Partners.

Oasys Water Inc., a Cambridge, Mass.-based developer of desalination and water treatment technology, has raised $10 million in Series A funding. Flagship Ventures and Advanced Technology Ventures co-led the round, and were joined by Draper Fisher Jurvetson. The company was originally formed via a seed investment from GreatPoint Ventures.

The Carlyle Group is raising up to $3 billion for a fund to invest in financial assets, and already has lined up $1 billion.

VC Deals

Copan Systems, a Longmont, Colo.-based provider of persistent data storage solutions, has raised $18.5 million in fifth-round funding. Westbury Partners led the round, and was joined by return backers like Austin Ventures, Globespan Capital Partners, FirstMark Capital and Credit Suisse. Battery Ventures, which led the firm’s $32.4 million Series D round, did not participate. The Battery partner who led that deal, Mike Scanlan, left the firm last year. Copan Systems has now raised over $100 million.

Exalt Communications, a Campbell, Calif.-based provider of microwave radio systems for wireless backhaul applications, has raised $15 million in Series C funding. InterWest Partners led the round, and was joined by return backers Velocity Interactive Group and Trinity Ventures.

Emergent Game Technologies, a Calabasas, Calif.-based provider of videogame development applications, has raised $12.5 million in fifth-round funding. Hopewell Ventures was joined by return backers Worldview Technology Partners, Jerusalem Venture Partners, Walker Ventures and Adena Ventures.

Triton Format AG, a German provider of water solutions for the maritime, industrial and small municipal sectors, has raised €10.4 million in new VC funding. Zouk Ventures led the round, and was joined by Meidlinger Partners and company management.

OpSource, a Santa Clara, Calif.-based provider of enterprise SaaS and Web applications, has raised $10 million in Series E funding from Nippon Telegraph and Telephone Corp. (NYSE: NTT). It had previously raised around $54 million from Velocity Interactive Group, Crosslink Capital, Intel Capital, Key Venture Partners and Artiman Ventures.

Yieldex, a New York-based provider of inventory management and forecasting technology solutions for addressable media, has raised $8.5 million in Series B funding. Madrona Venture Group led the round, and was joined by and return backers Sequel Venture Partners and First Round Capital.

Bizanga, a San Mateo, Calif.-based provider of an email and message management platform, has raised $8 million in second-round funding. Credit Agricole Private Equity led the round, and was joined by return backer Galileo Partners. Aelios Finance advised Bizanga on the transaction.

Achieve CCA Inc., an Evansville, Ind.-based provider of debt management services to healthcare patients, has raised $5 million from Chrysalis Ventures.

Airband Communications Inc., a Dallas-based fixed wireless company for business customers, has raised $3 million in Series D funding. Return backer M/C Venture Partners was among the participants. Airband has now raised over $70 million in VC funding since 2000, from firms like M/C, Sevin Rosen Funds, Crescendo Ventures, Key Venture Partners and Dolphin Equity Partners., a Santa Monica, Calif.-based college search portal, has raised $2.25 million in Series B funding. OCA Ventures led the round, and was joined by Origin Ventures and return backer Rincon Venture Partners.

Vontoo Inc., an Indianapolis-based provider of voice marketing solutions, has raised $2 million in VC funding led by return backer EDF Ventures.

Ontela Inc., a San Diego-based maker of camera phone picture-saving technology, has raised an undisclosed amount of third-round funding from Eastven Venture Partners. Ontela had previously raised $14.5 million from Steamboat Ventures, Hunt Ventures, Oak Investment Partners and Voyager Capital.

Buyout Deals

KRG Capital Partners has made an investment in Federal Flange Ltd., a Houston-based maker of oilfield hardware. No financial terms were disclosed.

Nailite International, a Miami, Fla.-based maker of molded plastic residential siding products, has filed for Chapter 11 bankruptcy protection. The company was acquired in 2003 by Graham Partners and Argosy Partners.

Polaroid Corp. creditors filed a series of legal objections to a proposed sale of the company’s assets to an affiliate of Genii Capital for $42 million.

Invenergy Wind LLC, a developer and operator of large-scale wind energy generation assets in North America and Europe, has raised $30 million from Clean Leaf Energy Co. (LSE: LEAF).

PE Exits

Aragon Consulting Group has acquired Krugle Inc., a Menlo Park, Calif.-based provider of code maintenance and analysis technology. No financial terms were disclosed. Krugle had raised over $8 million in VC funding since 2005, from firms like Emergence Capital Partners, First Round Capital, Omidyar Network and Rustic Canyon Partners.

Firms & Funds

Arboretum Ventures has closed its second fund with $73 million in capital commitments. The Ann Arbor, Mich.-based firm focuses on healthcare and life sciences opportunities, and had raised $24 million for its debut fund in 2005.

CDC Group has committed $15 million each to a pair of microfinance funds: India Financial Inclusion Fund, managed by Caspian Capital Partners, and Catalyst Microfinance Investors.

Coller Capital has bought a 23.9% stake in SVG Capital, the London-listed private equity group that is the main limited partner in Permira.

Praesidian Capital is preparing to raise $300 million for its third mezzanine fund, according to LBO Wire. Unlike past Praesidian offerings, this fund will not use leverage.

Human Resources

Ronan Agnew is leaving Credit Suisse, one year after moving to Hong Kong to run the firm’s Asian private equity banking group. No word yet on his future plans. He will be succeeded by Toby Groser and Ben Ngai.

Klaus Maurer has joined Silverfleet Capital, after having been an analyst in the Frankfurt office of Terra Firma Capital Partners.