PEHUB Wire: Tuesday, February 3, 2009

Senators Carl Levin (D-MI) and Chuck Grassley (R-IA) last week introduced something called the Hedge Fund Transparency Act, which would require hedge funds to register with the SEC. But the bill also would apply to private equity and venture capital funds, so long as they are larger than $50 million.

Erin has more details here – including a downloadable copy of the bill – but the basics are that funds would have to regularly disclose their fund value (fund-level, not underlying assets), and also the names and addresses of any beneficial owners (i.e., LPs). In other words, PE fund values could soon become a matter of public record, even if the fund did not take money from a pension system in disclosure-friendly states like California or Texas. I’ve got three quick items:

1. The bill would apply to any “investment company,” as defined by the Investment Company Act. A Senate staffer explains: “The bill takes this approach to avoid getting into the impossible task of distinguishing between hedge funds, private equity funds, venture capital funds, and other types of funds, while providing a low-cost, reasonable means for the SEC to obtain basic information about these investment companies.”

2. There’s a bit of irony here for the buyout funds, in that hedge funds were largely the engine that helped fuel larger and larger deals during the “Golden Age.” Now hedge funds will be the engine that shines greater light on just how bad some of those deals were (albeit on an aggregate portfolio basis).

3. This bill could be a boon for public LPs like CalSTRS and UTIMCO, which have been shunned by certain GPs because of their public disclosure requirements. If everyone is required to disclose, the public LP stigma disappears.

*** “Long Tail” author Chris Anderson yesterday wrote a WSJ piece called The Economics of Giving It Away, arguing that most online businesses can no longer succeed if CPM-based ads are their only revenue stream. I agree, which is why peHUB offer Premium Subscriptions and hosts events like the Shindigs. But I do take issue with one line in Anderson’s piece, in which he says:

“For the first time since 2001, the overall tide of investment and advertising won’t rise. Indeed, it will almost certainly fall. Venture capital has dried up…”

It’s undeniably true that venture capital activity has slowed down, but to say it has “dried up” is a massive overstatement. In fact, it’s closer to a canard.

Venture capitalists funded 833 U.S.-based companies in Q4 2008, for a total of $5.47 billion. That’s well off the $8.08 billion invested in Q4 2007, but it’s hardly “dried up.” In fact, it’s pretty close to where the VC market was at the end of 2005, when just $5.79 billion was invested in 810 companies. Moreover, not a single quarter in 2004 even broke the $5 billion mark.

I understand Anderson’s consternation, and it’s true that today’s entrepreneurs need to show clearer revenue paths than they did 15 months ago. But that’s more a reflection of past VC froth than an ability of quality companies to get funded. But there is still plenty of money available, and there will be going forward. Certain things truly have dried up (VC-backed IPOs, mega-LBOs, etc.), but venture capital isn’t one of them.

*** CMEA Ventures has quietly changed its name to CMEA Capital. Jim Watson, a CMEA managing director, says the move was made to better reflect the firm’s plan to broaden its investment strategy. It will continue doing early stage deals, but also plans growth-stage and other sorts of funds in specific sectors.

For example, CMEA is currently raising a Green Growth fund, and soon could do similar things in spaces such as IT or healthcare. CMEA historically has invested around 75% of its capital into early-stage deals, with the remainder going to growth or late-stage opportunities.

Top Three

SunTx Capital Partners has signed a non-binding letter of intent to acquire up to a 24.9% stake in Colonial BancGroup Inc. (NYSE: CNB), for between $1 and $1.50 per share.

American Media has reached a deal whereby bondholders would receive a 95% ownership stake, while the company’s debt load would be reduced by $227.2 million. American Media is currently owned by THL Capital and Evercore Partners, which would lose around $300 million and $200 million, respectively.

Ian Goh has resigned as a China-based partner of Kleiner Perkins Caufield & Byers, for undisclosed reasons. He had been promoted to the partner position in early 2008.

VC Deals

SkyCross Inc., a Viera, Fla.-based developer of wireless antenna solutions, has raised nearly $23 million in Series D funding, as first reported by peHUB. Investor Growth Capital led the round, while other backers include BEA Systems, Milcom Technologies, Gabriel Venture Partners, Intel Capital and TL Ventures.

ReShape Medical Inc., a San Clemente, Calif.-based developer of a medical device to help treat obesity, has raised $20 million in Series B funding. U.S. Venture Partners led the round, which closed last October. Return backers include New Leaf Venture Partners and SV Life Sciences. ReShape has now raised around $28 million in total fundin! g.

Roadrunner Transportation Services Inc., a Cudahy, Wis.-based provider of non-asset based transportation and logistics services, has raised $12 million in Series B funding, according to a regulatory filing. The company is currently in registration for a $150 million IPO, and has backing from firms like Thayer | Hidden Creek Entities, Eos Partners and American Capital Strategies.

RNA Networks, a Portland, Ore.-based provider of memory virtualization software, has raised $7 million in Series A funding led by Menlo Ventures.

R2 Semiconductor Inc., a Sunnyvale, Calif.-based chip startup, has secured $2 million of a $12 million Series A round, according to a regulatory filing. Backers include Sigma Partners and Morgenthaler Venture Partners.

Bright Automotive Inc., an Anderson, Ind.-based maker of hybrid and electric vehicles, has around $11 million of a $17 million Series A round, according to a regulatory filing. The only listed shareholders are White Pines Partners (Boston) and Duke Investments (Cincinnati).

TextDigger Inc., a San Jose, Calif.-based semantic search startup, has raised $4.3 million in Series A-1 funding. True Ventures led the round, and was joined by CBS Interactive and Intel Capital. The company previously raised $3.8 million.

Somark Innovations Inc., a St. Louis-based developer of chipless RFID tattoos for animal identification, has raised an undisclosed amount of new VC funding. Finistere Ventures and T2 Venture Capital co-led the round, and were joined by Med-Pharmex Animal Health and the St. Louis Arch Angels.

Space-Time Insight Inc., a Fremont, Calif.-based provider of software that offers real-time visual and temporal analysis of a company’s operating status overlaid on satellite images, has raised an undisclosed amount of Series A funding from Opus Capital.

Buyout Deals

Angelo Gordon & Co. has acquired the Bridgeview, Ill.-based headquarters and principal processing and distribution facility of Stampede Meat Inc. The $14 million deal was structured as a sale-leaseback, and was closed simultaneously to a recap of Stampede Meat’s balance sheet. Stampede Meat is a portfolio company of Fairmont Capital, PNC Mezzanine Capital and Sankaty Advisors.

BS Private Equity and BS Investimenti have acquired Tiscali’s international network business for €47 million.

Design Within Reach Inc. (Nasdaq: DWRI) a San Francisco-based home furniture maker, has retained Thomas Weisel Partners to advise on various alternatives, including a possible sale of the company. The company’s current market cap is just south of $50 million.

Edscha, a German car roofing specialist backed by The Carlyle Group, yesterday filed for insolvency.

GMT Communications Partners has refinanced the senior debt facilities of portfolio company Redext, a company formed in 2005 to acquire three independent outdoor advertising groups in Spain.

HD Supply and The Home Depot have reached an agreement related to post-closing purchase price adjustments resulting from the $8.5 billion buyout of HD Supply in August 2007. Under terms of the deal, HD Supply will receive a $22 million payment from Home Depot, plus other non-cash considerations. HD Supply was bought by Bain Capital, The Carlyle Group and Clayton, Dubilier and Rice. Home Depot retained a 12.5% equity stake.

Insight Equity has completed its take-private acquisition of Meadow Valley Corp., a Phoenix-based construction contractor and construction material supplier. The deal’s total equity value was around $61.3 million, with Meadow Valley stockholders to receive $11.25 per share. Alvarez & Marsal Securities advised Meadow Valley on the deal.

Oaktree Capital and homebuilder Ryland Group (NYSE: RYL) have formed an acquisition and development platform, focused on distressed U.S. residential real estate opportunities.

Sorenson Capital has acquired International Development Corp., a Roanoke, Texas-based provider of solar and other alternative residential outdoor lighting products. No pricing terms were disclosed. Leveraged financing was provided by NewSpring Mezzanine, Calvert Street Capital Partners and Patriot Capital.

PE Exits

3i Group has sold its 48% stake in Diab, a Swedish core materials maker, to Ratos AB. The deal is valued at approximately $48 million.

Insituform Technologies Inc. (Nasdaq: INSU) has agreed to acquire Corrpro Companies Inc. (OTYC BB: CRRP) for approximately $91 million. Corrpro is a Medina, Ohio-based maker of corrosion control engineering services, systems and equipment. Its shareholders include American Capital and Wingate Partners.

Millipore Corp. (NYSE: MIL) has agreed to acquire Guava Technologies, a Hayward, Calif.–based provider of bench-top cell analysis systems. The deal is valued at $22.6 million. Guava has raised around $60 million in VC funding since 2000, from firms like Granite Global Ventures, HLM Venture Partners, Skyline Ventures and Abingworth Management.

PE-Backed M&A

Michigan Orthopedic Services, a portfolio company of Huron Capital Partners, has acquired Lansing, Mich.-based O&P Professional Care. No financial terms were disclosed.

Radialpoint, a Canadian provider of managed Internet security to ISPs, has acquired the assets of HiWired Inc., a Needham, Mass.-based provider of technology support services to ISPs. No financial terms were disclosed. HiWired had raised over $17 million in VC funding since 2005, from firms like Kodiak Venture Partners, North Hill Ventures and Sigma Partners. Radialpoint last year sold a minority ownership stake to TA Associates.

Firms & Funds

The Carlyle Group is raising up to $75 million for its fourth Latin American real estate fund, according to a regulatory filing. It already has secured around $10 million.

Citigroup plans to begin auctioning off Japanese brokerage Nikko Cordial as early as this month. This deal is expected to be worth upwards of $3.4 billion.

Tudor Capital, the private equity affiliate of energy-focused bank Tudor, Pickering, Holt & Co., is raising up to $250 million for a new fund, according to a regulatory filing. It already has secured over $50 million in capital commitments.

UBS AG has held preliminary talks with Wachovia Securities about forging a joint venture of the firms’ North American wealth management groups, according to The New York Post.

Human Resources

Jean-Hugues Verdu has joined French buyout firm Activa Capital as chief operating officer. He previously was a Paris-based director with Alvarez & Marsal.

Mitch Scherzer has joined The Silverfern Group as a managing director. He previously ran JP Morgan’s media investment banking practice.

Philip Ruppel has joined Navigation Capital Partners as an analyst. He previously was part of the financial institutions group of Bear Stearns & Co.

Morgan Stanley plans to cut between 3% and 4% of its global workforce, or up to 1,880 people.