peHUB Wire: Tuesday, June 16, 2009

Twenty percent of institutional investors plan to decrease their target allocation to private equity over the coming year, according to the latest results of a bi-annual survey conducted by Coller Capital. This is the largest percentage of expectant downsizers since Coller began the survey in 2004, with the group usually representing between just 3% and 6% of respondents.

It’s worth noting that another 15% or so plan to actually increase their target allocations, although that figure has dropped precipitously over the past two years (it had approached 50% in the summer of 2007).

One reason for the decrease is simply that there will be fewer private equity firms in which to invest. LPs expect 28% of today’s VC firms and 23% of today’s buyout firms will fail to raise a new fund over the next seven years. Those are pretty heady numbers, particularly for a VC industry that already experienced a minor shakeout earlier this decade. Moreover, 84% of LPs report having chosen not to reinvest with an existing GP relationship, compared to just 45% three years ago.

Presumably, all of this should lead to a sea change in the LP/GP power dynamic — which is traditionally dominated by GPs. For example, nearly 80% of LPs expect buyout fund terms to become more LP-friendly over the next two years, while around 65% believe the same of venture fund terms.

That’s all well and good, but LPs would have more credibility if they began insisting on changes to funds that have already been raised. For example, why have LPs not raised holy hell ovcer the 99.9% of buyout funds that haven’t cut the sizes of funds raised in 2007 and early 2008? Most of those vehicles were far larger than their predecessors, due to expected increases in deal volume and deal size (due to rising valuations). Those capital requirements are no longer operative, but LPs keep paying fees as if nothing’s changed.

Even more egregious are static fees and fund sizes from firms that have cut headcount over the past nine months. Sure the firm might have staffed up right after the fund was raised — an argument made by Carlyle and Sun — but LPs were kind of expecting that when they pro rata doubled and tripled their commitments. LPs were willing to pay more for more work, but shouldn’t be willing to pay more for less.

Finally, only 35% of North American LPs approve of their general partners buying debt in their own portfolio companies, while two-thirds of all LPs disapprove of their GPs buying public equities (PIPEs). But do any of these LPs actually do anything to stop such activities? Save for a scolding phone call here and there, the answer seems to be a resunding “no.”

Limited partners seem to relish their potential power, but should begin wielding it before the balance flips back.

*** If you’d like to view the actual Coller survey results, we’ve posted them here.

*** Yesterday’s big VC news was that Eric Hippeau is stepping down as a general partner with Softbank Capital, in order to become CEO of portfolio company HuffingtonPost. Two notes about this:

1. Hippeau not only led HuffPo’s original VC funding round, but he’s arguably the reason there was a round at all. Here’s what I wrote back in August 2008:

HuffingtonPost did not seek out venture capital, but rather venture capital found it. Softbank Capital managing director Eric Hippeau is a former Ziff Davis CEO (think ZDNet), who was looking for ! an investment in the news area. He was attracted by HuffingtonPost’s demonstrated ability to find an audience, and began selling Softbank as a financial partner that could help the site expand into a full-fledged new media organization.

“A large part of our decision had to do with Eric,” Arianna Huffington says. “We were getting someone who was very knowledgeable about new media and where we wanted to take it… We’re not just acquiring $5 million, but we’re also acquiring a very significant partner.”

2. An arguably bigger issue is what this move means for Softbank Capital, which loses one of its six partners and one of its two managing partners (although Hippeau will remain a “special partner” and continue to serve on three Softbank portfolio boards). The firm’s third fund is mostly committed, although it does have a small pool of drier capital that is dedic! ated to investments within New York State.

“We actually had com mitments to a new fund last year, but our sense was that it was better for us to focus on our 26 current portfolio companies… For Eric, this is a terrific opportunity for him to build a very large and successful company, which would benefit all of our investors.” explains remaining managing partner Ron Fisher.

If I may be so bold, let me briefly decode the VC-speak: Some of our LPs signed back up for a new fund, but not enough for us to hold a final close. So we’re holding off until we generate some more liquidity and the overall fundraising environment improves. HuffoPo may be one of our best ROI shots so, while we’d prefer not to have lost Eric, we’d rather he go there than somewhere else.

*** Great seeing so many Chicagoans last night at our peHUB Shindig. We’ll certainly do it again. And a final thanks to sponsors Bank of Ireland and Crowe Horwath LLP for making it all pos! sible.

Top Three

Extended Stay Inc. has filed for Chapter 11 bankruptcy protection, just one year after Lightstone Group bought the company from The Blackstone Group for approximately $8 billion.

HM Capital Partners has acquired certain news media and associated real estate assets from Blethen Maine Newspapers Inc., a subsidiary of The Seattle Times Company. Citizens Financial Group arranged financing for the deal, for which pricing terms were not disclosed. The news assets include: The Portland Press Herald/Maine Sunday Telegram (the largest paper in the state, the Kennebec Journal, the Waterville Sentinel, the Coastal Journal and

Antenna Software, a Jersey City, N.J.-based provider of enterprise mobility solutions, has acquired Dexterra Inc., a Bothell, Wash.-based provider of mobile workforce and field service software. No financial terms were disclosed. Antenna Software has raised $53 million in VC funding since 2001, from firms like Commonwealth Capital Ventures, North Bridge Venture Partners and Polaris Venture Partners. Dexterra has raised over $100 million in VC funding since 2002, from firms like New Enterprise Associates, Canaan Partners, Intel Capital, Mesirow Financial, Motorola Ventures and Sigma Partners.

VC Deals

Beijing Polybona Film Distribution Co. Ltd. of China has raised around $14.63 million in second-round funding. Matrix Partners China was joined by return backers Sequoia Capital China and SIG. The company previously raised $10 million, and said that it is planning for an IPO in the U.S. during 2011.

BOKU Inc., a San Francisco-based provider of a payment service for those buying digital and virtual goods with their mobile phones, has raised $13 million in VC funding. Benchmark Capital led the round, and was joined by Index Ventures and Khosla Ventures.

CeNeRx BioPharma Inc., a Cary, N.C.-based developer of CNS drugs, has raised $4 million in Series C funding from return backers Aisling Capital, L Capital Partners and Pappas Ventures. It also secured a $5 million credit facility from MidCap Financial.

Buyout Deals

Alcoa Inc. (NYSE: AA) has completed the sale of its wire harness and electrical distribution business to Platinum Equity. No financial terms were disclosed.

Big 10 Tire Stores Inc., a Mobile, Ala.-based tire retailer that filed for bankruptcy protection earlier this year, reportedly has canceled an auction after no bidders emerged to compete with existing owner Sun Capital Partners.

Mr. Mikes Restaura! nts Corp., a casual steakhouse franchisor in Western Canada, has raised an undisclosed amount of private equity funding from Yellow Point Equity Partners.

Stichting Pensioenfonds ABP, a Dutch pension fund for government and education employees, has acquired a 6.3% stake in Chinese juicemaker Huiyuan (1886.HK), via a purchase of convertible bonds. The move comes shortly after Warburg Pincus declined to redeem its convertible bonds in Huiyuan, rather than exercise an option to swap them for a 7% equity stake.

Mr. Mikes Restaurants Corp., a casual steakhouse franchisor in Western Canada, has raised an undisclosed amount of private equity funding from Yellow Point Equity Partners.

PE-Backed IPOs

LogMeIn Inc., a Woburn, Mass.-based provider of user remote connectivity and support services, has set its proposed IPO terms to 6.67 million common shares at between $14 and $16 per share. The company would have an initial market cap of approximately $342 million, were it to price at the high end of its range. LogMeIn plans plans to trade on the Nasdaq under ticker symbol LOGM, with JPMorgan and Barclays Capital serving as co-lead underwriters. It has raised around $30 million in VC funding since 2004, from firms like Prism VentureWorks (23.79%), Polaris Venture Partners (20.99%), 3TS Capital Partners (15.83%), Integral Capital Partners (8.91%) and Intel Capital (5.43%).

Firms & Funds

The Board of CalPERS voted to increase its target allocation to venture capital and private equity from 10% to 14 percent. The move is largely a reflection of current exposure.

Bridgescale Partners, a Menlo Park, Calif.-based growth equity firm, announced plans to open a Toronto office later this summer. It did not name any staffers, but did say that it’s recruiting.

Cipio Partners has held a €61 million first close on its sixth direct secondaries fund, which is targeting €200 million.