peHUB Wire: Tuesday, March 31, 2009

Several years ago, academics Josh Lerner (Harvard) and Antoinette Schoar (MIT) published a paper about how LP returns are affected by the location of their general partners. Specifically, they found a negative proximity effect – that the PE portfolio performance of state pensions and public universities improved the farther away they invested from their home states. For example, UMass would do better if 70% of its GP commitments were to out-of-state funds, as opposed to if only 40% were.

Why bring this up today? Because Lerner and Schoar have just released a new working paper on the direct investment strategies of sovereign wealth funds, which features a strikingly similar conclusion. From an email Lerner sent over:

“We examine nearly 2700 direct private equity investments by 29 sovereign wealth funds over the last two decades. We find that sovereign funds engage in a form of ‘trend chasing,’ investing more at home when domestic equity prices are higher, and investing abroad when foreign prices are higher. Funds experience poor performance in the year after their domestic investments, while their investments abroad actually do better in the year after. Funds where politicians are involved have a much greater likelihood of investing at home than those where external managers are involved. Funds where with politicians are involved invest in higher valued industries, which have poor returns in the year after the investment, while the opposite pattern holds for funds with external managers.”

Lerner and Schoar acknowledge that domestic investments may provide social or economic development benefits not reflected in ROI, but add that such an argument also contains its own problems. For example, if most domestic investments are made when domestic equities are high, then wouldn’t that also be a time when more domestic private capital is available (thus reducing the need for SWF investment)?

The paper is set to be formally released later this week, by Harvard, MIT and the National Bureau of Economic Research. But we’ve got it over at peHUB, for your perusing pleasure.

*** Doctoral student Shai Bernstein also co-authored the above paper.

*** A bunch of hooting and hollering this week over The Blackstone Group’s refusal to comply with an SEC request that it publicly disclose the performance of its buyout and hedge funds (kudos to Bloomberg for the get).

In a December 5 letter to the SEC, Blackstone said, in part: “The individual rates of return have no direct impact on our financials and therefore we question the relevance to our investors.” The SEC responded two months later, by saying that it had completed its review and did not have further comments “at this time.”

Not quite sure I understand either Blackstone’s position (or the related outcry). After all, almost all of this information is publicly available elsewhere. Remember, Blackstone takes tons of money from public pension funds in disclosure-friendly states like California, Oregon and Washington.

For example, here are the IRRs for Blackstone’s past four funds through Q3 2008, according to CalPERS:

• Blackstone Capital Partners II (1994): 37.4%

• Blackstone Capital Partners III (1997) 13.8%

• Blackstone Capital Partners IV (2003): 44%

• Blackstone Capital Partners V (2006) -6.9%

*** Boston Readers: If you saw the Globe sports page today, you might have read a column by Bob Ryan about how anti-poverty agency ABCD is struggling to find corporate partners for its annual Field of Dreams program. Tough economy, just at the time when a program like ABCD is needed most.

The program is a fundraiser for ABCD, and allows participating corporations to field a softball team that gets to play at Fenway Park for an afternoon. The tax-deductible cost is $15k per team, which allows 22 players and up to four coaches. There is also a $7,500 half-team option for 11 players, two coaches.

So I was thinking… How about a peHUB team? Each person chips in their share, and we all experience a once-in-a-lifetime afternoon. Send me an email if you might have interest (

Top Three

Google Inc. has formed a $100 million venture capital fund. It will operate as a separate entity, and be more focused on maximizing returns than on strategic synergies with Google. It will be co-managed by Bill Maris (Mountain View), a former investor with Investor AB who later founded Web hosting company; and Rich Miner (Cambridge), co-founder of mobile platforms developer Android (sold to Google).

Sun Capital Partners has agreed to acquire the fuel systems and hose extrusion operation of Fluid Routing Solutions Inc., a Sun portfolio company that filed for Chapter 11 bankruptcy protection last month. The acquisition is valued at $11 million. During the bankruptcy period, Sun had provided Fluid Routing with $12 million in DIP financing.

Hermes Fund Managers has hired Bridgepoint to manage its direct private equity investment efforts. As part of the deal, Hermes’ 10-person direct investment team will operate as a business division of Bridgepoint, called Bridgepoint Development Capital. This includes Hermes team leader Rod Selkirk, who will become a Bridgepoint partner.

VC Deals

Pathway Medical Technologies Inc., a Kirkland, Wash.-based developer of endovascular treatments for peripheral arterial disease, has raised $40 million in Series D funding. Return backers include HLM Venture Partners, Latterell Venture Partners, Oxford Bioscience Partners, Forbion Capital Partners and Giza Venture Capital.

Livescribe Inc., an Oakland-based developer of a pen with an onboard computer, has raised $7.5 million in additional Series D funding from Aeris Capital. It had previously held an $11.1 million first close, from Lionhart Investments Ltd. and VantagePoint Venture Partners. Livescribe has now raised over $53 million in total funding, from Aeris, Lionhart, VantagePoint, Blueprint Ventures, Greenhouse Capital Partners and several family offices.

SpaceClaim Corp., a Concord, Mass.-based 3D mechanical designer for the manufacturing industry, has raised $7 million in third-round funding. Return backers include North Bridge Venture Partners, Kodiak Venture Partners, Borealis Ventures and Needham Capital Partners. It had previously raised $21 million.

Buyout Deals

CVC Capital Partners reportedly has entered exclusive talks to acquire iShares from Barclays PLC for approximately £3 billion.

WL Ross & Co. reportedly is among the bidders to acquire a majority stake in fraud-tainted Indian outsourcer Satyam Computer Services Ltd.

APR Energy Cayman Ltd., a provider of turnkey temporary power generation services, has received a $30 million minority investment from Levant Capital Ltd., a Dubai-based private equity firm.

Sara Lee Corp. (NYSE: SLE) is considering a sale of its international household and personal care business, after receiving interest from potential suitors. The group has around $2.3 billion in annual sales.

PE Exits

Western Digital Corp. (NYSE: WDC) has agreed to acquire SiliconSystems Inc., an Aliso Viejo, Calif.-based provider of solid-state drives for the embedded systems market. The deal is valued at $65 million in cash. SiliconSystems had raised around $14.5 million in VC funding, from firms like Miramar Venture Partners, Rustic Canyon Partners, Samsung Ventures, Shepherd Ventures and Sandisk Corp.

PE-Backed M&A

Ace Expediters Inc., an Orlando, Fla.-based logistics management company, has acquired Network Express Inc., a provider of specialized distribution services for pharmacies serving the long term care market. No pricing terms were disclosed for the deal, which included senior debt from Golub Capital and subordinated notes from groups like Prism Mezzanine Fund. Ace Expediters is a portfolio company of Atlantic Street Capital.

FleetPride, an independent aftermarket distributor of heavy-duty truck and trailer parts, has acquired the assets of Lubbock, Texas-based Pro Truck & Trailer Supply Inc. No financial terms were disclosed. FleetPride is owned by Investocrp, Banc of America Capital Investors and company management.

Nordform and S:t Eriks have merged to form Sweden’s largest independent supplier of pre-fabricated concrete products for infrastructure. Existing Nordform shareholder Segulah will be the combined company’s majority shareholder.

Firms & Funds

Mercer and Callan Associates have mutually agreed to terminate the merger of their investment consulting businesses. No explanation was provided.

Morgan Stanley is nearing a $6 billion final close on a new global real estate fund, which has originally been targeted at $10 billion.

Murex Investments and RHD Inc. have launched GoodCompany Ventures, a Philadelphia-based venture-style incubator program for socially-conscious entrepreneurs.

Human Resources

Jeff Mansukhani has joined Bay Hills Capital Management as a partner. He previously was a managing director with Cambridge Associates. Bay Hills is a San Francisco-based fund-of-funds manager focused on the small to lower mid-market buyouts space.

Robert Collins has joined Greenhill & Co. as a Chicago-based managing director, overseeing infrastructure advisory work in the Americas. He previously was at Morgan Stanley as a managing director and head of infrastructure I-banking in the Americas.

Maurice Marchesini and Sean Minnihan have joined UBS Investment Bank as managing directors in the firm’s financial institutions group. Marchesini will be based in Los Angeles, and previously was with Morgan Stanley as head of financial services I-banking for the Western U.S. Minnihan will be based in New York, and previously was with Banc of America Securities, as head of its ! financial tech and security group.

Mark Gailys and Casey Winters have joined Alvarez & Marsal as managers in the firm’s Los Angeles office. Gailys was previously with Beacon Partners and, before that, with GI Partners. Winters was previously with PricewaterhouseCoopers.