peHUB Wire: Wednesday, April 15, 2009

The sun is shining, the tax man is knocking and tomorrow I fly down to North Carolina for the VCIC Finals (and to eat some BBQ with my father). In other words, it’s time for some Wednesday Warblings…

First up is a pair of lengthy emails related to yesterday’s item about Goldman Sachs’ secondary fund markdown. One agrees that Goldman must have overpaid, the other does not. Both are from folks involved in the secondary market.

* John: “In 2007 secondary pricing declined from a premium to NAV at the start of the year to approx NAV by the end. H1 2008 pricing declined to a 10-20% discount to NAV. The real fall came in H2 2008, post Lehman, with prices falling to a c40% discount (typically to June 08 NAV’s). Prices have continued to decline into 2009 — now over 50% discount on a comparable basis.

These discounts carry major health warnings, as they generally refer to latest NAV figures which themselves have been declining (we see 20-30% falls at December 2009).

If Goldman bought in August 08 and paid a market discount of say 20% to June NAV, and NAV declined 25% by December, this would imply a markdown of c7% – so far so good. However, a deal completed in November should have factored in the change in pricing (we and many others pulled deals we couldn’t re-price at this time). The only basis I can see for writing down a secondary fund within its first year is if investment cost falls below latest reported NAV. If Goldman had priced their November drawdown deals at the market rate (40% discount to June NAV), they should still be valued at December at a discount to cost of 5-10%. Your conclusion that they have overpaid is the only obvious one to draw…

The bigger issue here is that many of the secondary funds who are out in the market now or planning to be soon will have major performance issues from their most recent funds. It will be interesting to see how they manage this information flow.”

* G counters: “The secondary industry generally records day one gains.For example, if Goldman paid $20 for $100 of NAV(80% discount to NAV), they would book $20 of cost, $100 of NAV (FMV – as the secondary transaction does not set FMV under SFAS 157) and an unrealized gain of $80.

If the GP later marks down that $100 of NAV to $75 (a 25% reduction), Goldman also records the markdown as a $25 unrealized loss (still leaving them with $55 of unrealized gain). So at the end of the subsequent accounting period, they have cost of $20 and NAV (FMV) of $75. So their 80% discount at closing was reduced as a result of the subsequent markdown. So you can still record subsequent FMV markdowns and not overpay and/or pay par. I think that is what very likely is going on with their fund.”

* Ned on Highland Capital targeting just $400 million for its next fund: “I’m thinking that the fundraising constraints caused by the economic meltdown will end up benefiting the VC firms that are able to survive. Most data suggests that small early-stage investments outperform large later-stage investments. If firms are required to move toward the former due to smaller fund sizes, then it should help boost returns.”

* Bob on the federal fund-of-funds proposal: “Government programs and innovation – what do they have in common? Very little. DARPA runs a pretty good program for small innovation grants – this is up and running. The SBA ran the SBIC program to mixed results – a lot of overhead and complexity that did not contribute to results at the end of the day. You are right on the money Dan – the money is in the system already. What we need to do is pull it off the metaphorical beach. Rather than putting $2B into another government sponsored program – with all of the “strings” attached – there are a few simple things that can be done to accelerate the 10’s of billions that are ready to deployed – once the risk/reward balance is restored:

1. Drop capital gains for startup companies. Put incentives for risk taking back in the system.

2. Lower the regulatory hurdles that complicate the life of the entrepreneur, provide disincentives and lower the eventual reward.

3. Open our doors to the world’s best and brightest to innovate in the US and contribute to our economic growth.

The challenges we are facing today are largely or our own (government’s) creation. If you restore the reward side of the equation – the capital and entrepreneurs will flow – willingly and with more velocity that can be created with $2B of government sponsorship.”

*** Finally, a happiest of birthdays MFP. Way too long no see…

Top Three

eBay announced plans to spin Internet phone company Skype off into an independent company, via an IPO. Skype’s co-founders had been trying to buy the company back from eBay, with the backing of private equity firms.

Bridgepoint Education, a San Diego-based provider of online and campus universities, raised $141.75 million via an IPO. The company sold 13.5 million common shares at $10.50 per share, compared to an estimated offering range of between $14 and $16 per share. It will trade on the NYSE under ticker symbol BPI, while Credit Suisse and J.P. Morgan served as co-lead underwriters. Warburg Pincus was expected to sell nearly 8 million shares in the offering, which would have dropped its ownership stake from 89.4% to 64.5 percent.

TPG Capital has offered to cut the size of its latest Asia private equity fund by up to 10 percent (approx. $420 million).

VC Deals

Synageva BioPharma Corp., a Waltham, Mass.-based developer of protein therapeutics, has held a $30 million first close on its sixth funding round. Baker Brothers Investments led the tranche, and was joined by Tullis Dickerson and Four Partners. The company previously raised over $50 million.

StoredIQ Inc., an Austin, Texas-based provider of intelligent information management solutions for the enterprise, has raised $8 million in new VC funding. Return backers include S3 Ventures and Techxas Ventures.

Pontiflex, a Brooklyn, N.Y.-based operator of an online marketplace for leads, has raised $6.25 million in Series B funding. RRE Ventures led the round, and was joined by return backers New Atlantic Ventures and Greenhill SAVP. It previously raised $2.5 million.

FastScale Technologies Inc., a Santa Clara, Calif.-based provider of data center software platforms, has raised $5.5 million in Series B funding. ATA Ventures led the round, and was joined by an undisclosed corporate investor and return backers Leapfrog Ventures and Hunt Ventures.

Reva Systems Corp., a Chelmsford, Mass.-based RFID company, has raised $5 million in third-round funding. Return backers included North Bridge Venture Partners and Charles River Ventures. The company previously raised around $30 million from CRV, NoBVP, Cisco Systems and SAP Ventures.

SoundCloud, a Berlin, Germany-based online audio platform for music professionals, has raised €2.5 million in Series A funding from Doughty Hanson Technology Ventures.

ThinkVine, a Cincinnati-based provider of marketing planning and simulation software, has raised $1.85 million in Series B funding. Draper Triangle and DFJ Portage co-led the round, and were joined by Draper Fisher Jurvetson, CincyTechUSA and Fort Washington Capital Partners., a Chinese social networking site, has raised $20 million in second-round funding, according to local press reports. Backers include Qiming Venture Partners, Ceyuan Ventures and Northern Light Venture Capital.

Buyout Deals

Istithmar said that it has injected an undisclosed amount of new capital into department store chain Barneys New York. The money is expected to ensure that Barneys meets its 2009 schedule of shipments. Istithmar bought Barneys in 2007 for $943.2 million from Jones Apparel Group.

HCA Inc. is planning to sell between $1 billion and $1.5 billion of 10-year senior secured first lien notes. It had originally said that it would offer just $500 million. The yield is expected to be nine percent. HCA was taken private in 2006 by Bain Capital, KKR and Merrill Lynch Global Private Equity.

PE-Backed M&A

Majestic Research Corp., a New York-based provider of independent equity research, has acquired Rood Research, a New York-based provider of healthcare market research. Majestic raised an undisclosed amount of Series A funding in 2005 from BV-Cornerstone Ventures.

Marshal8e6, a provider of Web and email security products, has acquired Avinti, a provider of behavior-based malware detection technology. No financial terms were disclosed. Marshal8e6 was formed late last year via the merger of UK-based Marshal and Orange, Calif.-based 8e6 Technologies. Backers include Updata Partners, Kelso Place Asset Management, Darwin Group, CX Ventures and Vora Venture. Avinti had raised around $8 million from firms like vSpring Capital, Sequel Venture Partners and Symantec Corp.

RMI, an Atlanta-based provider of rail information services to the transportation industry, has acquired 10East, a Jacksonville, Fla.-based provider of SaaS applications to support signal and communications infrastructure needs of railroads in North America. No financial terms were disclosed. RMI is a portfolio company of Carlyle Growth Partners.

Vistar Corp., a foodservice distributor owned by The Blackstone Group and Wellspring Capital Management, has agreed to acquire the assets of Five Star Distributors Inc., a Chicago-based provider of vending and office coffee products in the Midwest region. No financial terms were disclosed.

PE Exits

Wall Street Institute, a provider of English-language instruction, has sold its Chinese subsidiary to Pearson PLC for $145 million in cash. Wall Street Institute is majority-owned by The Carlyle Group, and was advised on the deal by Credit Suisse Securities.

Sanofi-aventis (NYSE: SNY) has agreed to acquire BiPar Sciences Inc., a Brisbane, Calif.-based developer of PARP inhibitors as cancer therapies. The deal could be worth up to $500 million, based on the achievement of milestones for BiPar’s lead candidate. BiPar has raised around $60 million in VC funding, from firms like Domain Associates, Canaan Partners, Vulcan Capital, PolyTechnos Venture-Partners, Asset Management Company and Quantum Technology Partners. It also has raised venture debt from Lighthouse Capital Partners.

Firms & Funds

BlackRock plans to raise between $5 billion and $7 billion to buy toxic assets under the PPIP program. It hopes that around $1 billion of that would come from Japanese institutions.

New Enterprise Associates has scaled back the target for its thirteenth fund by at least $1 billion, according to VentureWire. The firm originally wanted to raise $3 billion.

Pegasus Capital Advisors has teamed with Deerfield Capital Corp. to form an investment venture that will purchase distressed corporate bank loans and other senior secured corporate loans. Pegasus has committed $75 million, while Deerfield has committed $15 million.

Human Resources

Centerview Partners has hired three Merrill Lynch investment bankers focused on the healthcare space: Alan Hartman, Richard Girling and Mark Robinson. The firm also announced that it opening new offices in London and San Francisco.

Nomura Holdings has cut another 50 investment banking jobs in Asia, excluding Japan.

UBS said that it will cut another 11% of its global workforce, which works out to around 8,700 jobs.