peHUB Wire: Wednesday, December 23, 2009

In early 2007, this space reported on the relationship between CalPERS and Pacific Corporate Group, a private equity advisory and investment firm based in La Jolla, California. PCG had just suffered a massive personnel shakeup, but still got two new mandates from CalPERS after agreeing to alter its organizational structure.

It looked like a classic quid pro quo, and showed that CalPERS would go out of its way to give PCG the benefit of its doubts. Not illegal or even improper. Just old-boys cozy.

All of this came rushing back to me this week, when reading an LA Times piece about possible conflicts of interest between CalPERS, PCG and controversial placement agent Alfred Villalobos. I tried creating a graphical representation of the relationship, but it was way too messy (triangle-shaped, with arrows going every which way). So let’s try this:

• PCG was hired by CalPERS, to advise on two investments being marketed by Al Villalobos.

• PCG recommended both deals, including a $600 million investment in exchange for a 10% stake in Apollo Global Management.

• PCG also attempted to sell a piece of its management company to CalPERS, and was represented on the deal by Al Villalobos. The deal did not ultimately transpire. peHUB has learned that PCG originally hired ARVO in February 2006, and later met with CalPERS staff about the deal. It did not reach the CalPERS board level until after the Apollo deal closed. (note: this timeline is disputed, depending on who you talk to).

• PCG made CalPERS aware of the possible conflicts of interest in regards to Al Villalobos shortly after being retained to advise on Apollo. CalPERS did not object (download both PCG letter and CalPERS statement).

PCG was just one of many consultants hired by CalPERS on the Apollo deal, and its role was mostly limited to advising on whether such a transaction would fit into CalPERS’ investment strategy. Other advisors included PricewaterhouseCoopers (on Apollo’s portfolio valuations), Lazard (deal valuation opinion) and Pension Consulting Alliance. None of the four appear to have objected.

Why did PCG hire Villalobos for its own sale? We don’t know for sure, although one source tells us that Villalobos came up with the idea of selling an equity stake in PCG to one or more public pension systems, therefore making it “his deal.” Another source, however, says the notion of bringing outside investment into PCG predated Villalobos’ involvement. PCG so far has declined to comment.

It is worth reiterating that neither CalPERS nor other pension systems ultimately invested in PCG’s management company. This certainly could be seen as evidence that any appearance of impropriety ! is just a mirage. On the other hand, it also could be seen as evidence that Villalobos was in position to influence PCG — whose support of the Apollo deal indirectly led to millions in placement fees for Villalobos.

But no matter which scenario you prefer, CalPERS should have objected.

The pension giant apparently was satisfied by a reported Chinese wall between PCG’s consulting and investment groups, but the firm was trying to sell a piece of its management company. In other words, PCG was asking CalPERS to buy the sky over that Chinese wall. Moreover, the organizational separation was only put into place in early 2007, as part of that management reorg that CalPERS itself insisted upon.

The PCG-Villalobos connection may not have led to back-scratching, nor did it necessarily illustrate such intentions. But there was no way at the time for CalPERS to know, nor could it keep tabs after the die was cast. T! his is why potential conflicts are supposed to be killed in their crib s, and why CalPERS has a vetting process to do just that.

Some might argue that PCG passed the buck by sending CalPERS a disclosure letter rather than passing on the Apollo assignment, but it was CalPERS that dropped the ball. How on earth did the pension system not see the potential conflict that PCG itself pointed out? And, if CalPERS approved this arrangement, who knows what else met its anosmiatic smell test…

Top Three

First Reserve Corp. has agreed to lead a $2.2 billion investment into Swiss commodities trader Glencore International AG, according to The Wall Street Journal. The deal likely would be structured as a convertible preferred security, with First Reserve investing around $1 billion and the rest coming from a consortium of mutual funds and other energy-focused funds.

PTC Therapeutics Inc., a South Plainfield, N.J.-based drug company focused on post-transcriptional control mechanisms, has raised $50 million in new VC funding. The Column Group and return backer Delphi Ventures co-led the round. Undisclosed new investors were joined by return backerslike CSFB Private Equity, HBM BioVentures, Novo A/S andCelgene. PTC previously raised over $143 million in VC funding, and filed for an IPO in 2006 that it later withdrew.

Genband, a Plano, Texas-based provider of IP infrastructure solutions, has agreed to buy most of the assets of Nortel Networks’ carrier VoIP a! nd applications solutions businesses, for approximately $282 million. Genband is being backed on the deal by existing shareholder One Equity Partners.

VC Deals

WePay, a Palo Alto, Calif.-based online payment startup, has raised $1.65 million in first-round funding, according to Scott Kirsner. Backers include August Capital and angels like former Intuit CTO Eric Dunn.

Medic Vision, a Haifa, Israel-based startup focused on reducing radiation in CT scans, has raised $1 million in VC funding led by 7 Health Ventures, according to Globes Online.

Webvanta Inc! ., a Sebastopol, Calif.-based developer of SaaS solutions for building content-rich websites, has closed its Series A funding led by individuals from the North Bay Angels. No financial terms were disclosed, although the two-year-oldcompany recently reported in a regulatory filing that it had secured $378,000 of a $500,000 equity offering.

Buyouts Deals

Black Diamond Capital Management has been named the successful bidder for the assets of PTC Alliance, a Wexford, Penn.-based maker of steel tubing and rods that yesterday filed for Chapter 11 bankruptcy earlier this year. In related news, PTC received a DIP financing extension through January 5.

CI Capital Partners has acquired Transplace, a provider of non-asset-based third party logistics and transportation management services. No financial terms were disclosed. Transplace was founded in 2000 by six U.S. freight carriers, and this year will generate more than $700 million in revenue from approximately 650 customers.

Excellere Partners has completed it! s acquisition of MTS Medication Technologies Inc. (Nasdaq: MTSI), a provider of medication adherence packaging systems. The deal was valued at approximately $37 million, or $5.75 per share. Raymond James & Associates served as MTS’ financial advisor.

GI Partners reportedly has acquired Shirebrook Care Group, a UK-based operator of nursing homes for adults with learning disabilities. The deal was valued at around £20 million.

Hg Capital and Ontario Teachers Pension Plan were scheduled to submit final bids on Monday for Acorn Care and Education, a UK-based provider of foster care services and schools for children with learning disabilities, according to ! the FT. The offers were expected to be worth approximately £150 millio n. The seller is Phoenix Equity Partners, which is being advised by Rothschild.

Idearc Inc., a bankrupt yellow pages publisher, has received approval of a restructuring plan in which hedge fund Paulson & Co. would take ownership of nearly half the company’s stock when it emerges from bankruptcy.

Intrawest, a Canadian ski resort operator owned by Fortress Investment Group, may default on a $1.4 billion loan, according to Bloomberg. A $524 million payment is due tomorrow, but Intrawest reportedly is in talks with its lenders about a workaround.

KKR has led a bid for Erickson Retirement Communities LLC, a bankrupt U.S. retirement community developer. KKR’s syndicate also includes Beecken Petty O’Keefe & Co. and CoastWood Senior Housing Partners, while an earlier rival bid was made by Redwood Capital. < /a>

Norican Group, a Danish metallic parts enhancement company has completed a financial restructuring. No terms were disclosed, except that the deal involved existing Norican equity sponsors, Mid Europa Partners and Mezzanine Management, and lenders Nordea, HSH and DnB Nor).

PE-Backed IPOs

China Pacific Insurance (HK: 2601) shares rose 1% in their Hong Kong debut, after completing a $3.1 billion IPO. Shareholders include The Carlyle Group.

Mitel Networks Corp., an Ottawa-based provider of integrated communications solutions and services for business customers, has filed for a $230 million IPO. BoA Merrill Lynch, J.P. Morgan and UBS are serving as co-lead underwriters, while significant shareholders include Francisco Partners and EdgeStone Capital Partners. The company withdrew registration for a $150 million IPO back in September 2007, citing its then-recent acquisition of Inter-Tel.

PE-Backed M&A

LifeSync Holdings Inc. has purchasedthe Besson wireless patent portfolio from Motorola Inc.No financial terms were disclosed. The patents cover “wireless, two-way, digital communication between patient-electrodes or sensors and an evaluator station for monitoring a patient.” LifeSync is a subsidiary of GMP Companies, whose investors include Affinity Capital Management, TPG Captial and VCE Capital.

SafeNet Inc., an information security company owned by Vector Capital, has acquired Assured Decisions LLC, a Columbia, Md.-based provider of consulting services to the government’s cyber security community. No financial terms were disclosed.

SeniorBridge, a New York-based provider of homecare services for individuals with chronic conditions, has acquired M! adison, Conn.-based Senior Care Consulting. No financial terms were disclosed. SeniorBridge is a portfolio company of Caltius Equity Partners.

PIPE Deals

Bruckmann, Rosser, Sherrill & Co. has agreed to buy $25 million of convertible preferred stock in Ruth’s Hospitality Group Inc. (Nasdaq: RUTH), owner of several restaurant concepts including Ruth’s Chris Steak House. Proceeds will be used to pay down an existing credit facility.

Rho Ventures has agreed to purchase $15 million worth of newly-issued common stock in Bluefly Inc. (Nasdaq: BFLY), an online fashion retailer.

Firms & Funds

Fortress Investment Group has sued law firm Dechert LLP, related to assurances given about a $50 million loan linked to Marc Dreier’s admitted Ponzi scheme. Fortress claims in court documents that Dechert issued a “false” opinion letter that served as the basis for Fortress’ decision to make the loan.

Human Resources

Joseph Leone said that he will retire as chief financial officer of CIT Group, effective at the end of April.