peHUB Wire: Wednesday, March 10, 2010

Carried interest taxation is back on the blogs this week, thanks largely to a piece by The New Yorker’s James Surowiecki. It also doesn’t hurt that Rep. Sandy Levin (D-MI) — author of a 2007 bill that proposed changing the treatment of carried interest from capital gains to ordinary income – was named acting head of the House Ways & Means Committee, in the aftermath of l’affaire Rangel.

But, just between us, I’m absolutely sick of discussing carried interest (let alone writing about it). Levin’s legislation was submitted nearly three years ago, and the issue has been used as political brickbat ever since. The original impediment was a threatened presidential veto, plus some poison pill dispensing by Chuck Shumer. Then came a new sheriff who promised to change the law, until being saddled with the most hapless Congress in recent memory (those folks couldn’t pass the salt).

For the repeated record: I favor a change to carried interest tax treatmen! t. So do a lot of notable VC and PE pros, although very few are willing to discuss it on the record.

Carried interest is a fee for service, pure and simple. Capital gains treatment was designed to stimulate investment, by giving additional upside to those who put their capital at risk (not for those who help manage that capital).

Imagine if you offered your stockbroker the following deal:

“You invest $5,000 for me, and I will pay you a 2% commission. Then, if the investments generate a profit (after accounting for the commission), you’ll get 20% of the profit.”

Perfectly legal, except that the stockbroker’s share would be taxed as ordinary income. The only reason PE/VC firms get to pay capital gains on a similar agreement is because they utilize a partnership structure. Now why do you think that is?

But back to my sickness: Earlier this week, attorney Steve Hurwitz told me that a recent change to investment tax law in Canada resulted from “an act of political will by the government.” It’s time for Obama and his Congressional “allies” to exhibit the same. In this country, that’s known as put up or shut up.

The reason to change this rule isn’t because of the extra revenue it might generate (most of those estimates are inflated), nor is reason to oppose because it might reduce VC/PE investment volume (the number of VCs who quit due to this rule will be close to the number of actors who left the U.S. when Bush took office). They should do it because it’s the right thing to do.

It is certainly true that the curre! nt tax code is an imposing mess. But so is my garage, and this weekend I tackled one corner and successfully cleared it out. A little bit of fairness is better than a little less.

*** Quiz Time: Can you name the well-known hedge fund firm that is scouting out for VC talent, in preparation of its first official foray into the arena?

*** Steve Rattner is appearing at a Dow Jones conference late this afternoon, to debate the U.S. auto industry’s future and the government’s role in corporate restructurings. Erin will be there, but my guess is he won’t address the question we most want answered: What is the status of Andrew Cuomo’s investigation into Rattner’s activities while at Quandrangle Group? Oh, and is he disappointed that Chooch never got serious Oscar consideration?

*** Publishing Note: I’m stuck in meetings down at the Times Square office all day tomorrow, and then helping judge the regional VCIC at MIT on Friday. As such, Erin will be your Wire captain for the rest of this week. Please send her any news of note:

Top Three

Lone Star Funds plans to resume selling its 51% stake in Korea Exchange Bank, which currently is valued at around $3.9 billion. Prior sale attempts failed due to pricing and legal disputes.

Metaswitch Networks, a London-based provider of carrier systems and communications software solutions, has acquired Apptrigger Inc., a Richardson, Texas-based maker of an application session controller. No financial terms were disclosed. Metaswitch has raised an undisclosed amount of funding from Francisco Partners andSequoia Capital. Apptrigger had raised around $58 million from Star Ventures, Sevin Rosen Funds, CenterPoint Venture Partners, Covera Ventures and Chisholm Private Capital.

Robert Hull has agreed to ! join Providence Equity Partners as chief financial officer. He will succeed Raymond Mathieu, who will become a managing director focused on special projects. Hull most recently was CFO of GMAC, and before that was with Bank of America as CFO of the firm’s global wealth and investment management business.

VC Deals

Lemnis Lighting BV, a Dutch LED bulb maker that has an office in San Francisco, has raised $35.7 million in Series D funding from undisclosed African investors.

Carticept, an Alpharetta, Ga.-based developer of medical devices that help repair cartilage defects, has raised $20 million in Series B funding. SonoSite Inc. was joined by return backersDomain Associates and New Enterprise Associates. Carticept previously raised around $25.55 million.

Genticel (f.k.a. BT Pharma), a French developer of immunotherapies to prevent cancers caused by HPV, has raised €13.1 million in new VC funding. AGF Private Equity led the round, and was joined by! the Institut Régional de Développement Industriel, Amundi Private Equity Funds, InnoBio fund (CDC Enterprises) and return backer Edmond de Rothschild Investment Partners.

RainStor Inc., an online information preservation company with offices in San Francisco and the UK, has raised $7.5 million in Series B funding. Storm Ventures and Informatica co-led the round, and were joined by return backers Doughty Hanson Technology Ventures and The Dow Chemical Company.

Payfone Inc., a New York-based company that allows users to pay for online goods by using mobile credit, has secured $6 million of a $10 million funding round, according to a regulatory filing. Bob Borcher! s, a partner with Opus Capital, is listed as a new board director. The company previously raised around $1.6 million in a round led by RRE Ventures.

Eureka Genomics, a Hercules, Calif.-based provider of bioinformatics analysis of sequencing data, has raised $3.7 million in angel funding.

Todacell, an Israel-based operator of a mobile display ad network, has raised $1 million in new VC funding from existing shareholder AfterDox.

Testar Electronics Corp., a Taiwan-based maker of LED chips, has raised an undisclosed amount of VC funding from WI Harper Group.

Buyouts Deals

Apollo Management has agreed to buy Citigroup’s real estate investment division, according to Bloomberg.

Card Factory, a UK greeting card retailer, has received buyout bids of up to £400 million. Bidding firms include Cinven, Permira, Summit Partners and Warburg Pincus.

QuadraMed Corp. (Nasdaq: QDHC) shareholders have approved a $126 million take-private offer from Francisco Partners. The deal was first announced last December, and is now expected to close next week. Wells Fargo Foothill and Silicon Valley Bank had committed debt financing, although the deal does not include a financing condition. QuadraMed is a Reston, Va.-based provider of healthcare IT ser! vices.

Shanks (LSE: SKS), a UK waste management company, has ended buyout talks with The Carlyle Group, after rejecting a reduced 120 pence per share offer.

Neiman Marcus recorded a quarterly profit, after having recorded a loss one year earlier. The company was acquired by TPG Capital and Warburg Pincus in October 2005.

PE-Backed IPOs

Kabel Deutschland, a German cable television provider, has reduced the number of shares being offered in its IPO. The company is 88% owned by Providence Equity Partners, 8% by Teachers’ Pension Plan and 4% by management. Providence now is expected to retain a majority ownership position after the float.

PE Exits

The Carlyle Group has retained Goldman Sachs to find buyers for defense and aviation portfolio company Arinc. The deal could be worth upwards of $1 billion, with private equity firms expected to express interest.

Innovative Brands, a portfolio company of Najafi Cos., has agreed to sell its Pert Plus haircare and Sure deodorant brands to Helen of Troy Ltd. (Nasdaq: HELE). No financial terms were disclosed.

Isthimar is seeking to sell port and shipping agent Inchcape Shipping Services for up to $700 million.

MGM reportedly has set a March 19 deadline for binding acquisition bids, and is expecting six strategic players to make final offers. Earlier non-binding bids had topped out at $17 billion. The film studio is owned by TPG Capital, Providence Equity Partners, DLJ Merchant Banking, Quadrangle Grou! p, Sony Corp. and Comcast Corp.

Firms & Funds

The Pennsylvania State Employees’ Retirement Board today is holding aboard meeting. Among the items are proposed fund commitments to Advent International’s fifth Latin America Fund andJ.H. Whitney’s seventh fund.The firm also will recommend bringing in both Francisco Partners and Weathergage Capital for fund presentations. PSERS has existing relationships with each of the aforementioned firms.

Human Resource

Ron Bernal has joined New Enterprise Associates as a venture partner. He previously was a partner with Sequel Venture Partners, and is a director on the boards of four NEA portfolio companies: Boulder Wind Power, Data Robotics, HelioVolt and ProStor.

Fred Hu is stepping down as a China partner with Goldman Sachs, in order to launch a private equity fund.

Jurgen Leijdekker has joined Welsh, Carson, Anderson & Stowe as an operating executive. He previously was president of Paul Winston Group.

Abhijit Sen has joined KKR India as chief financial of! ficer and chief administrative officer. He is the former South Asia CFO for Citigroup.

Dafina Toncheva has joined Tugboat Ventures as a partner, after having spent the past two years with Venrock.

Cognetas, a European private equity firm,has promoted Antoine de Péguilhan to the position of investment manager. He joined Cognetas in 2008 as an associate, after having been part of the French coverage team at Goldman

Abbott Capital Management has promoted Mary Hornby, Timothy Maloney and Paolo Parziale to managing director.