peHUB Wire: Wednesday, March 25, 2009

It’s official: The Quadrangle Group has temporarily suspended efforts to raise its third private equity fund. So said firm co-president Josh Steiner, during the Reuters Private Equity & Hedge Fund Summit. Quadrangle had been seeking $2 billion, but got derailed by both the difficult fundraising environment and the departure of firm co-founder/frontman Steve Rattner (he’s now a counselor to Tim Geithner).

“We’re not raising the fund at this moment, but we will at some point,” said Steiner, adding that all of Quadrangle’s investors had been apprised of the situation. “Steve’s great, any firm in the investment banking business would rather have him part of the firm than not have him… most financial institutions go through a transition and we were determined when we founded this not to make any individual indispensible.”

Quadrangle has called approximately 75% of its $2 billion second fund, which closed in 2005. Steiner says that most of that money will be ! used to support existing portfolio companies, but that Quadrangle remains open to new investments (particularly PIPEs or debt purchases).

Well, sort of open. In order to make new investments, Quadrangle needs its LPs to approve both an extension of its investment period and a reworking of its key-man provision. Normally this would require 51% consent, but Quadrangle’s LPA cleverly requires 51% dissent. In other words, no LP action means that Quadrangle can get on with it. And even if LPs do dissent (unlikly, but possible), Quadrangle could still do follow-on investments for existing portfolio companies, including bolt-ons.

A few other notes from our conversation with Steiner:

* Quadrangle focuses on the media and communications sectors, but almost all of its portfolio companies are subscription-based rather than advertising-based. One notable exception was Alpha (a.k.a. Maxim Magazine), which Quadrangle has already written down to zero.

“Alpha w! as clearly a mistake… We invested in an ad-based business in the worst ad environment in decades… We take responsibility for the loss, and it’s unlikely we’ll recover any of [the investment]. I assume the company will be owned by its creditors.”

* The Quadrangle portfolio, excluding Alpha, experienced a 12% growth in year-over-year EBITDA from Q4 2007 to Q4 2008.

* Steiner was not on the deal team for either Alpha or MGM, in which Quadrangle holds a 3% slice. In practice, this means that Steiner has not attended any film premiers or Maxim Super Bowl parties. Pity.

* Quadrangle will not raise a corporate opportunity fund, TARP fund, TALF fund, etc. If it wants to buy debt, it will do so out of the existing Fund II pool. Quadrangle bought its first debt securities last November.

* Never say never, but don’t expect Quadrangle to participate in newspaper fire sales (i.e., Platinum Equity buying San Diego Union-Trib). Someone asked if the firm could buy a paper and then experiment with new strategies (read: tech), but St! einer said that Quadrangle is not comfortable experimenting with a company’s core business.

* He declined to comment on Quadrangle’s alleged payment of around $250k to Hank Morris, who last week was indicted for a kickback scheme that involved private equity firms and the New York Common Retirement Fund. Didn’t really expect that he would, but we’ve gotta ask the questions…

* Not from Steiner: A Quadrangle LP tells me that Quadrangle has been “badly shaken” by Rattner’s departure. The firm had expected that he’d go to DC if Hillary Clinton became president, but had been under the impression that he would not be any part of an Obama Administration. “[Rattner] really sold Quadrangle down the river,” this LP said.

*** On the Summit docket today is Scott Sperling of THL Partners. Send in any and all questions. Same goes for my Peter Nolan (Leonard Green) interview tomorrow at Buyouts East.

*** The Carlyle Group and Riverstone LLC have quie tly closed on around $6 billion for their fourth Global Power & Energy Fund. The commitment period has been extended for a few more months, although I’m not sure how much more cash the firms are hping to get (probably not much, since $6b was the original target).

By the way, if there is a fifth such fund, don’t be surprised if it’s named Riverstone/Carlyle Global Power & Energy. It would be a subtle change, but an important one nonetheless (reflecting Carlyle’s diluted interest in the venture).

*** Quiz Time: Can you name the San Francisco-based growth equity firm that has told LPs that it’s winding down operations?

*** NY Common Scandal: When I asked Steiner about Quadrangle’s alleged payment of $250k to Hank Morris, I prefaced it by saying: “You guys had Monument Group as a placement agent. It’s a highly-regarded firm that certainly would know people at NY Common,! or at least at NY Common’s PE advisor (Hamilton Lane). Why would you pay someone else?”

Again, no comment from Steiner, but worth noting that a placement agent like Monument likely would have required Quadrangle to sign an indemnification doc for using an alternate agent/finder. After all, it would have been Monument’s name (and legal responsibility) on the front of Quadrangle’s book. These are the reasons why placement agents like exclusive contracts…

*** Ever since this NY Common scandal broke last week, I’ve had nearly a dozen conversations with LPs and GPs about political arm-twisting at public pension funds. Some of it brazen, some of it subtle. All difficult to confirm. If you’ve got a story, I’d love to hear it. This system (in the aggregate) is absolutely rotten.

Top Three

NewPage Group Inc., a coated paper manufacturer owned by Cerberus Capital Management, has sold its Little Quinnesec hydroelectric facility in Niagara, Wisconsin to Northbrook Wisconsin LLC, a portfolio company of Energy Investors Funds and Northbrook Energy LLC. No financial terms were disclosed.

NeoVista Inc., a Fremont, Calif.-based ophthalmic device company focused on the treatment of age-related macular degeneration, has raised $18 million in Series D funding. Return backers included Essex Woodlands Health Ventures, MPM Capital and return backers Versant Ventures, SV Life Sciences, The Carlyle Group and Accuitive Medical Ventures. NeoVista raised a $41 million Series C round in late 2006.

TouchTunes Corp., a provider of out-of-home interactive entertainment networks in North America, has agreed to go public via a reverse merger with Victory Acquisition Corp. (AMEX: VRY), a special purpose acquisition company. The deal is valued at approximately $330 million, plus the assumption of $40 million in TouchTunes debt. TouchTunes is controlled by VantagePoint Ventur! e Partners.

VC Deals

Audience, a Mountain View, Calif.-based provider of voice processing solutions enabled with noise suppression, has raised $15 million in total VC funding. Return backers included New Enterprise Associates, Tallwood Venture Capital, Vulcan Capital and VentureTech Alliance. The company has now raised $60 million.

GoViral, a Copenhagen-based distributor of branded video content, has raised €6.5 million from Kennet Partners.

CoolIT Systems, a Calgary-based provider of electronics cooling solutions, has raised C$6.2 million in VC funding. iNova Capital led the round, and was joined by AVAC Ltd. and returning angels.

Pixazza, a platform that allows shoppers to buy products from photos seen on websites (like Google AdSense, but with pictures instead of text), has raised $5.75 million in Series A funding. Backers include August Capital, CMEA Ventures, Foundation Capital and Google.

Ascenta Health Ltd., a Halifax, Nova Scotia-based maker of omega-3 fish oil supplements, has raised C$4 million in funding from Avrio Ventures.

BiOptix Diagnostics Inc., a Boulder, Colo.-based developer of a biomolecule detection system, has raised $3 million in Series A funding. Boulder Ventures led the round, and was joined by individual angels.

Xobni Corp., a Sa! n Francisco-based provider of email analytics software, has raised over $3 million in additional Series B funding from the BlackBerry Partners Fund. The company previously announced a $7 million first close from Cisco Systems, Khosla Ventures, First Round Capital, Baseline Ventures and Atomico.

GrubHub, an online service for ordering restaurant takeout and delivery meals, has raised $2 million in Series B funding. Origin Ventures and Leo Capital co-led the round, and were joined by return backer Amicus Capital. The Chicago-based company will use the capital to expand its services to Boston, San Francisco and New York City.

Extreme Reach Inc., a Needham, Mass.-based provider of a video advertising management platform, has rais! ed an undisclosed amount of new VC funding. Greycroft Partners led the round, and was joined by return backers Long River Ventures and Village Ventures.

Buyout Deals

AIG is expected to receive bids from at least three private equity firms next month, in the second-round of its auction for International Lease Finance Corp. (IFLC). Bidders reportedly include THL Partners, Carlyle Group and Greenbriar Equity/Onex Partners.

Ellassay, a Chinese maker of high-end women’s fashion, has raised $20 million from Carlyle Asia Growth Partners.

Satyam Computer Services Ltd. said in a regulatory filing that it hopes to finalize the buyer of a 51% stake by April 30.

PE Exits

3i Group and Praxis Capital have sold their 20% stake in Chinese hot-pot chain operator Little Sheep for $63 million.

Firms & Funds

Stone Key Partners has launched as a New York-based investment bank specializing in M&A and strategic advisory services. Its two principals are: Denis Bovan, former vice chairman of I-banking and chairman of global tech, media and telecom with Bear Stearns; a! nd Michael Urfirer, also a Bear Stearns vice chairman of I-banking and global head of strategic advisory banking.

Spark Capital has launched a seed funding program called Start@Spark. The program will be focused on media, IT and communications entrepreneurs in the Boston and New York areas, with initial investments of up to $250,000.

Madison Dearborn Partners is expected to write down the value of its fifth fund by around 25% for Q4 2008, according to LBO Wire. The $6.5 billion fund currently has nine portfolio companies.

Providence Equity Partners wrote down the value of its sixth fund by 8% in Q4 2008, according to LBO Wire. The $12.1 billion fund closed in 2007. Q4 2008 was the first quarter that PE firms were required to comply with FAS 157, but the article says that Providence began earlier.

Human Resources

Jay Chen is giving up his role as a fulltime partner with Softbank China & India Holdings, according to Reuters. He will become a venture partner.

The Carlyle Group has promoted 24 professionals to senior positions, including six to managing director.