peHUB Wire: Wednesday, September, 15, 2010

Thrice Bad News For PE

*** The recent pronouncements from Basel III are the latest regulatory attempt to play the role of Atlas beneath the world economy. Certainly, increases in primary capital ratios, specifically common stock paying no dividends, provide an increase in the margin for error. However, a ten-year period to actually achieve those ratios eliminates the hope these regulations will mitigate systemic risk for the next decade. The regulations will also have the effect of reducing the amount of credit available to the world economy, and, therefore, to the financing of leveraged buyout transactions.

More central to the question of regulation is not ratio management, but the taking of risk by the banks. Critical problems at the banks were inventory levels of and exposure to securitization products, proprietary trading operations and the banks’ counterparty risks. None of these three areas were addressed by Basel, rendering it a hollow attempt to actually reduce systemic risk in the international banking system. Unlike Lady Gaga, Basel needs to be meatier to be effective.

*** The vast under-funding of municipal pensions has recently begun to see the light of day in the financial press. Simultaneously, corporate pensions, which have been predominantly fully funded, are now falling behind actuarial targets due to the Sharia compliant yields of U.S. treasuries and credit worthy corporate bonds. What are the potential implications of these trends for private equity?

One possibility is increased allocations to PE on the mistaken belief higher PE returns will appear asynchronous with low financial returns in more liquid markets. A more daunting harbinger is the Harrisburg, PA situation, in which the city chose not to make bond payments last week due to liquidity problems, as contractual defaults become a choice for liquidity-strapped municipal pension funds facing capital calls. More likely an eventual renegotiation of the benefit liability will have to occur, but it will be coupled with more conservative investments, not PE, to ensure payment. The recent unilateral reductions of benefits for existing retirees by the State of Minnesota is the test case for the next decade.

*** Although the rules have not yet been written, the Dodd-Frank Act has set forth new compliance requirements unlikely to add to the sum total of human knowledge, but likely to cost a great deal of money to fulfill. The Dodd-Frank Act is akin to the 1933 National Recovery Administration, set up to stabilize business with codes of “fair” practices, but later declared unconstitutional. In this case, since PE is already regulated by the 1933 and 1940 Securities Acts, we hope it is declared unnecessary.

Rob Morris is managing partner at Olympus Partners, a buyout shop in the news recently for its acquisition of Churchill Financial Holdings LLC. Rob is one of the pioneer PE bloggers. Read his work at the firm’s web site.

Top Three

Providence Equity Partners dropped out of the $2 billion auction for China Network Systems Co, a source told Reuters on Wednesday. The decision to pull out of the auction stemmed from differences over price, the source added. Macquarie Group Ltd., Bain Capital and Permira remain interested in the Taiwan-based cable operator. MBK Partners is selling China Network Systems. It bought the business for $1.5 billion in 2007.

France’s Casino Guichard-Perrachon and Britain’s Tesco PLC remain in the running to acquire Carrefour’s stores in Southeast Asia, people close to the matter said on Wednesday. Carrefour has a Nov. 5 deadline for second-round bids, two other sources said. Dairy Farm (backed by Jardine Group), Aeon Co. Ltd. and Malaysian private equity firm Navis Capital Partners have moved into the second round.

Credit Suisse’s asset management division agreed to acquire a minority interest in York Capital Management, which will continue to operate independently under the leadership of founder and CEO Jamie Dina and CIO Dan Schwartz. Credit Suisse will pay an initial $425 million for its interest in York. The transaction includes earn-out payments based on five-year financial performance.

VC Deals

SandForce Inc. closed $25 million in Series D funding. The round was led by Canaan Partners. Existing investors DCM, Storm Ventures, Translink Capital, LSI Corporation and UMC Capital participated in the round. SandForce is a Santa Clara, Calif.-based developer of flash solid-state drive processors.

Tryton Medical Inc., a Durham, N.C.-based developer of stents designed to treat bifurcation lesions, closed a $20 million Series D round of financing. Current investors PTV Sciences, RiverVest Venture Partners and Spray Venture Partners participated in the round. The financing was lead by Arnerich Massena. Arnerich Massena’s Russell J. Rottiers joined Tryton as a director.

Cint AB received $13 million in growth capital. The investment in the Stockholm-based software company was led by Prime Technology Ventures. Creandum (an existing investor) participated in the funding round.

SG Biofuels Inc. closed a Series A financing round with $9.4 million. Flint Hills Resources LLC and Life Technologies Corp. participated in the funding of the Encinitas, Calif.-based bioenergy crop company.

Extole closed a $5 million Series A round of funding. The round was led by Trident Capital. Redpoint Ventures and Norwest Venture Partners also participated. Extole plans to use the capital to grow the team and to expand its social marketing platform to meet demand. Inaddition, the company completed the rebranding of TellAPal to Extole.

Guided Therapeutics Inc. completed a private financing of about $3 million. The Norcross, Ga.-based company develops devices that detect diseases on a cellular level. It issued 3.77 million shares priced at 81 cents each. PIPEWire reported that Financier George Landegger and his affiliate Whittemore Collection Ltd. were the investors.

Ciranova Inc., a Santa Clara, Calif.-based electronic design automation company, received an investment from Intel Capital. Financial terms were not disclosed. Ciranova plans to use the funds to expand its sales and customer support operations and for specific extensions to its technology.

Grid2Home, developer of Smart Energy G2H-SE2 Software, completed a round of seed funding. The financing was led by Granite Ventures. Grid2Home plans to use the capital to customize its G2H-SE2 software for multiple platforms and to expand its business across the Smart Grid HAN ecosystem. Grid2Home Doug Rasor as chairman and Rick Kornfeld as president and CEO.

Buyout Deals

Advent International has agreed to invest in Five Below, an extreme value retailer owned by LLR Partners. Once the deal closes later this year, Five Below founders David Schlessinger and Tom Vellios, LLR and company management will continue to own a significant stake. Founded in 2002, Five Below targets the youth and young adult market, offering merchandise priced between $1 and $5. LLR Partners is a Philadelphia PE shop that invests in mid-market firms.

Flagstar Bancorp, which is majority owned by MatlinPatterson, is trying to raise $600 million in a share sale to boost capital after eight straight quarterly losses, according to Bloomberg News. Flagstar has held talks with PE firms and may sell shares to current investors, the story said. Flagstar expects to use proceeds to boost capital and pursue growth, including possible acquisit! ions. MatlinPatterson, which was founded by David Matlin and Mark Patterson, invested $350 million in Flagstar last year.

Polar Capital bought HIM Capital Holdings as part of its strategy to grow by attracting new investment talent and building specialist expertise, Reuters said. HIM Capital is a financial funds manager. Financial terms were not disclosed, but sources close to the company said the deal was funded by cash and shares.

PE-backed IPOs

Anacor Pharmaceuticals Inc. filed a registration statement with the Securities and Exchange Commission for a proposed initial public offering of its common shares. The number of shares to be offered and the price range for the offering have not yet been determined. Prior to the IPO, Rho Ventures holds a 25.5 percent stake, Venrock Associates 16.1 percent, Care Capital LLC 12.4 percent and Aberdare Ventures 11.5 percent.

Kraton Performance Polymers filed Tuesday with the SEC to sell 8 million shares of common stock. If the underwriters exercise their overallotment iotuib, the shares to be sold will total 9.2 million. TPG Capital and J.P. Morgan Chase are selling the stock. Kraton, a specialty chemicals maker, said it won’t receive any proceeds from the offering.

PE-backed Exits

Montagu agreed to acquire cloud computing firm Host Europe from Oakley Capital. Montagu will pay £222 million ($344.1 million) for the provider of Web hosting, domain registration and web-based software to small- and medium-sized companies in Britain and Germany. Oakley will earn about three times its initial equity investment from the exit.

Human Resources

StorSimple named Ian Howells as chief marketing officer. Howells will be responsible for the developer of application-optimized hybrid storage solution’s marketing strategy and operational activities worldwide. He previously worked for Alfresco, where he was core part of the team that built it from a startup. StorSimple is funded by Ignition Partners, Index Ventures, Mayfield Fund and Redpoint Ventures.

Cantor Fitzgerald & Co. named Garett Stoffels and Steven Tuch as co-Head of its Private Capital Group within the firm’s Investment Banking department. Stoffels had been managing director at Bear Stearns. Tuch was managing director at Deutsche Bank.

StepStone Group LLC has named Weichou Su a managing director in the firm’s new Beijing, China office, which officially opened on Sept. 14. Su will focus on investment activities in China and throughout Asia. Su previously served as a managing director of Hina Group.