Dow Jones Private Equity Analyst

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Dow Jones Private Equity Analyst | April 2008
The most trusted news source
for Private Markets Investment
April 2008
Page 14
Drumbeat Of Protectionism Rings In PE Ears
Page 22
Looking For A Path Around Shuttered Debt Markets
Page 24
Yuan Funds Draw Interest, But Questions Linger
Page 77
Bust-Era VC Funds Show Signs Of Life
April 2008 Volume XVII Issue 4
“It’s like a toxic stew
of secrecy.”
Insight
Steven Lerner of the Service
Employees International
Union, on the relationship
between PE firms and
sovereign wealth funds
Page 14
4
Briefs
Blackstone Delays First Close; Big LPs Raise PE Targets
5
In The Public Eye
6
In PEA’s Pages A Decade Ago
10 Q&A
Comings And Goings
12 Frank Quattrone, Olivier Sarkozy; George Bischof
Top Story
14 Drumbeat Of Protectionism Threatens PE Deal-Making,
Fund-Raising, Exits
22
24
26
28
30
32
Analysis
LBO Firms Tiptoe Around Lenders
China Investors Hear Siren Call Of RMB Funds
Carlyle Capital’s Crash Points To Diversification Risks
Obscure Security Bedevils VC-Backed Start-Ups
Lifestyle Funds Strive To Do Well By Doing Good
Company Pensions Pose New Worries For PE Firms
Industry Data
36 Control Buyouts Lose Ground In Asia
“Carlyle’s practice
for two decades has
been to have
diversified products
and geographies.
And we will
continue to do so.”
The Roundup
38
40
46
49
51
52
53
55
Carlyle Group spokesman
Chris Ullman, on the
fallout from Carlyle
Capital’s collapse
Page 26
Strategy
GP Management Update
56 As Form D Filings Move Online, Fund-Raising
Hassles Loom
Avista Seeks $3B Follow-Up
Natural Gas Partners Closes On $4B
Flybridge Closes New Fund Amid IDG Dispute
Union Square Ventures Closes 2nd Fund
Charterhouse Targets EUR5B+ For New Fund
German VC Target Partners Holds 1st Close
Macquarie Raising Regional Emerging Markets Funds
Troika To Raise One Of Russia’s Biggest Funds
Limited Partners
58 Guardian Life Insures Its Access To PE By Touting
Stability, Connections
General Partner: Distressed
60 MHR’s Tactics May Ruffle Feathers, But Its Returns Don’t
General Partner: VC
61 Index Takes Page From US VCs With Late-Stage Push
“I love what I do.”
MHR Fund Management
head Mark Rachesky
Page 60
Dealmaking
LBO Deal Of The Month
63 Gores Group Lands First Media Deal By Emphasizing
Tech Skills
64 LBO Top Dealmakers
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Editor, Buyouts
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Dealmaking (cont.)
BlueRun Ventures Partner
John Malloy, on the firm’s
controversial investment
in Zivity
Page 66
Exits & IRRs
VC Deal Of The Month
66 BlueRun, Founders Fund Invest In ‘Sexy, Not Sex’
With Zivity Deal
68 VC Top Dealmakers
LBO Exit Of The Month
70 Kirtland Capital Hoists Essex Crane Into A SPAC’s
Welcoming Arms
72 The Exit Window: LBO
VC Exit Of The Month
74 Pluck Pays Off: Business Model Overhaul Secures An Exit
75 The Exit Window: VC
Returns Roundup
77 Some Bust-Era VC Funds Rise From The Dead
Index
80 By Company Name
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4
April 2008
Insight
Briefs
Blackstone Delays First Close
Blackstone Group has become the
latest big buyout firm to push back a
planned closing of its newest fund,
according to several of its limited
partners. The firm has bumped back its
planned first closing of the new fund,
which has a $20 billion target, from
April to June, these LPs said. During an
earnings call earlier this month,
Blackstone revealed that it still had $5.7
billion in capital left in its most recent
fund, a $22 billion pool closed last year.
As the buyout firm has shifted to doing
more mid-sized deals and minority
stakes, the remaining capital should last
longer than expected, one LP said. This
investor added that the collapse of
Blackstone’s plans to buy PHH Corp.
and the troubles its $7.8 billion
proposed acquisition of Alliance
Data Systems Corp. is going through
would likely delay the need for fresh
capital. Reach Blackstone Group at
212-583-5000.
Pensions Boost PE Targets
Just as their private equity portfolios
were coming dangerously close to
exceeding their target allocations,
Pennsylvania Public School
Employees’ Retirement System,
Maryland State Retirement and
Pension System and Virginia
Retirement System have all created
more room for further investments.
Penn. PSERS, which manages $67
Survival Of The Fittest As Israeli VC Matures
The recent decision by Walden
Israel, one of the first Israel-based
venture capital firms, to give up its
effort to raise a fourth fund is not a
sign that limited partners are losing
interest in the region, several Israeli
VCs said. Rather the market is mature
and now faces some of the same
flight-to-quality issues that venture
funds face in the U.S.
“I’ve seen many new [LPs] coming to
Israel in the last 12 to 18 months, and
they treat us like a mature market,”
said Avi Zeevi, co-founder of Carmel
Ventures, which successfully raised
$235 million recently for its third and
largest fund. “In every other mature
market it’s survival of the fittest.”
Prior to 1993, there were only a
handful of firms operating in the
region. That year the Israeli
government subsidized the Yozma
program, a fund of funds that allowed
10 new venture firms to raise their
first funds. The program apparently
worked; by 2006, there were more
than 50 venture firms that called
Israel home, with some $1.5 billion
available for investment, according to
the Israeli Venture Capital Research
Center. But that success bred
competition. Walden Israel, one of
the 10 firms Yozma funded, is not the
only one unable to raise its first
post-bubble fund: Concord Venture
Partners abandoned its $200 million
third fund in mid-2005 after years of
delays.
But plenty of firms are still succeeding
in the region. Carmel recently raised
$235 million for its third and largest
fund, while Evergreen Venture
Partners closed its fifth fund at $200
million, ahead of the $143 million its
fourth fund raised. And Pitango
Venture Capital, Israel’s largest
venture firm and another child of
Yozma, closed its fifth fund in
November at $330 million -– $30
million ahead of its 2004 fourth fund.
Most Active Israeli VC
Funds In 2007*
Gemini Israel Funds – 16 deals
Vertex Israel – 11 deals
Pitango Venture Capital – 9 deals
Giza Venture Capital – 8 deals
Sequoia Israel – 7 deals
*Ranked by first investments. Source: IVC Research
Center
billion in assets, will increase its target
allocation to 13% from 11%, while the
$40 billion Maryland fund recently
voted to raise its target to 5% from 2%,
according to officers at both funds. The
$55 billion Virginia Retirement can
invest up to 10% of its portfolio in PE,
an increase from the previous 7% limit,
said Jeanne Chenault, the pension’s
spokeswoman. All three systems were
getting close to their targets or
exceeding them. As of Dec. 31, 2007,
the actual allocation of Penn. PSERS
was 10.2%, while Maryland’s was 1.3%,
according to the officers. At Virginia, PE
represented about 7% of the fund as of
Feb. 6, Chenault said. Meanwhile,
Kansas Public Employees’
Retirement System has boosted its
private equity target to 6% from 5% as it
resumes commitments after a six-year
hiatus. It pledged $50 million to
Warburg Pincus Private Equity X LP
and $25 million to OCM Opportunities
Fund VIIb LP. Both of the firms behind
these funds were in Kansas PERS’
portfolio prior to 2001, when it stopped
making commitments. Reach PSERS at
888-773-7748; Maryland State
Retirement at 410-625-5555; Virginia
Retirement at 804-344-3190; and
Kansas PERS at 785-296-1018.
Clear Channel Heads To Court
Clear Channel Communications Inc.’s
buyout is headed to court after
Thomas H. Lee Partners LP and Bain
Capital Partners LLC filed lawsuits
against a syndicate of Wall Street banks
to force the lenders to fund the
transaction. The suits, one filed in New
York State Supreme Court and the
other in Bexar County, Texas, claim that
Citigroup, Morgan Stanley, Credit
Suisse, The Royal Bank of Scotland,
Deutsche Bank and Wachovia illegally
balked at their obligation to fund the
deal. “The banks have a huge loss and
they’re trying to figure out how to get
out of that commitment,” Clear
Channel Chief Executive Mark Mays
said. “But a deal is a deal. Lenders’
remorse is not Clear Channel’s
problem.” The complaint filed in Texas
asks for more than $26 billion in
damages. The New York suit asks the
court to grant what is known as specific
performance, an order forcing the
5
April 2008
Insight
banks to immediately provide
financing. Failing that, the plaintiffs
want damages to cover a $500 million
breakup fee that would be due Clear
Channel. The buyout firms have
already scored a victory in the Texas
case, with a court ordering that the
banks must not interfere with the
$27.45 billion buyout. The banks said
financing terms offered to Bain and
Thomas H. Lee Partners were
consistent with the original
commitment letter. “The Bank Group
has been and remains prepared to
honor the obligations as set forth in that
letter,” the banks said. “We believe the
suits are without merit and will contest
them vigorously.” Reach Thomas H.
Lee Partners at 617-227-1050; Bain at
617-516-2000.
AnaCap Sells Stake To NJ
When limited partners buy into private
equity firms’ management companies,
they usually go for big, well-known
names, like Carlyle Group and
Blackstone Group. That’s why the
New Jersey State Investment
Council’s first purchase of a general
partner stake is a bit unusual. The big
LP has taken a 5% stake in AnaCap
Financial Partners, a small buyout
shop focused solely on European
financial services companies, according
to board documents. A call to a
spokesman at the pension fund wasn’t
returned. New Jersey only recently
made its first direct commitment on a
fund level to AnaCap, investing €106.3
million ($167.5 million) in AnaCap
Financial Partners Fund II LP,
according to board documents. Reach
New Jersey State Investment Council
at 609-292-5106.
3i Gets Out Of Early-Stage VC
3i Group PLC said it is moving out of
early-stage venture investing because
of the sector’s failure to deliver strong
returns. “Early-stage has not been an
easy place,” Philip Yea, 3i’s chief
executive, told the Financial Times in
an interview. Yea said 3i would be
folding the late-stage arm of its
venture capital division into its growth
capital unit, which includes a U.S.
business based in New York.
According to spokesman Patrick
Dunne, only 20% of its £200 million or
so in 3i’s venture investing in the year
to March 2007 went to early-stage.
Reach 3i at 44-20-7928-3131.
Seattle Seed Fund Launches
Andy Sack and Chris DeVore have
launched Founder’s Co-op, a $2
million seed fund for Seattle area
start-ups backed completely by the
two serial entrepreneurs. Sack and
DeVore both have founded and sold
successful start-ups like Abuss, Firefly
Network Inc. and Adjacency Inc. But
the pair was not as successful with a
more recent venture, Judy’s Book, a
local review site that closed down last
year. From that experience, DeVore
has come to believe that the most
interesting start-ups are not the ones
that gain the most eyeballs, but those
that can find and make connections to
offline services that people will pay
for. “The bloom is going to come off
In The Public Eye
Too Dumb To Fail
The New Yorker, March 31
James Surowiecki, discussing Bear
Stearns & Co.’s astounding decline
over the past month, tackles head-on
one of the big issues clogging
financial markets right now: lack of
trust. Because banks use so much
leverage, he writes, they ought to be
careful about balancing risk against
reward. But instead, they’ve taken on
enormous risk “without
acknowledging the scale of their bets
to the outside world, or even, it now
seems, to themselves.” He hopes that
the Federal Reserve’s intervention to
prop up Bear Stearns will lead
lenders, clients and others to
scrutinize banks’ promises and
performance more thoroughly.
“Markets require trust to work well,
but when trust is blind they are
almost guaranteed to go haywire,” he
writes. “We don’t want the paralytic
level of skepticism that has reigned in
the marketplace in recent months to
continue, but we don’t want a return
to the way things were, either.”
The Path To Co-Investor Hatred
Equity Private Blog, Feb. 29
The Equity Private blog’s author,
who purports to work at a smallish
buyout firm, describes a particular
incident at her firm to explain why
she dislikes co-investors. Aside from
the fact that her firm likes to be the
lead and doesn’t want to wrangle
about the terms of management fee
splits and who sits on the board, she
is displeased that in co-investments,
you’re forced to deal with people
who may not be particularly
competent. She takes us through a
series of emails and meetings with
one such individual (“It is quite sad
that none of the document
production requests we made this
morning have been complied with in
any way,” he writes. “Now we will
have another day’s delay as by
afternoon it will be too late to ask for
clarifications and amplifications”)
before delivering us – and him – to a
very satisfying conclusion.
All Things To All Men
The Economist, Feb. 28
In a special report on asset
management, The Economist looks at
why the fund management industry
hasn’t consolidated, presenting a
dilemma for private equity firms to
puzzle over. It finds that while in most
industries, there are distinct
economies of scale to being larger,
there’s a real debate in fund
management as to whether size is a
help or a hindrance. “Total assets
under management is a relatively
poor explanatory variable of success,”
the magazine quotes David Hunt of
McKinsey & Co. as saying. The smaller
the firm, the better the chances the
fund managers are in charge. The
larger the firm, the more likely it is that
managers are too preoccupied with
short-term profit and increasing assets
under management, which risks
damaging the firm’s culture. Of
course, small firms have challenges of
their own: If they specialize in just one
thing, a couple of bad years could
finish them off.
6
April 2008
Insight
the self-referential online-only
properties that never tie back to the
real world or save [the consumer]
money,” DeVore said. Founder’s Coop will invest with that lesson in mind,
putting between $10,000 and
$250,000 into new companies,
according to Sack. The fund has so
far seeded two companies: Orange
Line Media Inc., which pays
photographers for stock photography,
and Cooler Planet, which matches
customers with alternative energy
suppliers. Reach Founder’s Co-op at
[email protected].
OPIC Backs Renewables
The Overseas Private Investment
Corp. will invest at least $500 million
in private equity funds focusing on
renewable energy investments outside
the U.S., Robert Mosbacher, OPIC’s
president and chief executive, said.
OPIC’s Global Renewable Energy
Fund will offer between $25 million
and $100 million in senior secured
debt per fund. The U.S. government
entity will look at various fund
structures, including project finance
providers and special purpose
acquisition vehicles, and is mostly
interested in growth and expansion
capital, rather than early-stage venture
investments. The funds must
predominantly invest in Asia, Eurasia,
Central Asia, Latin America, the
Middle East or North Africa, according
to OPIC’s Web site. OPIC will offer up
to half of the money needed by a
particular fund. Proposals are due
April 25 to Peter Tynan, associate
In PEA’s Pages A Decade Ago
Back in November 1996, Ravi Mohan, then a Battery Ventures associate,
dialed a wrong number. But rather than admit his mistake, he asked to speak
to the chief executive of the mis-dialed company’s business. Two days later,
Battery partners flew to Vancouver to begin negotiating a deal that, a few
months later, would become a $6.5 million equity investment.
This was the anecdote we led with in our April 1998 front-pager about how
intense competition for new deals was forcing venture firms into new
strategies. At the time, we chalked the wrong-number strategy down to
resourcefulness. But in hindsight, it looks like signs of a bubble were already
surfacing.
We talked to a number of venture firms for that article, all of which expressed
concerns about investment conditions. Accel Partners was worried about
“me-too” start-ups. Battery, as the above example indicates, was avoiding
well-traveled corners of the venture world. Both firms were doing more laterstage deals, to avoid surging prices for early-stage companies. Institutional
Venture Partners estimated that prices on early-stage deals rose by 25% to
50% in 1997, and said it was taking the tactic of going very early, “helping to
create and grow our own first rounds.”
Said Edwin Kania, then of Holland Ventures, at the time: “It’s a wonderful
and terrifying time to be in the venture capital business…You combine a rapid
drive in basic technological advances with a societal era where
entrepreneurism is good…and you throw into the mixture the significant
amount of capital that exists today, and you’ve got a fairly potent set of forces
driving new companies out there.”
So what happened to that company Battery Ventures funded? It didn’t go
public within 12 months, as the firm had anticipated. But it didn’t disappear in
the downturn, either. Originally called Prologic Computer Corp., the company
changed its name to Fincentric in 2001. It raised a total of about $30 million –
with its most recent round coming in 2000 – and was sold last year to a
private equity-backed company, Open Solutions Inc. While terms weren’t
disclosed, one investor said he was happy with the outcome.
–Jennifer Rossa
partner at OPIC’s adviser, Dalberg
Global Development Advisors. Reach
OPIC at 202-336-8400.
More Wealth Funds?
The central banks of Thailand and
Taiwan are considering sovereign
wealth funds to invest some of their
foreign exchange reserves in equities.
Thailand’s reserves amount to over
$100 billion, but the fund would start at
$5 billion to $10 billion, according to a
report in Bangkok newspaper the
Nation. Taiwan’s central bank,
meanwhile, has been collecting data
on the wealth funds of other countries,
Deputy Gov. George A-Ting Chou said,
adding that the final decision on
creating a Taiwanese wealth fund
would be made by its Cabinet. Japan is
also considering launching a sovereign
wealth fund, after the success of statebacked funds in China and South
Korea, which are already wellestablished. Meanwhile, South Korea’s
National Pension Service said it will
invest KRW400 billion ($402.8 million)
to KRW800 billion in foreign private
equity funds in 2008, on top of about
KRW500 billion invested as of the end
of last year.
A Different Health-Care Crisis
Investing in emerging markets presents
a range of concerns that private equity
firms in more established markets
don’t have to worry about. In one
example, Aureos Capital is launching
a $1 million preventive health-care
program for its East African portfolio
companies’ employees and their
families. The money will go to conduct
voluntary testing and education
programs against the spread of
diseases like AIDS and malaria, and to
provide drugs for infected patients. It
will cost the firm about $36 per
employee over two years and will
cover the employee and his family.
The program involves 15 Aureos
portfolio companies in East Africa and
is being funded by Norfund, a
Norwegian development finance
institution. It may ultimately be
extended to other portfolio companies
outside of East Africa. Reach Aureos
Capital at 44-20-7647-6800.
8
April 2008
Insight
Invesco Gets Calstrs’ Mandate
California State Teachers’
Retirement System has handed a
fresh $200 million fund-of-funds
mandate to Invesco Private Capital
Inc. to funnel into private equity funds
managed by newer groups. That adds
to an initial $100 million pledge that
Calstrs awarded Invesco’s fund-offunds team back in 2005 for a similar
strategy. Like its predecessor, New and
Kleiner Perkins
Launches $100M iFund
Kleiner Perkins Caufield & Byers
is betting $100 million on the power
of Apple Inc.’s iPhone and iPod
Touch, launching a new venture
capital fund that will help bankroll
new applications for the devices.
The fund, called iFund, is
specifically looking to back makers
of applications that will give Apple
an edge over competitors in the
race for the perfect smart phone,
especially in the areas of locationbased services, social networking,
advertising and payment features,
entertainment and communication.
Rich Wong, a partner at Kleiner rival
Accel Partners, said the new fund
makes sense “because the iPhone is
an awesome software platform.”
However, he questioned the fund’s
sole focus. “It’s important not to limit
one’s thinking to just the iPhone,” he
said. “I wouldn’t limit my mobile
investments to the iPhone.”
The iFund isn’t the only recent
example of a strategy tied to
another company’s platform,
although it is by far the largest. In
September, Accel, Founders Fund
and Facebook Inc. launched
fbFund, a $10 million fund for startups building applications on
Facebook’s new third-party
developer platform. Bay Partners
has a similar fund, Appfactory. Also
in September, Bay Partners and
Bessemer Venture Partners agreed
to partner with Salesforce.com Inc.
to invest up to $25 million in
companies building on Salesforce’s
Force.com platform.
Next Generation Manager Fund II LP
is earmarked for a mix of buyout,
venture capital and other private
equity funds, particularly those
reflecting the demographic diversity of
California itself. Invesco has committed
the first fund of funds to 14 vehicles
and is currently in due diligence for
one more before the portfolio is fully
committed, Partner Mary Kelley said.
The portfolio includes funds managed
by venture firms .406 Ventures and
Foundry Group and growth equity
firm Craton Equity Partners. With the
new mandate, Invesco may invest in 20
to 22 funds, committing up to $15
million to an individual partnership,
according to Kelley, who added that
the firm had looked at some 400 funds
since it received the first mandate.
Reach Calstrs at 800-228-5453; Invesco
Private Capital at 212-278-9000.
EDF Delays Fund-Raising
Following the departure last year of
Managing Director Beau Laskey, EDF
Ventures has halted fund-raising
discussions until it bulks up its staff.
“We were early in the discussions of
getting a new fund raised,” said Mike
DeVries, one of two remaining
managing directors at the firm. “Then
[Laskey] had an offer, frankly, he
couldn’t refuse, and we had his entire
portfolio we had to divide up between
us.” The firm is looking to bring on an
associate to help shoulder the burden.
DeVries said EDF will likely begin
talking to prospective limited partners
again in several months, but declined
to say how much the firm may be
looking to raise. Reach EDF at 734663-3213.
NJ Boosts Separate Accounts
New Jersey State Investment
Council continues to bulk up its
presence in difficult-to-access niches
via separate accounts. The limited
partner made a $400 million additional
commitment to CSFB/NJDI
Investment Fund LP, a separate
account managed by Credit Suisse
which makes investments in North
American buyout funds that are raising
$1 billion or less. Within the $400
million, $350 million will be deployed
to continue this strategy, but up to $50
million can be invested
opportunistically in other strategies
such as venture capital, growth equity,
infrastructure and biotech. New Jersey
also committed an additional $100
million to Credit Suisse for CS/NJDI
Emerging Opportunities Fund II LP
to make investments in small and
emerging buyout and VC funds. In
Europe, the pension system committed
an additional $200 million to Hamilton
Lane for NJHL European Buyout
Investment Fund III LP, which
explicitly invests in large international
buyout partnerships with significant
exposure to European-based
companies. Reach New Jersey State
Investment Council at 609-292-5106.
Canada Puts More In Asia
Canada’s public pension funds, already
active on the private equity scene in
North America and Europe, are
putting more money into Asia. Canada
Pension Plan Investment Board and
the investing arm of Ontario Teachers’
Pension Plan will invest $200 million
each into a new fund focused on smalland mid-sized private enterprises in
China, Mark Wiseman, who runs
private investments for CPPIB, said.
Singapore’s state-owned investment
company Temasek Holdings Pte. Ltd.
will invest a much smaller, undisclosed
amount, he added. The fund,
FountainVest, is run by Frank Tang, a
former China head for Temasek. In
addition, CPP has opened an office in
Hong Kong, its first outside Canada, to
hunt for deals. Reach Canada Pension
Plan Investment Board at 866-5579510; Ontario Teachers’ Pension Plan
at 416-228-5900.
Pequot Ventures To Spin Out
Following the lead of Pequot Ventures’
health-care team, the firm’s technology
practice is forming a separate business,
effectively splitting the venture arm off
from hedge fund parent Pequot
Capital. Pending approval from its
investors, the new firm, FirstMark
Capital LLC, will take on the remaining
technology portfolio of Pequot
Ventures on June 30. “The public side
and our business evolved into really
10
April 2008
Insight
separate and distinct businesses,” said
Managing Director Larry Lenihan,
who founded Pequot Ventures in
1996 and said the parting was
amicable. In 2006, Pequot Ventures’
health-care practice quietly spun out
and formed Longitude Capital
Partners. According to a recent
regulatory filing, Longitude has raised
$95 million for a potential $325
million first fund. As for FirstMark,
Lenihan said he expects to be back in
the market with a new fund in the
next 12 to 18 months. Reach Pequot
Ventures at 212-702-4400.
Baird Reaches Out To China
Baird Private Equity has formed
Baird Capital Partners Asia, which
will provide growth equity capital to
“smaller, high potential companies” in
China or with substantial operations in
China. The group, staffed by partners
Hock Goh, Huaming Gu and Brett
Tucker, will operate from Beijing,
Shanghai and Hong Kong. Baird said
that smaller companies have mostly
been ignored as capital has flowed into
Asia, and that it is well positioned to
step into that gap, given its previous
activities in the region. Baird
established a team in China in 2003 to
help its portfolio companies source,
manufacture and distribute in Asia.
And in 2004, it raised Baird Asia
Partners I LP, a $37 million fund that
co-invested alongside the firm’s other
funds in U.S. companies with strategic
operations in China. Reach Baird
Capital Partners at 312-609-4702.
NM Looks To Core GPs
New Mexico State Investment
Council plans to commit its typical
annual amount of $350 million to
private equity firms this year, but it will
be investing larger sums with fewer
firms. “A lot of funds we have had
good results with are back to market
this year,” said Charles Wollmann, the
institution’s spokesman. “It’s really
about supporting funds that have
historically done very well for us while
also picking a couple of promising
new funds.” Reach New Mexico SIC at
505-424-2500.
Mission Investing Takes Off
Adviser Cambridge Associates LLC is
partnering with some community
organizations to start a practice
focused on so-called “mission
investing,” which refers to making
money while furthering a social cause.
Cambridge’s Mission Investing Group
will help foundations, endowments and
Q&A With AlixPartners’ Stefano Aversa
AlixPartners is a restructuring,
consulting and advisory firm with 13
offices in the U.S., Europe and Asia.
About one-third of its clients are
private equity firms or their portfolio
companies. Stefano Aversa is copresident of the firm and oversees its
European and Asian business
initiatives.
Q
Are you seeing an uptick in private equity-related
restructuring right now?
A
We have seen an increasing need for restructuring in
the mid-market, both private equity- and non-private
equity-owned. I don’t think we have seen a particular
correlation so far between the fact that it was private
equity-[owned] or not. Because of the fairly relaxed
covenants of the financing [in buyout deals], I think we
need to probably wait before we can see the
consequences [of this downturn]. And I think that so far we
[can’t say for certain] that private equity-owned companies
have been performing worse or have been in need of
restructuring more than the others.
Q
What kind of companies are most in danger of filing
for bankruptcy right now?
A
In the first two months [of the year], we have seen 27
bankruptcies. None of the 27 is a large bankruptcy. All of
them are medium-sized companies. I don’t know exactly
what the rationale is. My hypothesis is that of course the
larger companies are more resilient. They typically tend to
be global, so [they are] less sensitive to a cycle in one
particular part of the world. They tend to be more
disciplined in managing cash and managing investments,
so they have been seeing some of the slowdown come and
they have been more prudent. Mid-sized companies tend
to be operating in niches; they are more sensitive to
volume. This is fairly typical. When you see a slowdown or
recession coming, the smaller companies are usually the
first to have trouble.
Q
What is different about this restructuring cycle from
ones in the past?
A
The companies in need of restructuring have an
additional hurdle to overcome today, amid an intensified
credit crunch, that being to accept stricter covenants and
potentially higher interest rates in order to secure the exit
financing. As an example, our client Dana Corp. was able to
negotiate a $2 billion exit loan with a pool of leading banks,
although at a higher interest rate than it would have received
a year earlier. Even with that willingness however, other
companies are still struggling to reach an agreement. In prebankruptcy situations, some lenders and other creditors are
looking for solutions to occur on very fast timelines.
Therefore we might see in the short term more asset and
company sales rather than full-blown reorganizations aimed
at addressing all major causes of financial troubles.
–Interviewed by Matthew Monks
11
April 2008
Insight
other clients make investments in
businesses and programs that help the
environment, develop low-income
communities, create jobs or provide
some other social good. The group will
help clients identify mission investors
and compile annual performance
reports on tobacco-free, cleantech and
other socially friendly investment
strategies. Partnering with Cambridge
on the new venture are the Annie E.
Casey Foundation, an advocate of
families and children; the F.B. Heron
Foundation, which provides grants to
low-income communities; and the
Meyer Memorial Trust, which provides
grants to Oregon and Washington
entities involved in arts and
humanities, community development
and environmental conservation
among other things. Reach Cambridge
Associates at 703-526-8500.
AlpInvest Rethinks Big Funds
AlpInvest Partners, Europe’s largest
investor in private equity, may halve
the number of mega-buyout managers
it backs as the industry matures.
Managing Partner Wim Borgdorff said
there are about 16 large buyout firms
that qualify as “mega managers,” and
it backs about half of these. “This
could be reduced to four or five as the
industry divides into classic private
equity managers with distinctive
strategies and mega managers,” he
said. “For mega firms, manager
selection is of more limited
importance than with traditional
private equity firms.” Reach AlpInvest
at 31-35-6952600.
Masdar Drops Fund Of Funds
The Abu Dhabi Future Energy Co., a
government-backed investment and
development arm of Abu Dhabi’s
Masdar renewable energy initiative, is
letting the sun set on new fund-offunds investments as it begins to
develop more renewable energy and
sustainability projects and increases its
direct investment activities. Through
the Masdar Clean Technology Fund,
Abu Dhabi Future Energy has made
investments in three funds: Altira
Technology Fund V LP, Enertech
Capital Partners III LP and Nth
Top Five Stories On Our Web Site*
1. Bear Stearns PE Arms Face Uncertain Times
2. JC Flowers’ Big Plans Leave LPs With Big Questions
3. First Reserve Comes Back To Market Early To Seek $12B
4. Harvard Management Veteran Takes Private Equity Helm At UNC
5. Texas LP Commences PE Activity With 2 Familiar Names, Local Firm
*From our weekly newsletter, available at www.privateequityanalyst.com, over the past month. Want more weekly news?
Visit www.privateequity.dowjones.com for details.
Power Fund IV LP, according to the
company’s Web site. Reach Masdar at
971-2-698-8000.
Worcester Gets Distressed
Worcester Retirement System has
joined the growing number of pension
systems eyeing distressed debt funds in
the face of an increasingly uncertain
economy. The Massachusetts pension
system, which managed more than
$739 million in assets as of late 2006, is
conducting a search for distressed-debt
managers that utilize control-oriented
strategies, according to a request for
proposals posted on the Massachusetts
Public Pension Forum’s Web site. The
pension system has yet to decide how
much it will commit to the space, only
saying that its objective is to identify
managers that best meet the needs of
its board. It remains unclear whether
the pension system would consider a
fund of funds, although it did specify
that it is not seeking hedge funds.
Meketa Investment Group is assisting
with the search. Reach the Worcester
Retirement System at 508-799-1075;
Meketa at 781-471-3500.
Schwarzman Gives To Library
Blackstone Group Chief Executive
Stephen A. Schwarzman will donate
$100 million of his own fortune to
expand the New York Public Library
system, one of the largest gifts ever for
a cultural institution in the city. The
gift will be spent transforming the
Central Library, a 1911 Beaux Arts
structure on Fifth Avenue, into a
research and book-borrowing
destination. Books currently cannot be
taken from the library. The library will
be renamed for the 61-year-old
financier and library trustee. Reach
Blackstone at 212-583-5000.
EU PE Gets New Monitor
European buyouts and venture capital
deals will be monitored by an
independent body called the Private
Equity Research Exchange Platform,
rather than the industry’s own trade
body, the European Private Equity
and Venture Capital Association. The
governing board of PEREP is made up
exclusively of academics, with
Professor Christoph Kaserer of the
Technical University in Munich as its
chairman. PEREP will track some
8,000 deals annually. Meanwhile, the
EVCA will continue to gather its own
data on fund-raising, investments and
exits across Europe.
SF ERS Seeks Adviser
The San Francisco Employees’
Retirement System will search for a
consultant to help it manage its
private equity program, according to
a board agenda. The search is in
response to incumbent consultant
Portfolio Advisors’ contract ending
June 30. Portfolio Advisors is invited
to re-bid. San Francisco has $16
billion under management and a 12%
target allocation to PE. Reach the San
Francisco Employees’ Retirement
System at 415-487-7000. ■
Send press releases to
[email protected]
12
April 2008
Insight
Morgan Chase & Co.’s semiconductor group as a senior
research associate.
Comings & Goings
Frank Quattrone, a controversial figure who
held sway over some of the biggest technology
deals of the 1990s, is re-entering the
investment-banking world with a tech-focused
banking and advisory boutique called Qatalyst
Group. Qatalyst Partners will provide mergersand-acquisition and corporate-finance advice,
Frank
Quattrone
while Qatalyst Capital Partners will make
principal investments.
CREDIT: Getty Images
Carlyle Group has nabbed investment banker Olivier
Sarkozy, 38, half brother of French President Nicolas
Sarkozy, from UBS AG to co-lead a new group making
investments in the financial-services industry. He fills a spot
vacated in January by Edward “Ned” Kelly, who departed
after just seven months on the job to become president of
Citigroup Inc.’s alternative-investment unit.
Two London buyout firms have filled out their New York
offices with new hires. BC Partners drafted Jamie Rubin
and Dan Selmonosky, who previously worked together at
New York investment firm Allen & Co. and again at One
Equity Partners. Meanwhile, Permira enlisted Daniel M.
Healy, former chief financial officer and executive vice
president of North Fork Bancorp, to advise on investment
opportunities, with a focus on financial services.
George
Bischof
George Bischof, the man behind the largest allcash acquisition of a venture-backed technology
firm, has left Focus Ventures to join late-stage
venture firm Meritech Capital Partners as a
managing director. At Focus, he was best-known
for his investment in IP storage provider
EqualLogic Inc., which agreed in November to
be acquired by Dell Inc. for $1.4 billion in cash.
Two noted limited partners have lost senior team
members. Endowment veteran Kevin Tunick departed
Harvard Management Co. to lead the private equity team
at UNC Management Co., which manages the
endowment for University of North Carolina, Chapel Hill.
Meanwhile, Keith Garrison, managing director of external
private markets for Teacher Retirement System of Texas,
left the large retirement system for Texas Christian
University’s endowment. Garrison will fill the
endowment’s new position of managing director for
alternative assets.
Two firms have expanded their cleantech practices.
Globespan Capital Partners scored Daniel V. Leff,
veteran of Harris & Harris Group, Sevin Rosen Funds and
Redpoint Ventures, as venture partner, while PCG Asset
Management LLC grabbed Mehdi Hasan from J.P.
VC Round-Up: CMEA Ventures has given its energy and
materials practice a boost with a new principal, Michael
Melnick, most recently chief commercial officer at Assay
Designs Inc.…Summit Partners General Partner Michael
Balmuth has joined Edison Venture Fund…New Dutch
VC firm YL Ventures hired Robert Goldberg, formerly
managing director at incubator Idealab Inc., as a venture
partner…Noro-Moseley Partners added Greg Foster,
previously vice president of corporate development for
Turner Broadcasting Systems Inc., to its investment
team…China-focused firm Northern Light Venture
Capital has added John Wu as a venture partner in
Shanghai. Wu was chief technology officer of e-commerce
company Alibaba Group.
LBO Round-Up: After six years at Piper Jaffray
& Co., Jeff A. Rosenkranz, head of the firm’s
middle-market mergers and acquisitions group,
stepped down to spend more time with his
family…CVC Capital Partners made two key
hires:
Istvan Szoke, who will oversee the firm’s
David
concerns
in Central & Eastern Europe, and
Baylor
Tim Parker, dubbed the “Prince of Darkness”
by trade unions after cutting 3,000 jobs at the Automobile
Association Ltd., who was appointed as industrial partner
in London…Blackstone Group hired Gerry Murphy, chief
executive of home-improvement retailer Kingfisher PLC, as
a London-based senior managing director…Christopher
Varelas, leader of some of Citigroup’s biggest technology
deals, is leaving the bank for Bigwood Capital, the firm
founded by former Flextronics CEO Michael Marks, which
will soon be renamed Riverwood…Towerbrook Capital
Partners LP hopes to spice up its deals in the restaurant
space with Anthony Wedo, who led bagel-chain company
New World Restaurant Group…Silver Lake Sumeru,
Silver Lake’s middle-market buyout arm, has hired John
Brennan, a former executive at Adobe Systems Inc., as a
managing director…Vector Capital has hired its first chief
operating officer, David Baylor, formerly COO and chief
financial officer of Thomas Weisel Partners. ■
In Memoriam
Phillip Tate, an investment director at turnaround
investor Endless LLP, was killed March 2 in a
snowboarding accident. Tate, 32, was snowboarding
with friends in the French Alps when the snow and ice
collapsed underneath him, the Yorkshire Evening Post
reported. Endless Managing Partner Garry Wilson said in
a written statement that Tate’s colleagues “will always
remember a big-hearted young man who grasped life
with both hands and lived it to the full.” Tate is survived
by his parents; brothers Martin, Andrew and Paul; and
longtime partner Kristine Grimshaw.
14
April 2008
Insight
$48.5B $27.7B
The amount sovereign wealth
funds invested in 2007, it was
more than double 2006 levels
Kohlberg Kravis Roberts & Co.’s
deal-making total outside the U.S.
last year
Drumbeat Of Protectionism Threatens
PE Deal-Making, Fund-Raising, Exits
The emergence of sovereign
wealth funds has protectionism
on the rise. PE firms are getting
caught up in the storm.
By Giada Cardoletti and Shasha Dai
When Bain Capital LLC decided to bid for
networking gear provider 3Com Corp., it went out of its
way to team up with Chinese company Huawei
Technologies Co., thinking that linking up with a Chinese
partner would give it a leg up in understanding 3Com,
much of whose business lies in Asia.
Bain had no idea that the partnership, so vital to doing the
deal, would be the very hurdle that would scuttle it. Bain
terminated the buyout in March after the Committee on
Foreign Investment in the U.S. made it clear that it would
act to block the transaction on national-security grounds
due to the Chinese company’s participation. CFIUS was
concerned that the deal would give Huawei, which is
allegedly connected to the Chinese military, access to
sensitive technology owned by 3Com, whose products
include anti-hacking software for the U.S. Department of
Defense.
China was clearly upset. Huwaei’s Chief Marketing
Officer Xu Zhijun told the Financial Times that U.S.
regulators’ concerns were “bull——,” as Huawei was
slated to take a minority stake in 3Com and wouldn’t
have had access to its sensitive technology. Liu Jianchao,
a Chinese Foreign Ministry spokesman, said the deal was
a “normal business investment,” and called for the U.S.
government to create “a fair and favorable environment”
for Chinese businesses in the U.S. Bain, meanwhile, tried
to structure a different deal that would pass muster with
officials, but failed. It’s now obligated to pay 3Com a $66
million breakup fee.
The 3Com deal is far from the only buyout to fall apart due
to protectionist concerns. Carlyle Group’s problems
getting deals done in China because of regulatory
concerns are becoming legendary. Nationalism has also
scuttled deals in places ranging from Europe to Australia.
Indeed, protectionist sentiment is rising around the world,
and that’s not good for the increasingly global PE industry.
In its most severe form, it threatens to scuttle deals,
hamper exits, and even fundamentally shift how and from
whom firms raise money.
“Protectionism is not good for the country, for industries,
or for businesses,” said Béla Szigethy, co-chief executive of
mid-market firm Riverside Co. “It doesn’t make economic
sense.”
Putting Up Walls
It is perhaps unsurprising that protectionism is surfacing
now, as the U.S. and other Western nations look to be
headed into an economic downturn of unknown depth
and duration. From the Smoot-Hawley Tariff Act in the
early 1930s to a backlash against the influx of Japanese
capital into U.S. real estate in the 1980s, protectionist
sentiment is often presaged by some sort of economic
downturn. The U.S. presidential campaign has fanned the
flames, with candidates seizing on the issue as a way of
rallying voters.
“When things are bad, usually the people’s first reaction is
to put up walls,” said Nancy Soderberg, a former foreign
policy adviser to President Clinton. “Today, Americans are
increasingly feeling unsure. They are losing their homes.
They are losing their jobs and they are looking for
something to blame. They are feeling the impact of
globalization and the failure of the government to manage
it correctly.”
Protectionism has been popping up more frequently for
the past several years, scuttling deals in both emerging
markets and developed nations (see table, page 16). But
the catalyst that raised temperatures in the last six months
or so is the emergence of a particular class of strong
emerging markets players who are scooping up assets in
developed markets.
Sovereign wealth funds, as these players are called,
manage the foreign-currency reserves of their countries,
and often have direct ties to their governments. These
funds are growing in size and number, and diversifying
their investing strategies out of conservative assets like
bonds and into riskier plays, like private equity and direct
investing. Amid financial turmoil in the West, they have
proved to be the only players with the cash available to
16
April 2008
Insight
shore up Western financial institutions, and have done so
abundantly, infusing billions of dollars into such brand
names as Merrill Lynch and Citigroup. Sovereign wealth
funds’ investments totaled $48.5 billion in 2007, more than
double the $19.2 billion they invested in 2006. In 2008,
these funds already had invested $24.4 billion as of early
March, according to research firm Dealogic (see table,
page 18).
These players’ sudden omnipresence, their purported ties
to their governments, and their secrecy about their
motives have led to concerns that they could be at an
unfair advantage in bidding against private companies,
and to fears that they might be investing for geopolitical
reasons, rather than purely financial ones.
“Protectionist sentiment could be partially based on a lack
of information and understanding of sovereign wealth
funds, in part due to a general lack of transparency and
clear communication on the part of the funds themselves,”
said David H. McCormick, U.S. Under Secretary for
International Affairs, in testimony before the Senate
Committee on Banking, Housing and Urban Affairs last
November.
Patchwork Quilt Of Regulations
Efforts to deal with this new class of investor are beginning
to solidify into a global attempt to come up with a single
framework that might put everyone’s minds at ease.
The International Monetary Fund has signaled that it will go
ahead with developing a code of best practices for
sovereign wealth funds, with plans to have a policy in place
by its October meeting. It will include sovereign funds in
the development process, and plans to hold a roundtable
with them this month. The code will require greater
disclosure and lay down rules on issues like governance,
risk management, accountability and disclosure.
The IMF may well include efforts by some individual
countries that have been proceeding in the meantime in its
own work. In late March, the U.S., Abu Dhabi and
Singapore agreed on a set of principles that call for
sovereign funds to make a formal pledge to invest for
commercial rather than geopolitical reasons, and to develop
strong disclosure and governance standards. The IMF said
that effort was a welcome contribution to its own work.
“I think we are all moving basically in the same
direction,” said Jaime Caruana, director of the IMF’s
monetary and capital markets department, on a
conference call. “We think a better understanding of the
role and the practices of the sovereign wealth funds, and
the development of this set of best practices, would be
mutually beneficial to all the parties.”
But getting so many parties onto one page is always a
difficult task. Some sovereign wealth funds are likely to
offer resistance to outside scrutiny of their investment
practices. The message coming from China in response to
the IMF’s efforts, for instance, has been mixed. A Chinese
government official recently supported the creation of
voluntary guidelines, even as a top executive at the
country’s sovereign wealth fund called the code-ofconduct proposal unfair.
Select Recent Cross-Border Deals That Have Run Into Trouble
Buyer
Bain Capital, Huawei
Technologies Co.
Canada Pension Plan
Investment Board
Carlyle Group
Carlyle Group
Carlyle Group
Cnooc Ltd.
Dubai Ports World
Lone Star Funds
TPG Capital,
British Airways PLC
TPG Capital,
Macquarie Bank Ltd.
Source: Dow Jones
Target
3Com Corp.
Auckland International Airport
Notes
The deal was scuttled after a U.S. government committee indicated it had grave
national security concerns.
Pends government clearance under a new takeover rule.
Xugong Group Construction
Machinery Co.
The deal was signed in August 2005 but has yet to close after a protectionist
backlash. Carlyle originally was to take an 85% stake, but has since agreed to a
45% stake instead.
Chongqing Commercial Bank Co.
The deal was blocked by regulators.
Yangzhou Chengde Steel Tube
The firm had planned to take a majority stake but was limited to a minority stake
after China said the company was a strategic asset.
Unocal Corp.
Cnooc withdrew its $18.5 billion offer after encountering a critical storm in the
U.S. Congress.
Six U.S. ports
It was forced to sell the ports after buying Peninsula & Oriental Steam Navigation
Co., a purchase that set off a storm of controversy in the U.S. over foreign
ownership of key U.S. assets.
Korea Exchange Bank
Lone Star has been unable to exit its stake in the bank, due to ongoing legal
issues in South Korea, where the government continues to investigate the
circumstances surrounding Lone Star’s initial investment.
Iberia Lineas Aereas de Espana SA The deal was scuttled by political concerns.
Qantas Airlines Ltd.
Shareholders rejected the deal.
18
April 2008
Insight
Until recently, private equity was typically a local business.
Even in the late 1990s, when the industry first looked
abroad seriously, the majority of its deals continued to be
done at home. But that has started to change in the past
few years, as private equity firms have gotten bigger and as
a natural consequence of globalization. Kohlberg Kravis
Roberts & Co., an early global mover, did $27.7 billion
worth of deals outside of the U.S. last year, 10 times its
non-U.S. deal volume in 2000, according to research firm
Dealogic. Another global firm, TPG Capital, did $3.5
billion worth of deals away from home last year, about six
times 2000 levels.
Nor is that trend confined to the biggest buyout firms. Midmarket shops are also starting to do deals overseas, or at
the very least helping their portfolio companies to expand
in overseas markets to remain competitive. Baird Private
Equity, which established a presence in China in 2003,
recently launched a growth capital fund that targets small
companies in that country. Riverside Co., which recently
made its first platform acquisition in Asia, now plans to
open an office in Shanghai no later than fall. Venture firms
are also active in emerging markets in Asia, attracted by its
large populations, emerging middle classes and expanding
infrastructure.
The trend has only accelerated as the economy turns
south in the Western world. Deal-making has dried up in
the U.S. and the rest of the West, as the banks that provide
the debt for deals go through a wave of restructuring and
$30,000M
20,000
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(# Deals)
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$13,027
(17) $11,519
(1)
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(2)
$6,600
(2)
(1)
$4,916
(5)
$2,850
(4)
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For private equity firms, the new wave of protectionism
bodes ill for a number of reasons. For one, it comes at the
worst possible time for the industry, which is increasingly
trying to go global.
(2007- Feb. 2008)
ver
‘A Toxic Stew Of Secrecy’
Top 10 Sovereign Wealth Fund Acquirers
Go
At the same time, efforts are proceeding in many
countries that could throw more barriers into the way of
global deal-making even if the IMF comes up with a
successful framework. The U.S. Department of the
Treasury is preparing to release regulations to lower the
threshold for conducting national security reviews on
foreign investments. That would allow transactions for
less than 10% stakes in companies – like the many recent
purchases of stakes in banks – to be reviewed by CFIUS.
A similar investment act in New Zealand just passed,
giving the government greater scope to reject
investments that would transfer control of key strategic
assets out of the country’s hands. That new law threatens
a partial takeover offer for Auckland International Airport
by the Canada Pension Plan Investment Board.
Meanwhile, a new Chinese anti-monopoly law will go
into effect Aug. 1 giving Chinese regulators authority to
examine foreign mergers involving acquisitions of
Chinese companies or foreign businesses investing in
Chinese companies. That will add a new layer of
regulatory scrutiny to many deals.
soul-searching. As a result, private equity firms are
justifying the massive funds they have raised by pointing to
globalization and new opportunities to do deals in
emerging markets. Protectionism threatens that
opportunity.
Another problem for PE firms lies in the focus of the
current protectionist sentiment on sovereign wealth funds.
PE firms and sovereign funds go back a long way; GIC
Special Investments of Singapore, for instance, was one
of the first LPs to put money in KKR over two decades ago.
The ties have only gotten closer in the last year or so, as a
number of buyout firms sold stakes in their management
companies to sovereign funds.
All of the attention directed at wealth funds exposes these
relationships to unwanted scrutiny. Worries about the
reasons sovereign wealth funds invest mean that any deal
a private equity firm with sovereign backers does will likely
be subject to the same scrutiny as a deal done by a
sovereign fund itself. And private equity firms’ own
reputation for secrecy hasn’t helped matters.
“It’s like a toxic stew of secrecy,” said Steven Lerner,
director of the Service Employees International Union
Private Equity Project.
The way that new scrutiny impacts PE can be seen in a bill
pending in California. That bill would ban California
Public Employees’ Retirement System and California
20
April 2008
Insight
State Teachers’ Retirement System from investing in
private equity firms that are fully or partly owned by
certain sovereign wealth funds. States often mimic each
others’ lawmaking processes – recent examples of antiSudan and anti-Iran legislation are a prime example – so it
is entirely possible that similar bills could soon target big
pension funds in other states.
Hoping For The Best
At this point, most players, including private equity firms
with sovereign wealth funds as investors, seem to be on
board with constructing an international framework that
everyone agrees to adhere to voluntarily. “The concerns
surrounding sovereign wealth funds are both
understandable and complex, touching on capital
formation, national security and foreign policy,” said
Doug Lowenstein, president of the Private Equity Council.
A voluntary framework would be beneficial to PE firms,
just as a free trade agreement is to trading partners, by
helping to reduce conflict and lower the cost of dispute
resolution. PE firms themselves recently signed up to just
Foreign direct investment protectionism
can affect existing operations and new
investments. How high is the risk of increased
FDI protectionism in the following markets
during the next five years, in your view?
US
Asia
15.9%
Latin America
& the Caribbean
26.6%
UK 11.7%
Eastern
Europe
30.3%
Middle East
29.9%
0%
High
Moderate
43.2%
30.2%
59.9%
49.0%
50.7%
44.4%
Russia and
Central Asia
Sub-Saharan
Africa
30.0%
41.6%
4.9%
North Africa
54.1%
28.4%
Other Western
Europe 9.4%
46.7%
26.5%
27.6%
20%
40%
But private equity firms continue to worry about steps
beyond a broad framework – like countries coming down
hard on free trade or enacting regulations that make it
harder for foreign buyers to invest. That, they fear, would
set off a global game of tit-for-tat.
“If we cross that line it will absolutely hurt the PE industry,”
said James P. Dougherty, a senior fellow for Business and
Foreign Policy at the Council on Foreign Relations. “There
is no doubt in my mind that other governments feel more
emboldened by their economic strength and will take
economic action against the U.S.”
On the fund-raising side, if bills like the California one were
to take root, PE firms, especially the mega funds, would
have to rethink how they raise money. This bill would
effectively force PE firms to choose between two of their
largest sources of capital: the sovereign funds or big public
pension funds.
“If the California bill is ever passed…in the mid-term, firms
will get money from sovereign wealth funds,” said Steven
Kaplan, a professor with the University of Chicago
Graduate School of Business.
This bill would also present big problems for the pension
funds. Not only would they lose access to some of the
biggest and best-performing private equity firms at home,
they might well be banned from investing in promising
emerging markets firms by foreign governments.
47.6%
30.7%
21.7%
such a voluntary framework in the U.K., agreeing to
publish annual reports on their Web sites to provide the
public more information about their operations.
23.0%
43.1%
27.1%
46.2%
27.4%
44.8%
27.6%
60%
80%
100%
Low
Source: EIU survey conducted for World Investment Prospects to 2011: Foreign Direct Investment
and the Challenge of Political Risk (available at www.cpii.columbia.edu)
“If such a bill were to pass it would change how we
invest,” said Jay Fewel, senior equities investment officer
at the Oregon State Treasury.
As for deal-making, global protectionism wouldn’t just
keep private equity firms from doing new deals, as in the
case of Bain and 3Com. It might also prevent them from
exiting their investments.
This is a worry overseas, where changing government
regulations could hurt PE firms’ ability to exit companies
they have already bought in fields far from home. The
example of Lone Star Funds in South Korea shows how
changes in a government’s attitude toward foreign
investors can affect investments made in a country in the
meantime. After the Asian financial crisis in the late 1990s,
Lone Star became one of Korea’s biggest foreign investors.
It bought assets cheaply and sold some of them profitably
as the country’s economy recovered. Its gains stoked local
resentment, fueling a reexamination of the circumstances
under which Lone Star bought Korea Exchange Bank in
2003. One attempt to sell its stake in the bank has already
been derailed by a government investigation, and another
is currently endangered as well.
21
April 2008
Insight
Completed Cross-Border M&A Deals ($B)
$1,200B
$1,088
1,000
$768
800
600
$589
$548
$422
$378
400
$324
200
$88
$98
2000
2001
$62
$57
$68
2002
2003
2004
$137
$165
2005
2006
0
Developed Countries
protectionist drum and tell those folks that they are not
welcome to invest in U.S. assets and they take it to heart,
they will move that money out of those assets.”
Such a scenario is seen as unlikely, as it would hurt
everyone involved. “Pulling out their money would be
tantamount to cutting their own throats because they
have very large investments in U.S.-denominated paper,”
said Alan Ruskin, chief international strategist at RBS
Greenwich Capital.
Indeed, most people in the industry say there is a long
way to go before any of the more dramatic scenarios
painted above become reality. They are hoping that the
protectionist rhetoric being bandied about during the U.S.
presidential primaries is just that – rhetoric. “I guess the
rhetoric will tone down as we move into the general
election from the primaries…as people tend to move into
the center,” said Kaplan.
Emerging Markets
Source: World Investment Prospects to 2011: Foreign Direct Investmentand the Challenge of Political
Risk (available at www.cpii.columbia.edu)
Tighter regulations could also affect PE firms’ ability to sell
their U.S. portfolio companies. Many of the exit options
for U.S. companies have dried up at the moment, with the
initial public offering market unsteady and many U.S.
strategic acquirers dealing with problems of their own. As
a result, PE firms had been looking to foreign acquirers to
take up some of the slack. The passage of new
protectionist laws would damp that hope.
At the moment, the threat of protectionism appears to be
increasing foreign interest, with buyers rushing to take
advantage of opportunities now, for fear they may be cut
off later. “There is a lot of fear that the U.S. will become
more rather than less protectionist and I am seeing a big
rush to get cross-border deals done before there is a new
administration,” said Lee LeBrun, co-head of UBS’s M&A
practice for the Americas. “Dialogue has definitely
increased with foreign buyers looking at U.S. targets and I
expect the number of acquisitions to increase as the year
progresses on.”
PE players also paint another worrisome scenario:
Sovereign wealth funds have in excess of $1 trillion
invested in U.S. treasuries, according to the U.S. Treasury.
If they decided to stop investing, or to sell off their current
investments, the fall-off in demand would send yields on
debt through the roof. That would trickle down to the
debt that buyout firms put on their portfolio companies,
making borrowing prohibitively expensive.
This possibility was mentioned by several private equity
executives interviewed for this article, indicating it is
much on the industry’s mind. “We are the biggest debtor
nation,” said John Morris, managing director with fund-offunds group HarbourVest. “If you start banging a
More broadly, they say the globalization train has
already left the station, and that policy-makers need to
recognize that.
“Globalization is more than a buzz word,” said one
executive at a large global buyout firm. People have to
“shape policy around that.” ■
–With reporting by Tom Barkley
22
April 2008
Insight
long as a majority of the voting rights remain with the
original owner.
“I don’t think these documents are airtight,” the buyout
fund manager said. “And I don’t think anyone’s going to
do anything dumb enough to violate the agreement.”
LBO Firms Tiptoe
Around Lenders
Under such a structure, potential buyers wouldn’t have to
worry about lining up financing. And they could be
confident they’d be getting better terms on the debt than
they would in current markets.
By Paul Ziobro
With exit opportunities limited, buyout firms
are exploring novel ways to reap returns. And they’re taking
an especially close look at deal structures that would enable
a company to change hands while keeping its existing debt
in place.
One such structure would have a buyout sponsor sell a
majority equity position in a portfolio company while
retaining at least 51% voting control. At least four buyout
dealmakers say they’ve looked at this method in recent
months, although it’s unclear if any such transactions have
taken place yet.
“This would be a way for private equity sponsors to sell a
significant portion of a business that, with credit markets
today, they can’t sell any other way,” said the manager of
one middle-market buyout firm.
Typically, changes in control trigger debt refinancings.
That’s an automatic no-go in current debt markets, given
that few issuers are willing to lend and those that are
want a high return for the risk they’re taking. A
transaction like this, however, would sidestep the
change-in-control provisions in most deal documents, as
Average Yield On High-Yield Debt
10
8
6
4
2
2007
2008
Jan
Feb
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec
N/A
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec
2006
“I don’t see a traditional PE firm whose mission and goal it
is to use their own talent to improve a company” agreeing
to such a deal, said one private equity attorney. “But you
could certainly potentially have people out there that
would find that attractive.”
While lawyers and dealmakers try to find a way to get a
deal like this done, several others in a similar spirit have
gone through. Energy-focused buyout firm First Reserve
Corp. is funding a portion of its C$3.7 billion ($3.63 billion)
purchase of helicopter transport company CHC Helicopter
Corp. by monetizing sale-leaseback arrangements on the
company’s helicopter fleet, according to managing
director Mark A. McComiskey. CHC’s lenders agreed to
stay on, with some requesting that First Reserve cover
attorney’s fees to review documents.
Other companies foresightedly arranged debt before the
credit crunch that allowed sales without triggering changeof-control clauses. In October, 3i Group PLC financed its
roughly $1 billion buyout of Milan-based Global Garden
Products with a debt package put in place by the previous
owners, ABN Amro Capital and AAC Capital Partners.
The sellers had refinanced the company in June with
terms that allowed the debt to be transferred to a limited
group of buyers, 3i among them, within 12 months.
Candover Investments PLC’s purchase of French
business services company Alma Consulting Group from
Apax Partners had a similar structure.
12%
0
There are some barriers to getting a deal like this done,
which may explain why one has yet to come to light. For one
thing, any company considering such a deal would want to
be absolutely certain that change-in-control provisions in its
debt wouldn’t be triggered. Another challenge lies in finding
a partner willing to invest a significant chunk of equity
without getting full control. While hedge funds or growth
equity firms might be interested, buyout shops accustomed
to implementing their own strategies at portfolio companies
are likely to shy away from such a scenario.
Source: Standard & Poor's LCD
Terms like that, of course, were a function of loose debt
markets earlier in the year. But they are an example of the
out-of-the-box thinking buyout firms will have to engage in to
generate returns while the debt markets remain locked up.
“It’s all going to depend on how long the debt markets stay
where they are,” a fund manager said. ■
24
April 2008
Insight
domiciled in the Cayman Islands or British Virgin Islands,
to act as domestic Chinese investors. “The idea was to
simplify the investment process,” said Li Li, a partner at
Debevoise & Plimpton LLP in Shanghai, which helped
Victoria set up the fund.
China Investors Hear Siren
Call Of RMB Funds
By Ellen Sheng
When Victoria Capital recently did two deals
in mainland China, all it had to do to get regulatory
approval was file documents with the local Ministry of
Commerce – an unsually simple process.
The small Hong Kong-based firm, which took minority
stakes in a baby products retailer and in a company that
makes desalinization equipment, sidestepped what is
usually a lengthy regulatory approval process because it
was investing from a fund denominated in the local
currency, the renminbi, or Chinese yuan. Victoria sees that
fund, which attracted more than $100 million from mostly
non-Chinese investors in 2006, as a significant advantage.
And it’s not alone.
Foreign funds investing in mainland Chinese companies
must seek the blessing of relevant authorities to do deals.
Ordinarily, that means going to the central Ministry of
Commerce in Beijing – something that can take months or
even years amid political sensitivities and worries that
foreign capital has “overheated” the market.
Getting approval for deals typically “is a very cumbersome
process and becoming more and more lengthy,” said
Victoria Managing Partner Johannes Schoeter. Increasingly,
“there’s no certainty of being approved at all.”
RMB-denominated funds offer a way around some of the
red tape, enabling foreign funds, which are usually
Select Firms With RMB Funds
Bohai Industrial Investment Fund Management Co.
Citic Capital Partners, Bright Food (Group) Co.
Citic Securities Co.
IDG Technology Venture Investment
Suzhou International Development Venture Capital
Management
Suzhou Ventures Group/Hopu Fund (formerly
China-Singapore Suzhou Industrial Park Ventures Co.)
Source: Centre for Asia Private Equity Research
The RMB funds, part of China’s push to develop its
domestic private equity industry, are rapidly gaining in
popularity. According to the Centre for Asia Private Equity
Research, there are at least 27 yuan-denominated venture
capital or private equity funds that have raised or are
trying to raise a collective CNY109.5 billion ($15.6 billion).
While most are purely domestic affairs, run by Chinese
nationals and with Chinese investors, a handful have
foreign involvement. The most prominent of these is the
Hopu Fund. Run by Fang Fenglei, a well-known
dealmaker in China and chairman of Goldman Sachs’
Chinese joint venture, the fund has backing from
Goldman Sachs & Co. and Singapore’s Temasek.
But RMB funds do have drawbacks. One is the difficulty
funds denominated in yuan have doing business outside
mainland China. Some firms have found a way around this
by raising funds with two tracks – one portion onshore in
Chinese yuan, and another portion offshore in U.S. dollars.
They designate up to a certain amount for the RMB track
and transfer money into it as needed. Victoria and Tel
Aviv-based Infinity Fund both did this for their most
recent funds, following up on predecessors that were
denominated solely in yuan. The Hopu Fund is also
pursuing this structure, with some $700 million of the $3
billion or so it has raised so far denominated in yuan.
Other problems are not so easily resolved. It is unclear
what legal protections RMB funds have, as the
enforceability of onshore deals is not well established
under Chinese law. Funds housed offshore, in contrast,
have a well-established set of legal procedures and
protections.
And since RMB funds have been on the smaller side thus
far, the larger the fund gets, the more question marks it
carries. While China’s state counsel has been approving
funds of up to RMB10 billion, according to a person
familiar with the situation, larger firms are proceeding
with caution. Industry observers note that the intent of
the RMB funds was to foster a domestic private equity
industry, and that it is unclear whether high-profile
foreign firms are welcome, despite the limited success of
smaller non-locals.
In addition, RMB funds may not bring the same
advantages to larger deals that they do to small ones.
Once a deal exceeds a threshold of $200 million or so, the
approval process generally gets more complicated. “It’s
not very clear if you can actually cut through red tape by
labeling yourself to be domestic,” said a partner at a large
global private equity firm, whose firm has decided for now
not to pursue an RMB fund. ■
26
April 2008
Insight
investors in early July, short of the $400 million it had
planned. By August, it had to borrow $200 million from its
parent to shore up its finances. Last month it was placed
into liquidation after lenders began seizing its assets.
Carlyle Capital’s Crash Points
To Diversification Risks
By Shasha Dai
Carlyle Capital Corp.’s initial public offering
last year was to be another in a string of triumphs for
private equity, the latest example of how PE firms were
extending themselves into new strategies and markets.
Instead, Carlyle Capital followed what was almost a
straight line to liquidation. Now, rather than being a
shining example of diversification, the fund represents a
setback to parent Carlyle Group’s reputation and a rebuke
to the overall PE industry on the dangers of overreaching.
Carlyle Capital’s offering was troubled from the outset. The
fund, an investor in mortgage-backed securities, set plans
to list on Euronext Amsterdam in late spring of 2007, just
as cracks in the mortgage market were beginning to widen
dangerously. It had to slash both the size and the price of
its offering, ultimately raising $300 million from public
A Troubled History
2005
June KKR Financial goes public.
2007
June 21 Carlyle Group says it plans to take Carlyle Capital
Corp. public on Euronext Amsterdam.
July 4 Carlyle Capital goes public, raising $300 million, less
money than it had originally hoped.
Aug. 20 KKR Financial investors pledge $500 million to
shore up the fund, shortly after it said it had “ample
liquidity.” Kohlberg Kravis Roberts & Co. promises to help
out with a $100 million capital injection if necessary.
Aug. 21 Carlyle Group extends Carlyle Capital a $100
million one-year loan to shore up its affiliate’s finances. It
later loans the affiliate another $100 million.
2008
March 6 Carlyle Capital receives a default notice from a
lender after failing to meet a margin call. Other margin
calls quickly follow. Meanwhile, ratings on some
commercial paper issued by KKR Financial affiliates are
downgraded.
March 16 Carlyle Capital says it will liquidate.
The collapse has hurt Carlyle Group’s reputation, as there
were many links between it and Carlyle Capital, despite the
publicly-traded firm’s independent structure. The offshoot
was 15% owned by Carlyle Group principals including cofounders Bill Conway, David Rubenstein and Daniel
D’Aniello. Conway and senior adviser James Hance
occupied two of the five voting seats on Carlyle Capital’s
board. Some limited partners in Carlyle Group’s traditional
funds invested in the offshoot, and are feeling burned after
losing their capital. Indeed, there has been some confusion
among LPs about which entity was in trouble; according to
The Wall Street Journal, Carlyle Group has been fielding
phone calls from confused LPs wondering if it is at risk.
The failure of Carlyle Capital poses questions about
diversification, not only for Carlyle Group but for the rest
of the industry. “It’s definitely a wake-up call,” said Bob
Profusek, head of mergers and acquisitions practice at law
firm Jones Day. “Being a financial supermarket is not what
[these firms] are all about in the first place.”
Industry participants say that Carlyle Capital’s troubles
were primarily the result of extraordinarily poor timing.
Carlyle Capital’s strategy of investing in triple-A rated
securities guaranteed by quasi-governmental agencies like
Fannie Mae and Freddie Mac normally would have been
quite safe, these people said. “There was a 1,000-year
storm, and we were caught in the middle of it,” said one
person close to Carlyle.
But Carlyle Capital isn’t the only publicly-traded PE firm to
run into trouble. Shares of KKR Financial, an affiliate of
Kohlberg Kravis Roberts & Co. that also had to shore up its
finances last year, fell by as much as 22% in early March,
after some commercial paper issued by related entities was
downgraded. Shares rebounded after KKR Financial said in
a conference call that “our liquidity position is strong and our
business is fine.” While KKR Financial originally invested
heavily in mortgages as well, the firm has taken pains of late
to clarify that it is now focused on corporate debt.
Still, big buyout firms say they will continue to diversify,
although they may be more careful in how they go about it.
“As large global private equity firms are evolving, it makes
good sense to leverage sector knowledge, operational skills,
global sourcing and relationships into other areas of
alternative assets, such as credit, real estate and public
markets,” said Jonathan Coslet, a partner at TPG Capital,
which operates large and mid-market buyout funds, and has
distressed debt and hedge fund affiliates.
“Carlyle’s practice for two decades has been to have
diversified products and geographies,” Carlyle Group’s
Chris Ullman said. “And we will continue to do so.” ■
28
April 2008
Insight
Obscure Security Bedevils
VC-Backed Start-Ups
Wall Street’s crunch is spilling into the world
of Silicon Valley start-ups.
Like their larger counterparts, many of these closely-held
companies have found themselves stuck with illiquid debt
instruments called auction-rate securities. During
economic boom times, these obscure instruments were
marketed as extremely safe investments, nearly the
equivalent of cash, and found their way into any number
of company portfolios. But now, amid wider credit-market
worries, the $330 billion
market for these securities
Start-ups holding
has seized up, making it
hard for holders to convert
auction-rate
them to cash.
securities could be
forced to dump
them for big losses.
Because start-ups tend to be
cash-constrained, the mess
will hit them harder than
other companies and
institutions holding the instruments, lawyers and investors
say. If the squeeze in the auction-rate market continues,
start-ups that parked big chunks of their cash in these
securities – thinking they were liquid – could be forced to
dump them for big losses, if they can find buyers at all.
“It’s a huge problem,” says Edward Wes, a partner with
the law firm Perkins Coie. “The private companies need
liquidity more, because they’re burning cash faster than
public companies.”
It is hard to judge how widespread, and how dire, this
problem is among start-ups. Several start-ups that recently
filed for initial public stock offerings – including medicaldevice company Cardiovascular Systems Inc. and
molecular-diagnostics firm XDx Inc. – reported holding
auction-rate securities at the time of their filings. Ken
Lawler, a partner at Battery Ventures, said 12 of the 65
start-ups in Battery’s portfolio hold auction-rate securities,
though only a few face near-term liquidity problems. At
Scale Venture Partners, only two of about 35 companies
hold the securities, according to Managing Director Kate
Mitchell, who said the firm polled its companies after
hearing about the problems. Those two own only small
amounts, and so don’t have any immediate cash flow
problems, she said.
Companies with only a small portion of their cash in the
securities may not need the money for months, or even
years – by which time the troubles in the market may have
cleared up. But “if this persists into the summer or the fall,
I’m going to be losing a lot more sleep,” said an executive
at one Silicon Valley technology company, which has
parked about 10% of its cash in auction-rate securities. ■
–With reporting by Rebecca Buckman and Russ Garland
BSMB Holds Its Breath
At Bear Stearns & Co.’s direct investment arm, Bear Stearns
Merchant Banking, outbound calls aren’t just going to
buyout targets or investors. They’re also going to the buyout
team at J.P. Morgan Chase & Co.
Following news that its parent firm is being sold to J.P.
Morgan, Bear Stearns’ buyout arm made the calls to
“reach out and say hello” to people at One Equity
Partners, its counterpart at J.P. Morgan, a person familiar
with the situation said. But nothing was resolved.
“We don’t really know [what’s going to happen],” a
person familiar with the situation said. The PE operations
are “the least of concerns for senior management at this
time.”
Whether Bear Stearns will be able to continue funding its
commitments to its various buyout and venture capital
funds is one question mark. The parent bank committed
$500 million to the unit’s current buyout fund, the $2.7
billion Bear Stearns Merchant Banking Partners III LP,
raised in 2006. Another question centers on how
committed J.P. Morgan is to running an expanded private
equity business. In 2005, the bank chose to spin off its
large private equity business, J.P. Morgan Capital
Partners, keeping One Equity’s mid-market operations
instead.
Another PE unit of Bear Stearns that faces uncertainty is
Bear Stearns Asset Management, or BSAM, which
manages roughly $1 billion of assets, much of it in funds of
funds. It is dwarfed by a similar division at J.P. Morgan,
which has invested in some of the same buyout funds that
BSAM has.
BSAM is also an anchor investor in IT venture firm
Constellation Ventures. The collapse of Bear Stearns
comes at an awkward time for Constellation, which is in
the midst of raising a new fund.
While all this is ironed out, a BSMB spokeswoman said the
unit’s daily operations aren’t expected to be affected.
“We feel very comfortable that Bear Stearns Merchant
Banking will continue to operate and perform to the
expectations of our limited partners,” she said. Indeed,
shortly after the sale was announced, BSMB announced one
of its portfolio companies was doing an add-on deal, to
which it was committing additional equity.
30
April 2008
Insight
Capital, expects to invest $7 million to $12 million per
company broadly across the health and wellness and
sustainable living sectors, according to a prospective
investor. It is seeking $50 million in outside capital for its
first fund marketed under the Physic banner, which will be
combined with a $125 million commitment from Unilever.
Lifestyle Funds Strive To
Do Well By Doing Good
By Laura Kreutzer
Eat healthy. Take your vitamins. Exercise.
Conserve energy. All words to live by – and for an
increasing number of firms, words to make money by.
Perhaps half a dozen private equity firms are raising or
managing funds to invest in the “lifestyle of health and
sustainability,” or LOHAS, market. Some, like North Castle
Partners LLC, have been around for a while, while others,
like Physic Ventures, are just getting off the ground.
These firms’ investment strategies differ. North Castle, for
example, focuses on aesthetics and personal care,
consumer health, fitness and recreation, home and leisure,
and nutrition. The firm, which a prospective investor said
has collected at least $100 million of the $250 million that
it seeks for North Castle Partners IV LP, will do deals of
up to $500 million in size, according to its Web site.
Many of the other firms practicing this strategy are smaller.
Greenmont Capital Partners, Physic Ventures, Sherbrooke
Capital and TBL Capital are all raising smaller funds and
doing deals roughly in the sub-$250 million range.
Greenmont, which raised a $20 million debut fund in 2004
and is seeking $80 million for a follow-up, typically backs
later-stage growth companies producing annual revenue
of $2 million to $5 million, in industries like natural and
organic food products and eco-friendly home products.
Physic Ventures, formed last year by investment teams
from Unilever Technology Ventures and Great Spirit
Sherbrooke invests $1 million to $4 million at a time in
industries such as beverages, medical devices, services and
information. Sherbrooke is marketing its second fund,
Health & Wellness Fund II LP, which has already closed
on $52 million as it aims for a $125 million target. The
fund’s predecessor contained $101 million. And TBL,
which raised a $50 million debut fund from eight
individuals last year, will invest up to $10 million in
companies ranging from sustainable fish brokers to
companies developing software for nonprofits. Unusually,
TBL’s LPs have agreed that they may be paid in stock.
Whatever the strategy, these firms say they share a
common problem: convincing investors that they can
generate returns just as strong as those of their nonsustainable counterparts. TBL’s name – short for the
“Triple Bottom Line” of people, planet and profits that it
says it is focused on – is a reminder to investors that the
firm does take returns seriously.
“For us, social and economic interests are of equal
importance,” Principal Joe Glorfield said of TBL’s
investment approach.
But many limited partners remain unconvinced. There have
been some successful exits in this sector, such as the sale of
Izze Beverage Co. to Pepsi Corp. in 2006, which earned
Sherbrooke and Greenmont roughly three times their initial
investment in two years. But whether or not a fund – rather
than a single deal – can do well remains to be seen.
“It’s not really clear yet if you can successfully build a
whole fund around it,” said an investment officer at one
Midwest fund of funds. ■
–With reporting by Jonathan Matsey
Fitter, Happier, Stronger Returns
Firm Name Location
Greenmont Capital Partners Boulder, Colo.
Fund Name/Target
Greenmont Capital Partners II LP/$80M
Mindful Capital Partners Mill Valley, Calif.
North Castle Partners LLC Greenwich, Conn.
Physic Ventures San Francisco
Sherbrooke Capital LLC Newton, Mass.
Mindful Capital Fund I LP/ NA
North Castle Partners IV LP/$250M
Physic Ventures LP/$175M
Health & Wellness Fund II LP/$125M
TBL Capital Sausalito, Calif.
TBL Capital I LP/$50M*
*Closed. Source: Private Equity Analyst
Notes
Select investments include Izze Beverage Co.,
OzoCar LLC
Back in market with Fund IV after a year delay
Backed by Unilever
Backed by Massachusetts Pension Reserves
Investment Management Board, Oregon Investment
Fund and DSM Venturing
Select investments include Laloo’s Goat’s Milk Ice
Cream Co., Michelle Kaufman Designs Inc.
32
April 2008
Insight
Because the PBGC’s decision revolves around an obscure
definition also used by the Internal Revenue Service, it is
possible that it could be applied to federal tax
requirements as well, which could present even bigger
problems for the industry.
Company Pensions Pose
New Worries For PE Firms
By Tennille Tracy
“The government is like a dog with a bone,” Cagney said.
“Now that they have established this position, the question
is whether they will use it more often.”
Redefining Private Equity
Debevoise & Plimpton, is advising his U.S. private equity
clients to take a close look at retirement plans set up by
their portfolio companies. And he isn’t the only one.
The case involving the PBGC unfolded when a company
bought by a buyout firm went bankrupt. After the
company filed for bankruptcy, its assets were sold to a
third-party buyer. The third-party buyer then hired back
the employees, effectively purchasing the company
without taking over its defined benefit plan.
For years, attorneys believed that private equity firms bore
no responsibility for their companies’ defined benefit
pension plans. But that belief was thrown into doubt when
the U.S. Pension Benefit Guaranty Corp. issued a ruling in
January holding a private equity firm responsible for a
bankrupt portfolio company’s pension liabilities, worth
about $4 million.
In 2005, after the company declared bankruptcy, the
PBGC took over the company’s retirement plan and
started paying out its benefits. Shortly thereafter, it went
after the company’s former owner to recoup its expenses.
Lawrence Cagney, a partner with law firm
The ruling – the first of its kind in the U.S. – lays the
groundwork for future cases in which private equity firms
could be forced to cough up millions of dollars to finance
the retirement plans of companies that can no longer
afford them. Typically, that means bankrupt companies
offering defined benefit plans to their employees. Such
plans often become the responsibility of the PBGC when a
company runs into trouble.
U.K. Offers Pensions Lesson
To understand the effect the Pension Benefit Guaranty
Corp.’s ruling might have on U.S. private equity deal-making,
one need only look to the U.K. There, under the Pensions
Act 2004, any buyer looking to take over a company is
potentially on the hook for the company’s pension liabilities.
Debates that have resulted from this liability have scuttled
a number of deals. In one notable example, Qatari
investment fund Delta Two walked away from a bid for
grocer J. Sainsbury PLC last year after the company’s
trustees asked the firm to invest an extra £1.5 billion to
shore up its pension fund. The same issue had been
partially responsible for the dissolution of an earlier bid for
the company led by CVC Capital Partners.
This issue can continue to linger long after deals are done.
After buying EMI Group last summer, Terra Firma has
been engaged in a dispute with trustees of the company’s
pension plan, who are demanding that it increase
contributions to the plan. Terra Firma says that the fund
has a surplus, which the trustees dispute. In late 2007, the
matter was referred to the country’s Pensions Regulator.
The PBGC took the position that the private equity fund
belonged to the company’s “control group”, since it
owned more than 80% of the company, and therefore was
responsible for the pension plan. Taking an approach long
advocated by PE lawyers, the firm disagreed, arguing that
PE funds are exempt because they aren’t considered to be
a “trade or business.” This is a legal definition that helps to
determine responsibility for a defined benefit plan. Private
equity firms have emphasized the passive status of their
funds – which are removed from day-to-day operations of
the companies that they invest in – to avoid being
classified as a “trade or business.”
The case was ultimately settled, with one of the terms of
the agreement being that the identity of the private equity
firm and its portfolio company would remain anonymous.
The settlement leaves the debate between the two sides
undecided. The PBGC has clearly drawn a line in the sand,
but attorneys say they still believe private equity firms are
not responsible for unfunded pension liabilities. Since the
firm in the case elected to settle with the PBGC, rather
than appeal its decision, a federal court will not be given
the option to weigh in on the issue. As a result, it remains a
matter of he-said, she-said.
The PBGC’s new position on private equity firms could
also mean it is paying more attention to the other
companies that are more than 80% owned by firms that
see a portfolio company tumble into bankruptcy. It might
sound odd, but if a private equity fund buys an
ownership share in, say, eight different companies via
one fund, and one of those companies goes bankrupt,
then the PBGC will assign pension liability to the
remaining seven, under the same “trade or business”
34
April 2008
Insight
definition that the agency is now trying to assign to
private equity firms themselves.
predictable costs and revenue, and the costs associated
with defined benefit plans are not predictable.
Unlike PE firms, these companies have always been
considered a “trade or business,” but lawyers can’t recall a
time when the PBGC has sought reimbursement from
them.
“Any private equity firm worth its salt would take [pension
liabilities] into consideration,” said Brad Belt, former head
of the PBGC. “They would either require the current
sponsor to appropriately fund the pension plan or price it
into the acquisition. There’s no free lunch.” ■
Tax Worries
Also of concern to private equity firms, it is possible that
the IRS could start to characterize them as a “trade or
business,” since the PBGC and the IRS share the same legal
definition of that term, said Philip Strzalka, a partner with
the law firm Wildman Harrod. If that were indeed the
case, PE firms could be on the hook for all the taxes that
trades and businesses must pay. For instance, they would
be on the hook for
health benefit
“Any private equity firm
plans like those
laid out in the
worth its salt would take
Consolidated
[pension liabilities] into
Omnibus Budget
Reconciliation Act,
consideration.”
known as COBRA.
Brad Belt, former head of the PBGC
It is unclear
whether this issue is even on the IRS’s radar, and the
agency didn’t return calls seeking comment.
For now, private equity firms should focus on the PBGC
angle and make sure they have a solid handle on which of
their portfolio companies have defined benefit plans and
might be at risk of running out of money, Cagney said.
Once these plans are identified, private equity firms can
take steps to try to minimize the risks associated with those
plans. They can try to reduce plan costs by freezing or
reducing benefits, or even selling a portion of the company
to another buyer so that they own less than 80%. They
could also consider investing in such companies from
several different funds, keeping the stake owned by any
particular fund under 80%.
However, the PBGC will scrutinize any action that appears
to be aimed at avoiding liability for an unfunded pension
plan.
In the end, it is difficult to predict how big an impact this
ruling could have on the private equity industry without
researching every PE-backed company to figure out what
sort of pension plan each has. It is possible that the fallout
will be limited, since PE firms already tread carefully
around companies with defined benefit plans, which are
losing popularity but still exist at thousands of companies.
Since PE firms expect their companies to be able to make
consistent debt payments, they look for companies with
Defined Benefit Plans by the Numbers
30,330
Number of companies with defined benefit plans covered
by the PBGC
3,683
Number of retirement plans PBGC has taken over since
its founding in 1974
$4.3 billion
The amount PBGC paid out in terminated pension plans
in fiscal year 2007
$108 billion
The amount of underfunding in defined plans classifed as
“reasonably possible” to terminate – meaning they are
maintained by companies whose bonds are rated below
investment grade – as of Sept. 2005
Source: PBGC
36
April 2008
Insight
buyouts in 2006 and 2007 was 1.7 times money invested. In
contrast, new money raised for VC funds was more than 10
times the investment amount over the same period.
Industry Data
Control Buyouts Lose Ground In Asia
Growth capital investing was the dominant strategy in Asia
last year, as regulatory hindrances in emerging markets and
debt market woes in developed ones hindered buyouts.
In 2007, PE’s portion of overall M&A averaged 5.3% in Asia,
compared to 18.9% globally, SCM said. ■
Growth Capital Gains Ground In 2007
3.5% 0.4%
Growth capital accounted for 54% of Asian investments in
2007. Buyouts, after making up 51% of the pie in 2006, fell
to 42.1% in 2007, according to an analysis by SCM
Strategic Capital Management AG.
0.4% Seed /
Early-stage venture
42.1%
54.0% Growth capital
54.0%
42.1% Buyout
SCM attributed the decline in buyouts’ share of the market
mainly to the credit crunch, which hindered larger deals in
developed Asian markets, just like everywhere else, in the
second half of the year. But it also cited increasing lead
times to complete large deals, as firms tried to navigate a
tangled web of regulations in China and elsewhere.
Those dynamics also affected which countries got the most
capital. Australia/New Zealand fell to third in 2007 from first
in 2006, surpassed by India and China. “The relative strength
of China and India is a result of a contraction in deal activities
in Australia/New Zealand and Japan,” SCM wrote.
3.5% Other
Capital Overhang Increases
$35,000M
30,000
25,000
20,000
As large buyouts faltered, overall private equity deal volume
declined to $42 billion in 2007 from $50 billion a year earlier,
SCM found. But that didn’t impact fund-raising, which
soared to more than $33 billion, up 30% from 2006.
15,000
10,000
5,000
As a result, the gap between fund-raising and investing
widened in Asia. SCM said it is too early to draw any
conclusions about a general capital overhang, but did express
some concerns about an overhang on the venture side of the
industry. According to its analysis, new money raised for
Briefs
VCs Put More Into Clean Tech
Venture capitalists keep putting more green into green
technology, with global totals rising to $3 billion invested in
221 deals in 2007 from $2.1 billion in 173 deals in 2006.
Clean technology accounted for 8.5% of all venture
investment in 2007, up from nearly 5% in 2006, according to
data from VentureSource, which, like this publication, is
owned by Dow Jones & Co. The U.S. led all regions,
accounting for 83% of global investment in 2007. Venture
investors remain bullish on the sector, despite some
rumblings of a bubble. “[Cleantech] is going into very
diverse markets that are enormous and can sustain a
tremendous amount of capital and new technology,” said
Michael Bevan, managing director of cleantech venture firm
Element Partners. However, “2008 will be a year where
0
’00
Commitments
’01
’02
’03
’04
’05
’06
’07
Investments (equity value; excludes debt)
Source: Asia PE Review 2007 / SCM
some of the early leaders potentially stumble; there will be
some clarity around where the early winners are,” said Eric
Straser, partner at MDV – Mohr Davidow Ventures.
LPs Emphasize Risk Management
Institutional investors are pressing alternative asset managers
on issues of transparency and risk management as returns
drop and governance becomes as important as performance,
PricewaterhouseCoopers said. While 40% of investors polled
rated fund managers’ performance as a priority in retaining
managers, another 41% said risk management and
transparency were more important. European alternative
investment managers rated lower than their North American
peers in the quality of their governance, risk management
reporting and transparency, according to the survey of 226
investors and providers.
38
April 2008
The Roundup
Buyouts
Fund-Raising
Highlights
Buyouts
38 Altira Group
Altira Group, Denver
Longitude Capital Partners
49 Microsoft Corp.
Avista Capital Holdings LP
Union Square Ventures
Beecken Petty O’ Keefe & Co.
Upstart Ventures
Bertram Capital
Secondary
Blackstone Group LP &
First Reserve Corp.
50 Saints Capital
39 Brynwood Partners
First Nations Capital
Partners LLC
W Capital Partners
Funds of Funds
50 Advanced Capital
First Reserve Corp.
Constitution Capital Partners
Five Elms Capital
Great Hill Partners LLC
Goldman Sachs Asset
Management Private Equity
Group
H&G Capital Partners
RCP Advisors LLC
Hamilton Lane Advisors
Western Europe & Israel
JC Flowers & Co.
50 Bain Capital
Kairos Capital Partners
40 Knight’s Bridge Capital
Partners Inc.
Levine Leichtman Capital
Partners
Mainsail Partners
Mesirow Financial
New Mountain Capital LLC
NGP Energy Capital
Management
Bridgepoint Capital
Charterhouse Capital Partners
Endless LLP
Environmental Technologies
Fund
52 GIMV NV
HitecVision Private Equity AS
Investindustrial Holdings Ltd.
Nexit Ventures
Riverlake Partners LLC
PAI Partners
Silver Lake Partners
44 Solaia Capital Advisors LLC
Pragma Capital
Target Partners GmbH
Emerging Markets
Tenaska Capital
Management LLC
52 Dubai International Capital
Distressed/Turnaround
44 Ares Management LLC
Aurora Capital Group
Oaktree Capital Management
Mezzanine
44 Caltius Capital Management
Venture Capital
44 .406 Ventures
46 Accel Partners & Venrock
Chrysalis Ventures
Flybridge Capital Partners
FTVentures
Lightspeed Venture Partners
The mid-market buyout firm seeks a $3 billion follow-up to
its debut fund that closed last summer. Avista Capital
Partners II LP is looking to attract the same investors who
backed Avista’s $2 billion first fund, which according to
one person is currently generating a 116% internal rate of
return. Known investors in that fund include fund-of-funds
manager Partners Group and Teachers’ Retirement
System of the City of New York. A first close could come
in the late spring. Avista looks for deals in the energy,
health-care and media sectors. Reach Avista Capital
Partners at 212-593-6900.
Beecken Petty O’ Keefe & Co., Chicago
The firm nears the $650 million target for its third fund and
could fetch up to as much as $750 million, two people
said. Beecken Petty O’Keefe Fund III LP has had a first
closing, these people said, but the amount couldn’t be
determined. The health-care-focused firm, which allocates
roughly 80% of its capital to control positions and 20% to
growth-equity plays, has already done one deal out of
Fund III, these people said. Beecken Petty O’Keefe closed
its second fund above target at $325 million. Reach
Beecken Petty O’Keefe at 312-435-0300.
TLcom Capital LLP
Swander Pace Capital
Thayer Hidden Creek
Avista Capital Holdings LP, New York
51 Capvis Equity Partners
Norwest Equity Partners
42 SFW Capital Partners
Energy investor Altira Group closes its fifth fund at $176
million, nearly $75 million short of its initial $250 million
target. Investors in Altira Technology Fund V LP include
long-time LPs as well as first-time investors. Altira invests in
natural resources, clean energy and power management
technologies. Its most recent fund, which closed in 2003,
totaled $64 million. Reach Altira Group at 303-592-5500.
Dubai Techno Park
53 Global Investment House
Gulf Capital
Helion Venture Partners
Macquarie Infrastructure
Partners
54 Nexxus Capital
Orchid Asia Group
Management Ltd.
Qatar Islamic Bank
Raffia Capital Inc.
Bertram Capital, Palo Alto, Calif.
The growth-equity firm plans to raise a $650 million
second fund, just under a third of which will likely be
dedicated to the clean technology sector, according to
Jeffrey Drazan, Bertram’s managing director. He expects
Bertram Growth Capital II LP to have three to four new
limited partners. There are 15 in the current fund,
including California Public Employees’ Retirement
System and Lehman Brothers Holdings. The firm can
invest up to $100 million per company, but limited
partners are also able to co-invest, Drazan said. Reach
Bertram Capital at 650-543-9300.
55 Renaissance Partners
Troika Capital Partners
48 Market Monitor
Blackstone Group LP, New York,
and First Reserve Corp., Greenwich, Conn.
The two firms form a $2 billion partnership with Europe’s
largest independent oil refiner, Petroplus AG, to invest in
U.S. oil refineries. The three will each contribute $667
39
April 2008
The Roundup
million to the partnership, named PBF Partners. The
partnership will be run by Thomas O’Malley, who is
stepping down as Petroplus’s chief executive but will
remain chairman, and who is contributing $50 million of
his own money. Reach Blackstone at 212-583-5000; First
Reserve at 203-661-6601.
Brynwood Partners, Greenwich, Conn.
The small buyout firm gears up to market Brynwood
Partners VI LP, which aims to raise $350 million to $400
million. The new vehicle, which the firm hopes to close by
the end of the year, will buy business services, consumer
products, niche retailer and light-manufacturing businesses
worth $20 million to $100 million. The $250 million
Brynwood Partners V LP closed in 2005 and is fully
invested. Reach Brynwood Partners at 203-622-1790.
and health-care services companies. Reach Five Elms at
212-951-8625.
Great Hill Partners LLC, Boston
The mid-market firm is shopping Great Hill Equity Partners
IV LP, which has a $1.2 billion target and will invest in a
variety of industries. The fund would be Great Hill’s largest
yet, surpassing the $750 million it raised in 2006 for its last
fund. Limited partners supporting that fund include J.P.
Morgan Investment Management and Pennsylvania State
Employees’ Retirement System. Great Hill typically invests
$50 million to $150 million in deals ranging from late-stage
growth equity investments to buyouts, recapitalizations and
even private investments in public companies. Reach Great
Hill Partners at 617-790-9400.
H&G Capital Partners, Salt Lake City
First Nations Capital Partners LLC, San Francisco
A $25 million private equity fund launched by Wells Fargo
Community Development Corp. and two California
Native American tribes, First Nations will serve as a
vehicle for tribes to diversify their investments beyond
casinos and farming. Wells Fargo Community
Development Corp., the Colusa Indian Community of
Colusa and the Rincon Band of Luiseno Indians will
each commit up to $5 million toward the fund over the
next five years, and are also soliciting investments of
between $1 million and $5 million from other tribes and
nations. First Nations will look to make eight to 10
investments in companies primarily based in 11 Western
states. Reach Wells Fargo at 866-249-3302.
First Reserve Corp., Greenwich, Conn.
The firm plans to launch a new fund that will target $12
billion, even though its current $7.8 billion fund was only
46% invested as of the end of 2007, according to two
people familiar with the effort. The new fund, First
Reserve Fund XII LP, is expected to close in the first
quarter of 2009. Consistent strong performance may
bolster its fund-raising; as of Sept. 30, 2007, Funds VIII
through X had an aggregate 2.14 times net investment
multiple. Fund XI closed in August 2006 after only three
months of marketing. Investors include California Public
Employees’ Retirement System and Washington State
Investment Board. Reach First Reserve at 203-661-6601.
Five Elms Capital, Kansas City
The growth-stage investment firm closes on the first $14
million of an expected $20 million for Five Elms Equity
Fund I LP. Fred Coulson, who will lead the investment
team, said the firm will likely close the last $6 million in the
second quarter of 2008. The firm typically looks for
minority investments in companies that have established
revenue and are profitable. Coulson said the firm is
primarily interested in business services, financial services
Former Bain Capital Managing Director Robert C. Gay teams
up with billionaire chemical titan Jon M. Huntsman Sr. to
form H&G Capital Partners, which seeks to raise at least $1
billion for its first fund, H&G Capital Partners Fund LP. The
fund will focus on middle-market deals, people familiar with
the matter said. Reach H&G Capital at 801-456-3812.
Hamilton Lane Advisors, Bala Cynwyd, Pa.
The firm aims big with a $1.25 billion target on its second
co-mingled co-investment fund, more than double the size
of its debut effort. Hamilton Lane began marketing
Hamilton Lane Co-Investment Fund II LP last fall and
has attracted interest from at least three U.S. pension
funds: Public School Teachers’ Pension and Retirement
Fund of Chicago, Norfolk County (Mass.) Retirement
Fund and the Public Employee Retirement System of
Idaho. Hamilton Lane expects to invest in large and small
deals worldwide, but mostly in the U.S. Reach Hamilton
Lane at 610-934-2222.
JC Flowers & Co., New York
The firm expects to begin marketing its third buyout fund
later this year, according to several investors. It has told at
least two large LPs that JC Flowers III LP will likely
include a core fund targeting roughly the same amount
raised for its $7 billion predecessor, as well as a parallel
fund in which the China Investment Corp. will invest.
CIC’s investment in that fund is expected to be between $3
billion and $4 billion. JC Flowers still has a lot of dry
powder left in Fund II after terminating its $25 billion bid
for student lender SLM Corp., also known as Sallie Mae.
Reach JC Flowers at 212-404-6800.
Kairos Capital Partners, Westwood, Mass.
Yet another firm offering “one-stop” investment services,
Kairos Capital Partners is eyeing a $200 million debut
fund. Kairos Capital Partners I LP held a first close last year
40
April 2008
The Roundup
on an undisclosed amount and expects to hold a final close
before the end of the year. The fund initially launched with
a target of $100 million but is likely to approach its $200
million hard cap, a person familiar with the firm said. Kairos
aims to take controlling and non-controlling stakes in retail
and consumer-goods companies in the lower middle
market, looking at businesses with operational issues or
those that have been undervalued. Along with equity,
Kairos will provide subordinated debt to targeted
companies. Reach Kairos Capital at 781-722-2601.
Knight’s Bridge Capital Partners Inc., Toronto
The firm closes its first fund at C$62 million ($60.9 million),
leaving the door open to additional commitments. The
target for Knight’s Bridge Capital Partners Fund I LP
floated between C$50 million and C$80 million, with a
hard cap of C$100 million. The firm opted to close the
fund now to get back to making deals, Vice President
Adam Levy said. The firm seeks to invest C$5 million to
C$10 million per deal, in growth investments, leveraged
buyouts and, to a lesser extent, late-stage venture capital
deals. Reach Knight’s Bridge at 416-866-3000.
Levine Leichtman Capital Partners, Beverly Hills, Calif.
The firm seeks $1 billion for Levine Leichtman Capital
Partners IV LP, despite its predecessor falling short of its
initial fund-raising goal in 2004, according to two people
familiar with the firm. Fund III had a $500 million final
closing in 2003, below its initial $800 million goal. A
lawsuit by GMAC Commercial Credit LLC, later amicably
settled, temporarily delayed that vehicle’s fund-raising, and
the departure of three partners didn’t help either. Levine
Leichtman is also seeing some turnover this time around,
as Director Peter Rothschild recently departed for New
York hedge fund Sandell Asset Management Corp. Fund
IV is the latest vehicle in the firm’s Structured Equity Fund
family, which seeks to grow its portfolio companies without
taking controlling stakes. Investors in Levine Leichtman’s
funds include California Public Employees’ Retirement
System and New Mexico State Investment Council.
Reach Levine Leichtman at 310-275-5335.
Mainsail Partners, San Francisco
The firm closes its second fund, Mainsail Partners II LP, at
$110 million, more than triple the size of its $33 million debut
fund. Mainsail does growth equity investments, recapitalizations and management-led buyouts, investing between $3
million and $15 million of equity per transaction, according
to the firm’s Web site. Reach Mainsail at 415-391-3150.
Mesirow Financial, Chicago
Mesirow Financial begins marketing its latest co-investment
fund, which has a $250 million target and will invest in both
buyout and venture deals. Assuming it hits its target, the
fund would eclipse its $146 million prior predecessor,
Mesirow Financial Capital Partners IX LP, which closed in
2006. Mesirow also expects to wrap up its fourth fund-offunds offering at around $900 million within the next month
or so. Reach Mesirow at 312-595-6099.
New Mountain Capital LLC, New York
The firm closes New Mountain Partners III LP at $5.12
billion, substantially exceeding its initial target of $3 billion,
according to a person familiar with the fund. New
Mountain plans to invest the new fund in North American
companies with enterprise values of $100 million to $1
billion, typically chipping in $100 million to $500 million in
equity per transaction. Past investors have praised New
Mountain for its modest reliance on debt and strong focus
on growing its portfolio companies over the long term.
Limited partners include Ireland’s National Pensions
Reserve Fund and Employees’ Retirement System of
Texas. New Mountain Partners II LP closed at $1.5 billion
in 2004. Reach New Mountain Capital at 212-720-0300.
NGP Energy Capital Management, Irving, Texas
NGP Energy Capital Management wraps up Natural Gas
Partners IX LP at $4 billion, exceeding its $3 billion target
after six months of marketing. The fund hit the market in
August, closed on $2.1 billion in September and held
another closing at $2.6 billion in November. A majority of
investors in Natural Gas Partners’ prior funds have
returned, but first-timers contributed some 30% of the
capital, said Chief Executive Kenneth Hersh. Known
investors in Fund IX include Indiana Public Employees’
Retirement Fund and New Mexico Public Employees’
Retirement Association. Reach NGP at 972-432-1440.
Norwest Equity Partners, Minneapolis
The firm lines up $1.2 billion for its ninth buyout fund,
Norwest Equity Partners IX LP. The board of Wells
Fargo & Co., the sole limited partner in the fund,
approved its commitment in January, with the investment
slated to close this summer. The new fund is sticking with
the strategy of its $800 million predecessor, which closed
in 2004 and has about $200 million left to invest. That fund
invests $20 million to $80 million in companies worth $50
million to $250 million. Separately, Wells Fargo committed
$500 million to Norwest Mezzanine Partners III LP.
Reach Norwest Equity Partners at 612-215-1600.
Riverlake Partners LLC, Portland, Ore.
The firm raises $150 million so far for its second fund, which
has a $175 million hard cap. Riverlake Equity Partners
Fund II LP is intended to be substantially larger than the
firm’s $34 million debut fund, which closed in 2004. Fund II,
which will hold a second and possibly final close by the end
of the second quarter, will focus on manufacturing and
services businesses in the Northwestern U.S. worth $15
million to $50 million. Reach Riverlake at 503-228-7100.
42
April 2008
The Roundup
deals from $100 million to $300 million. Reach SFW
Capital at 914-510-8910.
SFW Capital Partners, Rye, N.Y.
SFW Capital Partners closes its debut fund at over $300
million, below a reported target of $350 million. SFW
Capital Partners Fund I LP is the first fund for a team of
ex-senior investment professionals from AEA Investors,
who founded the new firm in 2005. A source familiar with
the matter said SFW’s management opted to cut fundraising short by six months to focus on deal-making.
Limited partners include the Ohio-Midwest Fund and
New Jersey State Investment Board. The firm will back
Silver Lake Partners, Menlo Park, Calif.
Silver Lake Partners wraps up its newest main fund,
Silver Lake Capital Partners III LP, with $9.3 billion after
a year of marketing. Fund III had a target of $7.5 billion
and a hard cap of $10 billion. Investors include California
Public Employees’ Retirement System and Teachers’
Retirement System of Illinois. The firm is also putting the
Recent Disclosed LP Commitments
Limited Partner
Canada Pension Plan Investment Board
City of Philadelphia Board of Pensions and Retirement
Employees’ Retirement System of Texas
Indiana Public Employees’ Retirement Fund
Los Angeles City Employees’ Retirement System
Los Angeles County Employees’ Retirement Association
Los Angeles Fire and Police Pensions
Maryland State Retirement and Pension System
New Jersey State Investment Council
New Mexico Educational Retirement Board
New Mexico Public Employees Retirement Association
New Mexico State Investment Council
Ontario Teachers’ Pension Plan
Pennsylvania Public School Employees’
Retirement System
Pennsylvania State Employees’ Retirement System
San Francisco Employees’ Retirement System
School Employees Retirement System of Ohio
Teachers’ Retirement System of the State of Illinois
Teacher Retirement System of Texas
University of Michigan Regents
Fund
Commitment ($M) Fund Target ($M)
FountainVest
$200.0
N/A
LLR Equity Partners III LP
$20.0
$600
Carlyle Partners V LP
$100.0
$17,000
New Mountain Partners III LP
$60.0
$5,100*
Southwest Opportunity Fund LP
$69.1
N/A
CVC European Equity Partners V LP
$79.0
€11,000
Advent International GPE VI LP
$79.0
€5,000
Actis Emerging Markets 3 LP
$46.5
€2,500
Apollo Investment Fund VII LP
$20.0
$15,800
TPG Partners VI LP
$25.0
$18,000
Vista Equity Partners III LP
$50.0
$1,100
Levine Leichtman Capital Partners IV LP
$25.0
$1,000
Bain Capital Fund X LP
$50.0
$10,000*
Bain Capital Co-Investment Fund X LP
$50.0
$5,000
Carlyle Partners V LP
$150.0
$17,000
Frazier Healthcare VI LP
$35.0
$600*
Natural Gas Partners IX LP
$40.0
$4,000*
NGP Midstream & Resources LP
$25.0
$1,400*
Tenaska Power Fund II LP
$100.0
$1,500
Fletcher Spaght Ventures II LP
$15.0
$100
Lime Rock Partners V LP
$20.0
$1,400
Madison Dearborn Capital Partners VI LP
$25.0
$10,000
Riverstone/Carlyle Renewable Energy Infrastructure Fund II LP $20.0
$4,000
Bridgepoint Europe IV LP
$44.5
€4,500
Carlyle Mezzanine Partners II LP
$30.0
$600
Clayton Dublier & Rice VIII LP
$50.0
$7,500
Levine Leichtman Capital Partners IV LP
$35.0
$1,000
FountainVest
$200.0
N/A
Actis Emerging Markets 3 LP
$200.0
$2,500
Aisling Capital III LP
$100.0
$650
Cardinal Venture Partners II LP
$50.0
$160
CS Strategic Partners IV LP
$100.0
$2,500
CS Strategic Partners IV VC LP
$50.0
$325
Partners Group Secondary 2008 LP
$230.0
€2,000
ABS Capital Partners VI LP
$40.0
N/A
Lime Rock Partners V LP
$50.0
$1,400
Madison Dearborn Capital Partners VI LP
$50.0
$10,000
Versa Capital Partners II LP
$15.0
$600
Apollo Investment Fund VII LP
$30.0
$15,800
New European buyout fund from Summit Partners
$15.4
€1,000
TPG Partners VI LP
$30.0
$18,000
Graham Partners III LP
$40.0
$650
SPC Partners IV LP
$30.0
$500
Advent International GPE VI LP
$75.0
€5,000
Kline Hawkes Growth Equity Fund LP
$15.0
$200
Longitude Venture Partners LP
$30.0
$250
PAI Europe V LP
$75.0
€5,000
$310.0
€4,500
$23.2
€4,500
JOG IV LP
$10.0
N/A
*Closed. Source: Compiled by Private Equity Analyst from pension fund disclosures
44
April 2008
The Roundup
finishing touches on a middle-market fund, said a person
close to the firm. That fund, known as Silver Lake Sumeru
Fund LP, is still open after exceeding its $750 million
target, with a final closing expected shortly. Reach Silver
Lake at 650-233-8120.
Solaia Capital Advisors LLC, New York
New firm Solaia Capital Advisors, started by Michael
Carrazza, co-founder of fundless buyout shop Bard Capital
Group LLC, aims to raise a $150 million to $600 million
fund. Solaia will operate as an affiliate of Bard Capital,
buying companies worth $100 million to $600 million.
Carrazza believes the time is ripe for raising money since
the buyout market has hit a down cycle, when funds have
traditionally made some of their best returns. Reach Solaia
Capital at 212-201-2080.
Swander Pace Capital, San Francisco
Swander Pace Capital seeks $500 million for SPC Partners
IV LP, according to two people familiar with the matter. The
firm typically invests in consumer-products businesses with
revenue of $20 million to $30 million. The School
Employees Retirement System of Ohio has pledged $30
million. SPC Partners III LP closed at $325 million in 2003.
Reach Swander Pace Capital at 415-477-8500.
Tenaska Capital Management LLC, Omaha, Neb.
Tenaska Capital, the private equity arm of power producer
Tenaska Energy Inc., is seeking $1.5 billion for Tenaska
Power Fund II LP, according to two people familiar with the
firm. The New Jersey State Investment Council pledged
$100 million to the vehicle, which will focus on power
generation; energy and power infrastructure goods and
services; and biofuels, wind and geothermal. The firm closed
its debut fund with $838 million in 2005. Reach Tenaska
Capital Management at 402-691-9571.
exceed $5 billion. The fund, in which the GP plans to
invest $200 million, is expected to make a variety of
investments, including rescue and deleveraging capital;
distressed debt and discounted debt accumulation;
leveraged buyouts; and growth equity. As of Sept. 30, the
firm’s first fund, which closed at $751 million in 2003, was
generating a 1.7 times return. Reach Ares Management at
310-201-4100.
Aurora Capital Group, Los Angeles
Aurora Capital hopes to raise $800 million for Aurora
Resurgence Fund LP, a distressed debt fund focused on
industries within the firm’s core buyout sectors, according
to a person familiar with the effort. The firm has a diverse
investment mandate with a tangible asset focus, and
typically invests in companies with enterprise values of
between $150 million and $1.5 billion. Sectors of interest
include aerospace, general industrial, distribution,
specialty chemicals, building products and packaging. The
fund is expected to have a final closing by September.
Reach Aurora Capital Group at 310-551-0101.
Oaktree Capital Management, Los Angeles
The firm looks to raise up to $2 billion for Oaktree Loan
Fund II LP, just five months after closing its predecessor,
said two prospective investors. The new fund will likely
bring in a few outside investors, unlike Fund I, which was
only open to existing Oaktree limited partners. Fund II
intends to invest quickly to take advantage of banks’ urgent
need to clean up their balance sheets. Oaktree Loan Fund
II LP, like its predecessor, will dedicate at least 80% of the
capital it raises to buy bank loans and other senior debt
instruments, such as relatively safe senior-secured first-lien
loans. Reach Oaktree Capital at 213-830-6300.
Mezzanine
Caltius Capital Management, Los Angeles
Thayer Hidden Creek, Washington
The firm looks to close its $350 million Thayer Hidden
Creek Partners II LP by the end of the year, according to
a person familiar with the matter. The new fund aims to
acquire aerospace, automotive, power generation
equipment and other industrial businesses with $20 million
to $200 million in annual sales. The firm’s last fund was the
$218 million Thayer Equity Investors V LP, raised in
2003. Reach Thayer Hidden Creek at 202-371-0150.
Caltius Capital is raising Caltius Partners IV LP, its fourth
mezzanine fund, with a $400 million target. The firm’s
previous mezzanine fund closed on $300 million in 2004.
That fund’s limited partners included U.S. and Europeanbased public and corporate pension funds, funds of funds,
foundations, endowments and wealthy individual
investors. Caltius Mezzanine invests in mid-market
recapitalizations, buyouts and organic growth deals. Reach
Caltius Capital at 310-996-9585.
Distressed/Turnaround
Venture Capital
Ares Management LLC, Los Angeles
.406 Ventures, Boston
The firm is raising $4 billion for Ares Corporate
Opportunities Fund III LP, which would be double the
size of its $2 billion predecessor. While the fund doesn’t
have a hard cap, total commitments aren’t expected to
Two years after making its first investment, early-stage IT
investment firm .406 Ventures closes debut fund Point
406 Ventures I LP at $167 million, passing its initial target
of $150 million. Institutional investors, such as Employees’
46
April 2008
The Roundup
Retirement System of the State of Rhode Island and
Credit Suisse Group, make up 85% of the fund. The
remaining 15% comes from wealthy families and
individuals and the general partners, Managing Partner
Maria Cirino said. Reach .406 Ventures at 617-226-8706.
Accel Partners, Palo Alto, Calif.,
and Venrock, Menlo Park, Calif.
Players in Hollywood and Silicon Valley continue to buddy
up, with the latest partnership coming from the William
Morris Agency, Accel Partners and Venrock. The three
will form a joint fund that focuses on discovering seedstage consumer media technology companies. AT&T Inc.
will participate in selected investment opportunities with
the fund. Investments will range from $250,000 to several
million dollars; the fund’s size has not been disclosed.
Reach Accel Partners at 650-614-4800; Venrock at 650561-9580.
Chrysalis Ventures, Louisville, Ky.
Chrysalis Ventures rounds up $163 million for Chrysalis
Ventures III LP, ahead of the fund’s $150 million target.
Chrysalis, a provider of early- and expansion-stage capital
to technology, media, communications and health-care
services companies in the South and Midwest, closed its
last fund in 2002 at $143 million. New limited partners
include Morgan Stanley Alternative Investment Partners
and Venture Michigan Fund. Chrysalis’ managing
directors, professional staff and affiliates are also significant
backers. Chrysalis likes to make early investments in startups with $1 million to $5 million in revenue. Reach
Chrysalis Ventures at 502-583-7644.
Historical Fund-Raising
$254.7
(404)
$242.0
(487)
200
$168.1
(412)
$131.6
(409)
$113.4
(329)
$99.2
(353)
100
$51.6
(68)
$59.5
(327)
$43.9
(66)
$11.8
(35)
0
YTD-08
(as of 3/26)
Raised YTD ($B)
Apr-07
Apr-06
Still Open ($B)
Flybridge Capital Partners, formerly IDG Ventures
Boston, closes its third fund at $280 million and separates
from former sponsor International Data Group Inc. under
somewhat acrimonious circumstances. IDG’s founder
and Chairman Patrick McGovern said his company
declined to keep backing the firm because its
performance and strategy didn’t mesh with IDG’s goals.
Flybridge General Partner Michael Greeley, meanwhile,
said the move was “a mutual decision” and that it was the
firm’s own decision to change its brand. The firm was
initially financed entirely by IDG, and brought in outside
limited partners when it raised its $180 million second
fund in 2005. IDG didn’t commit to the third fund,
although it remains a limited partner in the first two
funds. The rest of the second fund’s institutional LPs,
including AlpInvest Partners and Princeton University,
returned for Flybridge Capital Partners III LP. New
investors include Alfred I. duPont Testamentary Trust
and TrueBridge Capital Partners. The fund plans to
back about two dozen early-stage consumer, health-care
and technology companies. Reach Flybridge Capital
FTVentures, San Francisco
The growth equity investor continues raising its largest
fund to date, FTVentures III LP, closing on $465 million in
commitments, according to a filing with the Securities and
Exchange Commission. The firm has a $600 million target
for its multi-stage fund. Limited partners in Fund III include
Liberty Mutual and RHM Pension Trust, according to the
SEC filing. FTVentures II closed in 2001 with $424 million.
Reach FTVentures at 415-229-3000.
Lightspeed Venture Partners, Menlo Park, Calif.
$308.9
(437)
$300B
Flybridge Capital Partners, Boston
$13.7
(46)
Apr-05
$57.3
(315)
$9.6
(44)
Apr-04
Full-Year Total ($B) (# Funds)
Amount raised YTD figures in past years reflect the amount raised through late April of the given
year. Full-year totals reflect the amount raised for the full year in any given year. Still open figures
reflect the amount and number of funds we knew were open as of this point in the year for any
given year. Source: Private Equity Analyst
The firm begins marketing its eighth venture fund, with a
$675 million target, according to several prospective
investors. One investor said the firm expects roughly 70%
of Lightspeed Venture Partners VIII LP to wind up in
early-stage investments and 30% to go toward later-stage
deals, compared with 20% for later-stage deals in its $480
million seventh fund. Investors may see more international
companies in the new fund’s portfolio as well, as
Lightspeed has steadily expanded its reach overseas in
recent years – namely in China, India and Israel. Reach
Lightspeed Venture Partners at 650-234-8300.
Longitude Capital Partners, Menlo Park, Calif.
The life science spin-out of Pequot Ventures raises $95
million of a potential $325 million first fund, according to
a filing with the Securities and Exchange Commission.
Seventeen limited partners have contributed to
Longitude Venture Partners LP, including the Public
Employees’ Retirement Association of Colorado and
Thrivent Financial for Lutherans’ White Rose Fund.
48
April 2008
The Roundup
Market Monitor
1Q PE Fund-Raising Tops Last Year
By Keenan Skelly
Despite the slowdown in the economy and private equity
deal-making, fund-raising remains strong, according to our
database. But the share of the total going to buyout funds is
on the decline.
As this publication went to press with a couple of days still left
in the first quarter, fund-raising by U.S.-based private equity
firms had topped year-ago totals, with 68 funds raising $51.6
billion, up 16% from $44.3 billion raised by 68 funds.
Buyout firms raised $22.3 billion across 28 funds, down
from the $35.2 billion raised by 34 funds in 2007. Their
share of the overall PE pie is also on the decline, to 43%
from 80% last year.
The decline in buyouts wasn’t a surprise to most industry
observers. “Why give a firm equity when it cannot deploy the
funds with leverage due to the state of the credit markets?”
asked Jay Tannon, partner at law firm DLA Piper.
Last year, a handful of mega buyout funds accounted for
$27.3 billion, or 62%, of the total capital raised. This year,
several large funds, including Madison Dearborn Partners
and Blackstone Group, have had to delay closings.
“There have been concerns with mega funds given the
difficulty in financing transactions, the slowing of distributions,
and financing from less typical places like hedge funds and
sovereign wealth funds,” said Brett Nelson, head of global
private equity at consulting firm Ennis Knupp + Associates.
That means that while one mega fund dominated the totals,
it wasn’t a buyout fund. Goldman Sachs & Co.’s new
mezzanine fund, GS Mezzanine Partners V LP, wrapped
up in February at around $20 billion, including leverage.
That helped push the mezzanine category to a total of $22.3
billion raised in the quarter by four firms, the same amount
as buyout firms raised.
2008 Funds Through March
Type of Fund
Buyouts/Corporate Finance
Venture Capital
Secondary & Other Private Equity
Mezzanine
Funds of Funds
Total
Number
28
27
5
4
4
68
Amount ($M)
$22,263.9
$4,138.2
$1,028.8
$22,270.9
$1,914.0
$51,615.8
It’s hard to extrapolate trends from just one quarter of data,
given private equity firms’ notorious secrecy. And there are
some funds which may have closed in the quarter –
notably, TPG Capital’s new vehicle, TPG Partners VI LP,
which was expected to have a closing on north of $10
billion – that aren’t included in the stats yet.
Still, it is safe to say the industry isn’t as bullish on the
buyout market as it was this time last year. “With deals
being much slower, we’ll have a period where tenured
groups will be sitting on their hands and not doing fundraising,” said Gary Robertson, head of private equity at
consulting firm Callan Associates.
Meanwhile, the venture industry continued chugging along
at the steady level it has maintained over the past couple of
years. Venture firms raised around $4.1 billion in the quarter,
up from the $3.8 billion raised at this point last year.
Observers expect more money to flow to VC firms this year,
as well as other niches less dependent on debt financing.
“If you’re a top-tier mezzanine, middle-market PE or VC
player, you will be perceived as attractive right now, in
part because you’re not quite as dependent on what’s
going on in the credit markets,” said DLA Piper’s Tannon.
Top 5 Buyout Funds To Hold Final Closes In Most Recent Month1
Fund Name Fund Region
1 New Mountain Partners III LP US
2 Bain Capital Europe III LP Western Europe
3 Natural Gas Partners IX LP US
4 Abry Partners Fund VI LP US
5 Investindustrial IV LP Western Europe
Firm Name Location
Total Amt. Raised ($M)2 Target Amt. ($M)
New Mountain Capital LLC New York
$5,120.00
$3,000.00
Bain Capital Inc. Boston
$4,799.00
$3,427.80
NGP Energy Capital Management Stamford, Conn.
$4,000.00
$3,000.00
ABRY Partners LLC Boston
$1,385.00
$1,350.00
Investindustrial Milan
$1,371.10
$1,096.88
Top 5 VC Funds To Hold Final Closes In Most Recent Month1
Fund Name Fund Region
1 Clarus Lifesciences II LP US
2 Orchid Asia IV LP Asia/Pacific
3 Flybridge Capital Partners III LP US
4 Environmental Technologies Fund Western Europe
5 Helion Venture Partners II Asia/Pacific
Firm Name Location
Total Amt. Raised ($M)2 Target Amt. ($M)
Clarus Ventures Cambridge, Mass.
$660.00
$600.00
Orchid Asia Group Management Ltd. Hong Kong
$420.00
$350.00
Flybridge Capital Partners Boston
$280.00
N/A
ETF Environmental Technologies Fund London
$220.63
$200.00
Helion Venture Partners LLC Port Louis, Mauritius
$210.00
N/A
(1) 2/20/08 to 3/20/08. (2) 2007 annual averages used to convert non-USD amounts. Source: Private Equity Analyst
49
April 2008
The Roundup
Longitude will invest in medical devices,
pharmaceuticals and biotechnology, according to the
firm’s Web site. Reach Longitude Capital Partners at
650-854-5700.
Microsoft Corp., Redmond, Wash.
Microsoft forms a nonprofit-targeted fund that could put
$3 million in the hands of start-ups. Microsoft
HealthVault Be Well Fund is part of Microsoft’s new
health site, HealthVault, and will make investments of
$150,000 to $500,000. The fund will target innovations in
four areas: primary prevention, secondary prevention,
acute care and juvenile health. Organizations eligible to
receive support from the fund include accredited degreegranting colleges and universities that have a nonprofit
status as well as research and health institutions with
nonprofit status. Reach Microsoft at 425-882-8080.
Union Square Ventures, New York
The firm closes its second fund with $156 million in capital
commitments, according to blog posts by its managing
general partners. According to Brad Burnham’s post,
Union Square Ventures 2008 LP will stay consistent with
the investment focus for the previous fund – which
backed early-stage information technology companies in
the media, marketing, financial services, health-care and
telecommunications sectors – but there will be differences
in the way the firm invests the new vehicle. Burnham
wrote that the firm will be more selective about earlystage Web services, and will invest in later-stage
opportunities that it believes are poised to grow as more
users become dependent on the Web to manage their
daily lives. General Partner Fred Wilson said all of its
previous investors returned. The firm closed its $125
million first fund in 2004. Reach Union Square Ventures at
212-994-7880.
Upstart Ventures, Salt Lake City
Upstart Ventures raises $9 million toward a $10 million
first close of Upstart Life Sciences Capital LP, which
looks to raise a total of $20 million to $30 million.
Managing Director Steve Borst said Upstart is in
discussions with both individual and institutional investors
for the remainder of the fund, which he expects to close
in 2009. Upstart, which looks to seed early-stage lifescience companies based in Utah, will focus on taking
intellectual property from the state’s universities and
creating stand-alone companies. Reach Upstart Ventures
at 801-556-0280.
50
April 2008
The Roundup
Secondary
Saints Capital, San Francisco
Secondary investor Saints Capital closes on a $300 million
sixth fund, Saints Capital VI LP, to take on portfolio
companies from VCs in need of an exit, ailing hedge funds
or investors that have changed strategies. The firm’s
previous fund raised $100 million in 2005, although with
additional sidecar funds it contained more capital. The
new fund gives Saints more capacity to take advantage of
the growing interest in secondary venture deals. Though
Fund VI has closed, several additional potential investors
are still in talks with the firm and one more close could
occur. Reach Saints Capital at 415-773-2080.
Goldman Sachs Asset Management Private Equity Group,
New York
The PE fund-of-funds arm of Goldman Sachs & Co. raises
$520 million for Goldman Sachs Concentrated Energy
Fund. The energy-focused fund of funds has already fully
invested the capital, taking advantage of its parent bank’s
balance sheet by warehousing the investments, which allows
LPs to view the fund in action before they commit. The fund
invests in the natural resources niche and focuses on the oil,
gas, coal, power, energy infrastructure and energy-services
sub-sectors. Ohio State University is one known investor,
with a $10 million commitment. Reach Goldman Sachs at
212-902-1000.
RCP Advisors LLC, Chicago
W Capital Partners, New York
The secondary investor finishes raising W Capital Partners
II LP at $700 million, outstripping its $500 million target.
The California Public Employees’ Retirement System
led the 50-plus limited partner base with a $140 million
commitment, according to Managing Director David
Wachter. The firm takes non-controlling stakes and is not
sector-specific. Reach W Capital at 212-561-5250.
Funds of Funds
Advanced Capital, Milan
The fund-of-funds manager sets a €500 million ($788
million) target for its third fund, AC III LP, which expects a
final close by the end of the year. Backed by Italian investors
such as retail giant Coin Group SpA and international
investors such as Credit Suisse, the firm focuses on global
private equity funds. Advanced Capital has allocated 20%
of the new vehicle’s capital to distressed investments, a
strategy the firm first embraced with AC II LP, which closed
at €250 million in 2005. The firm has committed Fund II to
18 funds, including those managed by Apax Partners and
MatlinPatterson Global Advisers LLC, among others.
Reach Advanced Capital at 39-2-799555.
RCP Advisors begins marketing its sixth fund of funds
focused on small- and mid-market buyout vehicles. The
firm is targeting $350 million for RCP Fund VI LP, roughly
equal to the $355 million that it raised last year for its
predecessor. Like that fund, Fund VI is focused on buyout
funds falling below the $1 billion mark. RCP also can coinvest a portion of its funds of funds directly in deals
alongside the general partners it backs. Reach RCP
Advisors at 312-266-7300.
Western Europe & Israel
Bain Capital, Boston
Bain Capital closes its third European buyout fund at €3.5
billion ($5.5 billion), more than triple the size of its
predecessor. The final tally for Bain Capital Europe III LP
came in well ahead of the fund’s €2.5 billion target. One
confirmed investor in the fund is the Pennsylvania State
Employees’ Retirement System. Bain’s previous two
European funds, which raised €1 billion in 2004 and €750
million in 2000, have delivered net annual returns of more
than 50% and a multiple close to four times, sources said.
Reach Bain Capital at 617-516-2000.
Bridgepoint Capital, London
Constitution Capital Partners, Andover, Mass.
New buyout fund-of-funds practice Constitution Capital
Partners, launched by a team of former Standard Life
Group professionals, prepares to market its debut fund
with a target of at least $500 million. The fund, Ironsides I
LP, will invest in U.S. funds ranging in size from $300
million to $5 billion, avoiding the smallest funds and the
largest. The firm would like to have its first fund wrapped
up in six months and will be courting domestic and
international public pensions, wealthy individual investors,
endowments and foundations. Reach Constitution Capital
The mid-market buyout firm hits the €4 billion ($6.1
billion) target for its fourth partnership and will press on
until early summer, said a source close to the fund-raising.
New limited partners in Bridgepoint Euro Private Equity
IV LP helped push the fund to its goal. With its fourth
fund, Bridgepoint will write equity checks averaging €250
million for 20 to 25 deals. Public investors backing the
fourth fund include New York State Common
Retirement Fund and Teacher Retirement System of
Texas. Reach Bridgepoint Capital at 44-20-7374-3500.
51
April 2008
The Roundup
Capvis Equity Partners, Zurich
The mid-market buyout firm closes Capvis Equity III LP at
€600 million ($945.7 million), exceeding its €500 million
target. Commitments came from more than 40 existing and
new global institutional investors, family offices and
endowments worldwide. Public and corporate pension
funds provided 20% of the commitments, with 10% coming
from endowments and family offices, 30% from financial
institutions and 40% from funds of funds. Known investors
in the fund include AlpInvest Partners and HarbourVest
Partners. Reach Capvis at 41-43-300-58-58.
the business, according to sources. Reach Charterhouse at
44-20-7334-5300.
Endless LLP, Leeds, U.K.
The turnaround investor closes on £164 million ($328.5
million) for its second fund, surpassing its target of £120
million. Endless Fund II is the follow-up to the firm’s $100
million first fund, which closed in 2005 with commitments
from an unnamed high-net-worth individual and a financial
institution. Fund II’s limited partners include global funds of
funds, European and U.S.-based family offices and
foundations. Reach Endless LLP at 44-113-210-4000.
Charterhouse Capital Partners, London
The buyout firm plans to target more than €5 billion ($7.9
billion) for its ninth fund as it develops succession plans for
Chief Executive Gordon Bonnyman. Charterhouse’s
previous fund, the €4 billion Charterhouse Capital Partners
VIII LP, closed in 2006 and is more than 75% invested after
the firm agreed to buy Giles Insurance Brokers and Tunstall
Group this month, according to investors who have seen
the fund-raising prospectus. Bonnyman, who has been chief
executive since he joined in 1990, is expected to take more
of an advisory role with the new fund, with partners
Malcolm Offord and Lionel Giacomotto closer to running
Environmental Technologies Fund, London
Environmental Technologies Fund raises £110 million
($221 million) for its first fund, Environmental Technology
Fund LP, exceeding an original target of £100 million. ETF
invests in growing companies in clean technologies and
services across Europe. Sectors include energy storage and
conservation, emissions reduction and recycling. The firm
invests between €5 million and €15 million over the total
investment period in a company. Investors in ETF’s maiden
fund include Swiss Re, European Investment Fund and
Robeco NV. Reach ETF at 44-20-7318-0732.
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April 2008
The Roundup
GIMV NV, Antwerp, Belgium
GIMV NV closes its second German-focused buyout fund
at its hard cap of €325 million ($512.7 million). The firm
took three months to raise Halder-GIMV Germany II LP,
which had an initial target of €275 million and will focus
on industrial companies. Limited partners include Access
Capital Partners, Finama Private Equity and AlpInvest
Partners. The fund will back 10 to 15 management
buyouts of German family-owned businesses with
enterprise values of €25 million to €300 million. Reach
Halder-GIMV at 49-69-24-25-330.
HitecVision Private Equity AS, Stavanger, Norway
The energy-focused firm closes a new, oversubscribed
$800 million fund, HitecVision V LP, exceeding a $600
million target. Investors in the fund included first-timers
from Europe and the U.S., although names weren’t
disclosed. Fund V hit the fund-raising trail in November,
and is expected to make eight to 10 platform investments
in Europe and North America within the next five years,
putting $30 million to $150 million of equity into each deal.
Reach HitecVision at 47-51-20-20-20.
Europe IV, which closed at €2.7 billion in April 2005. Reach
PAI Partners at 33-1-55-77-91-01.
Pragma Capital, Paris
Pragma Capital closes its second buyout fund, Pragma II,
on €345 million ($544 million). The fund had a hard cap of
€350 million. AXA is the largest limited partner in the fund,
committing €70 million. Other named LPs in the fund
include BNP Paribas and GIMV NV. With no change in
strategy from Pragma FCPR, which closed in 2002 with
€236 million, the firm will invest €10 million to €35 million
of equity in companies with enterprise values of €50
million to €250 million. Reach Pragma at 33-158-36-49-66.
Target Partners GmbH, Munich
Target Partners holds a first closing on €61.5 million ($97
million) for its new venture fund, Target Partners Fund II,
which has a €120 million target. Limited partners include
Morgan Stanley and LGT Capital. The fund will mainly
invest in IT, communications, Internet, media and clean
technology companies based in German-speaking
countries. Reach Target Partners at 49-89-2555-8500.
Investindustrial Holdings Ltd., Milan
TLcom Capital LLP, London
In the market for three months before reaching its hard
cap, Investindustrial Holdings Ltd. closes its fourth fund
at €1 billion ($1.6 billion), above its €800 million target.
That’s double the total raised for its predecessor, because
the firm wants to syndicate fewer of its deals, said Andrea
Bonomi, firm chairman. LPs in Investindustrial IV LP
include new investors Adams Street Partners, AlpInvest
Partners and HarbourVest Partners. Investindustrial,
which targets mid-market Italian companies that derive
most of their business outside the country, invests €50
million to €150 million per deal. Reach Investindustrial at
39-02-802-7761.
The firm holds a first closing of just over €50 million ($78.9
million) on its new venture fund, TLcom II LP. The fund is
targeting €150 million, which would make it slightly larger
than TLcom I LP, a €138 million fund that closed in
December 2000. European Investment Fund and Access
Capital Partners have returned as investors in the fund,
joined by Milan-based Finlombarda Gestioni SGR.
TLcom typically invests in information and communication
technology companies across Europe and Israel. Reach
TLcom Capital at 44-207-8516-930.
Nexit Ventures, Helsinki
Dubai International Capital, Dubai, U.A.E.
The early-stage mobile and wireless investor closes on €50
million ($78.9 million) so far for its €100 million new fund,
Nexit Infocom II LP. General Partner Michel Wendell said
the firm is looking to provide A and B rounds to
Scandinavian and American companies working on
applications, services and enabling technology for the
wireless industry. Among the investors are Finnish Industry
Investment, Finland-based Sampo Life and Italy-based CIR
Group. Reach Nexit Ventures at 408-725-8400.
The investment company, owned by the United Arab
Emirates’ ruler, Sheikh Mohammed bin Rashid Al
Maktoum, is looking at setting up a $500 million private
equity firm in Saudi Arabia. The investment company
wants to replicate the business model of its affiliate, Jordan
Dubai Capital, which is 28% owned by DIC. JD Capital is
an investment vehicle with $300 million of capital focused
on investment opportunities in Jordan. Reach Dubai
International Capital at 971-4-362-1888.
PAI Partners, Paris
Dubai Techno Park, Dubai, U.A.E.
The firm is on course to close its fifth European buyout fund
at its target of €5 billion ($7.9 billion), despite rumbling
investor concerns following the December departure of its
chairman, Amaury de Seze. The fund, which has an upper
limit of about €6 billion, may end up double the size of PAI
The state-owned firm begins raising a $300 million private
equity fund to attract Asian and European technology
companies to Dubai. Dubai Techno Park’s KTIC Jasper
Asia Gulf Horizons Fund will assist 10 to 15 Asian and
European technology companies planning to establish
Emerging Markets
53
April 2008
The Roundup
research, development and commercial operations in
Dubai over the next two years. The fund will be managed
by private equity management company Korea
Technology Investment Corp. Reach Dubai Techno Park at
9714-881-4888.
Global Investment House, Safat, Kuwait
Kuwait-based Global Investment House partners with
Dubai Islamic Bank and Millennium Capital to launch a
$500 million buyout fund. Global DIB Millennium Islamic
Buyout Fund will invest alongside the Global Buyout Fund
LP, a fund launched last May by Global Investment House
that has raised $550 million on the way to a $1.5 billion
target. The two funds, which invest in companies in the
Middle East and North Africa, as well as Turkey and South
Asia, are compliant with Islamic religious law. Reach Global
Investment House at 965-240-0551.
Gulf Capital, Abu Dhabi, U.A.E.
Gulf Capital is launching a joint venture with Credit Suisse
to take majority stakes in Persian Gulf companies. Credit
Suisse will have a minority stake in the partnership, said
Charles Pieper, the vice chairman of alternative investments
at Credit Suisse. The joint venture will invest in the oil and
gas sectors and social and hard infrastructure as the Gulf
region’s economic growth continues. Reach Gulf Capital at
971-2-671-6060; and Credit Suisse at 212-325-2000.
Helion Venture Partners, Port Louis, Mauritius
The India-focused venture firm finishes raising its second
fund, Helion Venture Partners II LLC, with $210 million.
The firm will expand its focus from mobile telephony,
Internet and outsourcing to include consumer services with
the new fund. All of the firm’s original investors returned for
Helion’s second fund, and new investors came on board as
well. The fund’s investors are global institutions including
university endowment funds, foundations and family offices.
Reach Helion Venture Partners at 230-212-9800.
Macquarie Infrastructure Partners, New York
The group seeks to raise between $1 billion and $1.5
billion each for Russia-focused Macquarie Renaissance
Infrastructure Fund and India-focused Macquarie India
Infrastructure Opportunities Fund, according to two
people familiar with the offerings. Macquarie’s Russia fund
will be in partnership with Moscow-based investment bank
Renaissance Capital. At least 50% of the fund will be
invested in Russia, and no more than 25% in other
54
April 2008
The Roundup
countries that are part of the Commonwealth of
Independent States. For the India fund, Macquarie will
partner with World Bank Group’s International Finance
Corp. Each entity will invest $150 million in the fund.
Reach Macquarie Infrastructure Partners at 212-231-1000.
Nexxus Capital, Mexico City
The firm holds a third close on $142 million for its latest
fund, Nexxus Capital Private Equity Fund III LP, which
has a $250 million target. Nexxus recently severed ties with
New York-based Zephyr Management, which had owned
a minority interest in the general partnership of Nexxus’
second fund, raised in 2002 with $119.5 million. Nexxus
intends to invest in middle-market, family-owned Mexican
companies. Reach Nexxus at 52-555292-3400.
Orchid Asia Group Management Ltd., Hong Kong
Orchid Asia Group holds a final close on $420 million for
its fourth fund, Orchid Asia IV LP. The growth capital
fund was significantly oversubscribed, closing above its
target of $350 million, and is more than double the size of
its predecessor, the $180 million Orchid Asia III LP, which
closed in 2006. The fund’s limited partners include
independent private banks, university endowments,
strategic individuals and high net-worth family offices in
Asia, Europe, the U.S. and the Middle East. Reach Orchid
Asia at 852-2115-8810.
Qatar Islamic Bank, Doha, Qatar
The bank signs a deal with Islamic investment bank
QInvest and Silver Leaf Capital to establish a private
equity fund in Qatar. The Dhow Gulf Opportunities Fund
wants to attract foreign investors to the region in general
and Qatar in particular, targeting various sectors including
telecommunications, environmental recycling
technologies, media, oil and gas, and infrastructure, Qatar
Islamic Bank said in an e-mail. The first closing of the fund
is set for the end of June, the bank said. The fund will be
managed by Doha-based Dhow Investors Advisor, a
company jointly owned by QInvest and SLC. Qatar Islamic
Bank, which initiated the project, will be the anchor
investor. Reach Qatar Islamic Bank at 44-09-409.
Raffia Capital Inc., Tokyo
The joint venture between Japan’s Shinsei Bank Ltd. and
the Development Bank of Japan launches Raffia II LP,
which will back medium-sized companies in Japan. The
fund’s size wasn’t disclosed. Founded in 2002, Raffia
55
April 2008
The Roundup
Capital became a joint venture of Shinsei and DBJ in 2007.
The firm manages Raffia Investment Business LP, which
invests in mid-sized companies in Japan and Taiwan.
Reach Raffia at 81-3-5775-5971.
Renaissance Partners, Moscow
Russian buyout group Renaissance Partners has raised
one of the country’s biggest funds, holding a final close at
its hard cap of $660 million for its latest vehicle.
Renaissance Partners, the private equity arm of investment
bank Renaissance Capital, raised the hard cap for the fund
from $500 million due to investor demand. Investors in the
fund will be able to co-invest, which, along with additional
co-investments from parent Renaissance Capital, should
boost its firepower significantly. The fund will invest in
high-growth companies in Russia and the Commonwealth
of Independent States, with a focus on businesses in the
metals, telecommunications and power sectors. Reach
Renaissance at 7-495-258-7777.
Troika Capital Partners, Moscow
The buyout arm of Russian bank Troika Dialog is joining
with Singapore state-backed fund Temasek to target $1
billion or more for a new fund. Troika is raising the fund,
which will operate as a joint venture with Temasek and
make growth capital investments. Troika’s first fund, raised
in 2006, has generated an internal rate of return of 35% to
date, according to the firm. The new vehicle will back
companies with a strong consumer focus, according to the
firm. The initial target is $800 million, but sources close to
the fund-raising said a hard cap of $1 billion to $1.2 billion
is likely. Reach Troika at 7495-258-0534. ■
Want more detail on these and other fund-raisings? Visit our
subscription Web site at www.privateequityanalyst.com
56
April 2008
Strategy
GP Management Update
As Form D Filings Move Online,
Fund-Raising Hassles Loom
By Keenan Skelly
A Securities and Exchange Commission decision to require that Form D filings
be submitted electronically promises some headaches for the private equity
industry. For start-ups, it will make maintaining secrecy harder. For funds, it
will make the early stage of fund-raising more complicated.
Start-ups and alternative asset managers – buyout, venture, real estate, hedge
fund and so on – have long been required to submit details on their fundraising. But until now, they have done so via paper filings. Paper filings are
available only in the SEC’s reading room or, at a steep charge, on services that
post them online. Most folks don’t have access to such services, allowing the
filings to remain relatively private until now.
“Historically, the paper Form Ds were filed in a central public reference room
at the SEC,” said Eric Wright, partner at law firm Ropes & Gray. “It was so
time-consuming to dig out individual filings that practically speaking they were
confidential unless you knew what you were looking for.”
Electronic Filings:
What’s Changing
Filers won’t have to identify
holders of stakes of 10% or more.
Filers won’t have to provide a
business description. Instead, they’ll
choose from a dropdown industry
classification.
Revenue range or net asset value
range information will be required.
The date of the first sale in an
offering will be required.
A limited amount of free writing
will be allowed in clarification
fields.
Filers must tell the SEC if they
expect their offering to last for
longer than a year.
Expense reporting will be
simplified.
Placement agents will be required
to disclose their broker-dealer
registration numbers, known as
CRD numbers.
Source: Securities and Exchange Commission
But when these filings begin moving online in September, they will become
instantly available to anyone with Internet access, free of charge. That will
make them easier to browse, creating obvious competitive concerns,
especially for young start-ups that are trying to fly under the radar. “Free
Internet access will make it much easier to blow the cover of stealth-mode
companies,” Wright said.
The SEC has made some concessions to address these concerns, including
allowing start-ups to stop disclosing the names of investors who hold stakes of
10% or more. It is also dropping the requirement for a company description,
instead asking filers to choose from an industry dropdown list. This will make it
harder to figure out start-ups’ business models, as well as which companies are
backed by top-tier venture firms. A really determined searcher, however, may
still be able to ferret some of this out, as the new Form D will require the
disclosure of all “executive officers, directors and promoters.”
But perhaps a bigger concern for the industry is the impact the new ruling will
have on how firms raise funds. According to lawyers, funds will now have to
file a Form D as soon as they receive a binding subscription agreement from
an investor, as the SEC is now treating the first sale as a first closing.
Previously, firms submitted filings at the first close.
This will be an unwelcome distraction from the fund-raising process, and will
take firms some getting used to, as they haven’t traditionally kept track of each
subscription agreement as it arrived. It may also mean firms will have to keep
track of different deadlines for federal and state filings. “This is an added burden
on fund managers who are focused on raising capital,” Wright said. “There is
more work earlier in the process because [firms] will have to focus on the filing
before the first closing, whereas now they focus on subscription agreements.”
General partners with enough muscle to tell limited partners what to do could
lessen the workload created by this change by setting a particular date on
which investors have to mail in subscription documents. Firms might also be
able to get around this requirement by collecting non-binding agreements
from investors until the first closing. But the latter course poses dangers, as LPs
who sign non-binding pacts can pull out of subscription agreements until the
first closing.
“I can’t imagine fund managers would settle for indications of interest from
investors to arrange a first closing just to try to postpone the date for filing
Form D,” Wright said. “The uncertainty that creates would far outweigh the
burden of making the filing.” ■
58
April 2008
Strategy
Limited Partners
Guardian Life Insures PE Access
By Touting Stability, Connections
By Laura Kreutzer
Most institutional investors that are new to private equity want to find their
way to the best firms. But doing so isn’t always easy, as such firms can be hard
to identify and are often leery of accepting capital from unfamiliar investors.
Guardian Life Insurance Co. of America says it’s surmounting those barriers
by emphasizing its own brand of due diligence and promoting the benefits it
brings to a relationship.
Guardian, which set a modest target to PE a couple of years ago, plans to
commit roughly $200 million annually to the asset class as it builds out its
portfolio. The insurance company hired David Turner away from fund-offunds manager WestLB Mellon Asset Management last year to help with that
task.
Turner doesn’t regard Guardian’s new LP status as too much of a challenge to
getting into solid PE partnerships, even if it can’t access the very top names.
“For every marquee name out there, I believe that there are another half
dozen or so less-than-marquee names that are equally strong performers,” he
said. “Maybe they haven’t worked together as long or maybe [they] have only
number two or three on the cover [of their PPMs]. When you’re looking for
access, there’s a rich vein of opportunities.”
Guardian Life
Insurance Co.
Assets
$39.5 billion (as of Dec. 31, 2006)
History
Guardian approved its target
allocation in late 2005 and over the
next year and a half made a series
of initial commitments. In June
2007, Guardian hired David Turner
to oversee the portfolio’s long-term
development. He helped the
company develop a long-term
strategy with sub-allocations of 40%
each to buyouts and venture
capital, as well as a 20% allocation
to special situations.
Key Personnel
Turner, who headed the fund-offunds team at WestLB Mellon Asset
Management before joining
Guardian, oversees a senior
associate and an analyst.
Select Commitments
Since Turner joined, Guardian has
backed seven partnerships,
including ones raised by Pfingsten
Partners LLC and Foundry Group,
and has three more in the pipeline.
To find those firms, Turner emphasizes due diligence, looking beyond track
record to team dynamics to gauge the likelihood of future strong returns. For
example, Guardian chose to invest in a mid-market buyout fund raised by
Pfingsten Partners LLC because of how the firm integrates “operation guys,
deal guys and support people” to focus on a particular portfolio company. “A
company might be dealing with HR issues or issues of financial controls,”
Turner said. “The firm can transfer the different team members’ skills back and
forth across companies as they’re needed.”
Guardian also likes how Pfingsten mentors less experienced staff. “They’ve
been very thoughtful about fleshing out their organization and cultivating
younger folks,” Turner said.
He offers the same praise for Foundry Group, an early-stage venture firm
formed by several former partners from Mobius Venture Capital. Guardian
invested in the firm’s $225 million debut fund, liking the principals’ ability to
connect with entrepreneurs, their tech savvy, and their willingness to stick
with companies through good times and bad.
As for convincing firms that it will be a good LP, Guardian has benefited from
connections – including ones at Pfingsten and Foundry – that Turner built in his
previous jobs at WestLB Mellon and the Michigan Department of Treasury. But
Guardian has plenty of benefits to tout, and Turner works aggressively to plug his
new employer. Last year, he cold-called one veteran VC firm, pitching
Guardian’s 149-year history as a solid financial institution, its long-term presence
in other alternative asset classes like real estate and private lending, and its
willingness, when necessary, to be more than just a passive source of capital.
“We talked at great length [with them] about our networks and our willingness
to do simple things like provide introductions when an opportunity presents
itself, or even looking at deal flow where we might have a proprietary edge,”
he said. Guardian ultimately secured a slot with the firm.
Turner says it helps that insurance companies don’t have the same reputation as
banks for jumping into and out of the asset class. He emphasizes that Guardian is
in it for the long haul, and will pay attention to both commitment pace and subasset allocations to make sure it has capital available for its GPs. “Once you
make a commitment to the asset class, you have to stay in,” Turner said. ■
60
April 2008
Strategy
General Partners: Distressed
MHR’s Tactics May Ruffle
Feathers, But Its Returns Don’t
By Tennille Tracy
Mark Rachesky might have had an easier life if he had stuck with his first
choice and pursued a career in medicine.
But the 48-year-old Rachesky, who obtained a medical degree from Stanford
University before getting a business degree there too, decided to become a
private equity professional instead. Now, he spends his days as a distressed
investor, doing surgery on troubled companies teetering near bankruptcy.
Without a doubt, his career choice has led to controversy. Since founding
MHR Fund Management more than a decade ago, Rachesky has been
accused of employing many of the aggressive tactics used by his former boss,
financier Carl Icahn, brokering sweetheart deals, executing stealth takeovers
and running over mom-and-pop investors.
Rachesky dismisses the criticisms as “baseless and without merit,” and says that
he’s happy with his work. “I love what I do,” he said.
Distressed investing always comes with some controversy, given that
someone’s money usually goes up in smoke when a company gets to the
distressed stage. But MHR seems to stir up more than the usual amount of
emotion.
MHR Fund
Management
Founded
1996
Headquarters
New York
Management
Co-founders Mark Rachesky and
Hal Goldstein
Current Fund
MHR Institutional Partners III LP, a
$3.5 billion fund launched in
October 2007
Returns
$850 million MHR Institutional
Partners II LP (2003); 42.9%
internal rate of return / 2.2x
investment multiple
Select Investments
Dana Petroleum PLC, Emisphere
Technologies, Key Energy Services,
Loral Space & Communications
Ltd., Leap Wireless, Lions Gate
Entertainment, Marvel Enterprises
Take the firm’s investment in satellite maker Loral Space & Communications
Ltd. In 2003, MHR bought up a lot of debt in the company, which filed for
bankruptcy later that year. The debt converted into a 36% equity stake when
the company emerged from bankruptcy in 2005. Regular shareholders
complained that their investments had been fully wiped out. During
bankruptcy proceedings, one shareholder said fighting MHR and other
creditors was like “standing in front of the train with our hands on it, slowing it
down by maybe five miles an hour,” according to an account in Barron’s.
Even after Loral emerged from bankruptcy, controversy lingered. In October
2006, MHR agreed to buy $300 million of the company’s convertible preferred
stock at a conversion rate that other investors said was too low. MHR and
Loral completed the stock sale in February 2007, prompting a handful of Loral
shareholders to file a lawsuit. The case is pending.
“We do not comment on ongoing litigation, but we believe we brought
substantial value to Loral by making the investment,” Rachesky said.
Not all of MHR’s deals get bogged down in that much controversy. But even
when they do, LPs say they’re willing to tolerate Rachesky’s aggressive tactics,
given his firm’s returns. Of 31 investments from MHR’s first and second funds,
28 have turned out to be winners, Rachesky says – a success rate of about
90%. Its MHR Institutional Partners II LP fund, raised in 2003, was
generating a 2.2 times investment multiple and a 42.9% internal rate of return
at year end, according to the firm.
But investors do worry about Rachesky’s role within MHR. They describe him
as the dominant force behind investment decisions and wonder if the firm
could survive without him. They also question whether he is doing enough to
retain talented staff and say he takes what one LP described as a
“disproportionate share” of the firm’s fees and carried interest revenue.
Rachesky says that he is one of three managing principals steering MHR, with
Hal Goldstein and Sai Devabhaktuni rounding out the management team, and
that the firm also employs half a dozen principals. Within the last five years,
only one senior-level professional has left, Rachesky says. “I think that we treat
our people very well. If not, these talented people wouldn’t stay.” ■
General Partners: VC
Index Takes Page From US
VCs With Late-Stage Push
61
April 2008
Strategy
By Russ Garland
Index Ventures made a name for itself as a European early-stage venture
firm, generating big wins from early bets on companies such as Skype
Technologies SA and, more recently, MySQL AB.
Now, however, Index is in the vanguard of what could be a European mirror
of the push by U.S. venture firms into growth equity.
Earlier this year, the firm closed its first growth fund, the €400 million ($625
million) Index Ventures Growth Fund I LP, following in the footsteps of
U.S.-based venture firms like Sequoia Capital and Draper Fisher Jurvetson.
The firm expects others to join it in the European growth space shortly, citing
such opportunities as maturing information technology markets and the capital
demands of drug-discovery companies preparing to push products to market.
“We feel that there will be others to follow because the opportunities are
really visible,” said Giuseppe Zocco, an Index co-founder and partner who will
manage the new fund. With most European venture firms too small to handle
such deals and most buyout shops busy frying bigger fish, there’s a definite gap
in the market, he said.
Like many early-stage venture firms, Index has made a few growth-equity
investments to boost fund returns while its start-ups gain traction. But with the
new fund, the firm is being careful to distinguish between the two strategies.
While some venture firms make growth-equity investments out of their main
funds, Index chose the separate-fund route because “we wanted to maintain
purity of strategy for the two vehicles,” Zocco said. Small, early-stage deals
tend to lose out in large, multi-stage funds, he said.
Index is hiring folks with experience at companies that are well past the
start-up stage to work with Zocco in managing the new fund. Dominque Vidal,
former chief executive of Yahoo Europe, will work on the IT side, and Guido
Magni, former global head of medical science in the pharmaceutical division
of F. Hoffman-La Roche Ltd., will handle health-care deals.
The growth fund is permitted to back companies already in Index’s portfolio,
but that will be “more the exception than the rule,” Zocco said.
For the most part, the new fund will target companies with prior venture
backing that are five to seven years old. “We can provide them with the
opportunity to have a second cycle of expansion and growth,” Zocco said.
The mix between information technology and life sciences will be similar to
Index’s early-stage funds, at roughly two to one. The fund’s core geographical
markets, too, will be similar – the U.K., Scandinavia, Germany and France –
but Zocco expects its growth fund investments will ultimately cover more
ground. He said the growth fund will look for deals in Italy, Portugal, Russia
and Spain, and will also back U.S. companies looking to expand into Europe.
One area where Index hopes the late-stage fund won’t differ from its
early-stage efforts is in returns.
Although some have argued that late-stage funds will likely generate lower
returns than their early-stage counterparts, “We actually expect very similar
returns at a fund level,” Zocco said, arguing that even though later-stage
investments likely won’t generate the five to 10 times returns of early-stage deals,
a lower company mortality rate should offset that.
“Most of the risk is around execution,” Zocco said. “It’s really building, if you
will, a mini-corporation.” ■
Index Ventures
Offices
The firm is based in Geneva and
has offices in London and St.
Helier, Jersey.
Key Personnel
Partners Bernard Dalle, Francesco
de Rubertis, Saul Klein, Guido
Magni, Michele Ollier, Danny
Rimer, David Rimer, Neil Rimer,
Dominique Vidal, Giuseppe Zocco
History
Founded in 1996 by David and
Neil Rimer and Giuseppe Zocco,
Index Ventures closed its fifth earlystage fund in 2007 at €350 million.
The firm has established itself as
one of Europe’s premier venture
investors through exits such as
Skype Technologies SA, which
eBay Inc. bought in 2005 for $4.1
billion, and MySQL AB, which Sun
Microsystems Inc. acquired in
February for $1 billion.
Growth Fund
The debut growth fund, which
made its first investment in
Munich-based Adconion Media
Group, was offered only to current
limited partners, but Index plans to
expand the investor base in
subsequent funds.
LBO Deal Of The Month
Gores Group Lands First Media
Deal By Emphasizing Tech Skills
63
April 2008
Dealmaking
By Rimin Dutt
Content may be king, but it has no clothes without the right distribution
channels and hands-on management. That’s the investment thesis behind
Gores Group’s first deal in the media sector, a $100 million private investment
in publicly-traded radio programming syndicator Westwood One Inc.
New York-based Westwood One provides programming such as sports,
countdown shows, traffic updates and talk shows like “The Dennis Miller Show”
to over 5,000 radio stations in the U.S. The company does not own or operate
radio stations, which insulates it somewhat from the turmoil radio companies
like Clear Channel Communications Inc. are going through as the radio
audience fragments. But because Westwood One’s content has gone solely to
radio stations, it has nonetheless suffered as radio’s core audience declines. Until
recently, it faced the additional challenge of a complicated agreement with CBS
Radio, a big customer and owner of a 20% stake in Westwood One, that
effectively meant CBS Radio controlled its day-to-day management.
As a result, the company’s structure was so complex that it made even an
experienced investor like Gores scratch its head. “We spent a lot of time just
getting an understanding of the business,” said Managing Director Ian
Weingarten.
Reflecting its troubles, Westwood One’s revenue fell to $451.4 million last year
from $512.1 million in 2006, and its earnings before interest, taxes,
deprecation and amortization fell to $97.4 million from $114.6 million. Its debt
load stood at $345.2 million at the end of 2007, or about 3.5 times operating
cash flow.
The company has been trying to address its problems since 2006, when its board
set up a strategic review committee. By late 2007, those discussions culminated
in an agreement with CBS Radio to restructure ties. In addition to extending
until 2017 CBS Radio’s agreement to carry Westwood One content and freeing
Westwood One to seek other partners, the pact ended CBS Radio’s
management of the company. Westwood One soon had a brand new
management team, including new Chief Executive Thomas Beusse, a former
Time Warner Inc. executive.
The agreement also required Westwood One to cough up some cash to CBS
Radio, which sent the company looking for an infusion of capital. It talked to
more than a dozen private equity firms before settling on Gores Group.
Westwood One liked the staged PIPE structure that Gores Group proposed,
which guaranteed the company enough upfront cash to close the CBS Radio
deal while also giving it a 30-day “go-shop” period before it had to commit to
the rest of the investment. The PIPE structure was preferable to an outright
buyout, which, due to the company’s heavy leverage, would likely have carried
a low offer price of around $1 or $2 a share, according to a person close to the
company. Westwood One’s public shareholders might well have had problems
with that range, which is below where the company’s shares have been trading.
Westwood One also liked Gores Group’s extensive background in investing in
technology-heavy companies, such as First Communications LLC, a voice and
data telecommunications concern, and videoconferencing provider Wire One
Communications Inc. Westwood One plans to move away from being a pure
radio content provider to distributing its content on other platforms like handheld devices and the Internet, said Beusse. Having a technology-savvy investor
to advise it in this transition will be a big asset.
Gores Group’s tech knowledge and turnaround abilities may mean it isn’t
done in the media sector. Managing Director Ian Weingarten said the firm
could look at more media deals, although he didn’t provide specifics. ■
Westwood
One Inc.
The Company
Westwood One provides
programming such as sports,
countdown shows, traffic updates
and talk shows to more than 5,000
radio stations.
The Deal
In the first step of the two-step deal,
Westwood One first sold to Gores
Group 14.3 million common shares
at $1.75 apiece, raising $25 million.
Next, it will sell the firm convertible
preferred shares, as well as
warrants to buy more shares, worth
between $50 million and $75
million. Excluding warrants, the
investment translates into roughly a
31% stake.
The PIPE
Doing a private investment in
public equity gives Gores Group
less control than a traditional
buyout would. But the firm gets the
right to elect three members to the
company’s board, to appoint one
independent director and to
approve “certain significant
corporate actions” for five and a
half years.
64
LBO Dealmakers
April 2008
A look at deal activity
in the buyout space
Dealmaking
PIPE deals are big these days, with firms such as
Gores Group, Thomas H. Lee Partners LP,
Goldman Sachs Group Inc., Warburg Pincus,
WL Ross & Co. and Kohlberg Kravis Roberts &
Co. engaging in them. In January alone, about
$24 billion of PIPE transactions were announced
in the U.S. and Canada, according to Capital IQ, a
Standard & Poor’s unit. If the pace continues, first
quarter PIPE deal volume will outstrip the record
$44 billion of PIPE deals in the fourth quarter of
2007. Some see PIPEs as likely to generate lower
returns than buyouts, since they aren’t leveraged,
but those engaging in them disagree. A PIPE could
be “every bit as attractive as a buyout, if in the
right company and if structured properly,” said
David Coulter, managing director at Warburg
Pincus, which recently did a PIPE deal with bond
issuer MBIA Inc.…
Top 10 LBO Deals Globally*
Target/Location
Investors
Industry
Value ($M)
Announced
CHC Helicopter Corp./Canada
Transportation
$3,071.0
2/22/08
Finance
$2,778.9
3/14/08
First Reserve Corp.
Ashikaga Bank Ltd./Japan
Nomura Principal Finance Co., Next Capital Partners Co., JAFCO Co.
Getty Images Inc./U.S.
Prof. Services
$2,024.8
2/25/08
Technology
$1,999.6
3/20/08
Finance
$1,536.9
3/11/08
Option One Mortgage Corp./U.S. Finance
$1,070.0
3/17/08
Forestry & Paper
$973.6
3/6/08
Dining & Lodging
$682.5
2/22/08
Prof. Services
$465.0
3/5/08
Retail
$403.4
3/11/08
Hellman & Friedman LLC
TietoEnator Oyj/Finland
Nordic Capital Svenska AB
Sintonia SA (14.3%)/Italy
GIC Special Investments Ptd.
(the mortgage loan servicing business)
AH Mortgage Acquisition Co., WL Ross & Co.
Papyrus AB/Sweden
Altor Equity Partners
Pret A Manger Ltd./U.K.
Bridgepoint Capital Ltd.
ABC Learning Centres Ltd./U.S.
(North American childcare assets )
Morgan Stanley Private Equity
Dreams PLC/U.K.
Exponent Private Equity Partners LP
*2/21/08-3/20/08. Source: Dealogic
Energy may be the one sector of the economy
where buyout deals are still going strong. First
Reserve Corp. sits atop the buyout volume league
tables thus far this year, having already done three
deals worth a total of $4.4 billion, according to
data tracker Dealogic…
We reported on the likelihood of unsolicited bids
picking up a couple of months ago, citing Sun
Capital’s bid for Kellwood Co. Perhaps spurred
by the success of Sun’s bid, other buyout firms
haven’t disappointed. Since that story, Gores
Group and Aquest Systems Corp. have expressed
interest in automation technology company Asyst
Technologies Inc., TPG Capital and Japan’s
Sumitomo Heavy Industries Ltd. have bid for
semiconductor manufacturing equipment maker
Axcelis Technologies Inc., and Oaktree Capital
Management and Angelo Gordon & Co. have
offered to buy Ocwen Financial Corp. alongside
the company’s chief executive. However, PE firms
are still showing a reluctance to go hostile.
Oaktree and Angelo Gordon withdrew their bid
for Ocwen after failing to reach acceptable terms
with the company’s board, while nothing is
happening with either the Asyst or Axcelis deals
following those companies’ rejections of the
offers…
Now is the best time for a contrarian bet, many
buyout firms say. It is perhaps in that spirit that
Harbour Group picked up knob and handle
maker Top Knobs USA, and Champlain
Financial Corp. bought a controlling stake in
luxury bathroom fixture company Les Produits
Neptune Inc. Both companies are heavily
involved in the home remodeling market, which
has been more resistant to a downturn than the
new homes market. ■
–Josh Beckerman
66
April 2008
Dealmaking
VC Deal Of The Month
BlueRun, Founders Fund Invest
In ‘Sexy, Not Sex’ With Zivity Deal
By Tomio Geron
When venture capitalists consider investing in a start-up, they usually steer
clear of taboo subjects like pornography and gambling.
But two venture firms, BlueRun Ventures and Founders Fund, have
invested $7 million in Series B financing in Zivity Corp. despite the fact that
the social-networking Web site it is building relies in part on nude models.
Zivity’s site, still in the beta stage, is aiming for “sexy, not sex,” with its plans to
publish professional photos of women – both scantily clad and “tastefully”
nude. It intends to employ a subscription-based model – unusual among Web
start-ups, most of which rely on advertising – by charging $10 per month to
subscribe. Members, who must be 18 or older, create a public profile and
interact with other users; they also view and vote on the photos uploaded by
women and screened by the site’s moderators. Zivity will use some of the
revenue from subscriptions to pay models 60 cents for each vote.
Photographers get 20 cents.
Zivity Corp.
The Company
Zivity runs a Web site that plans to
publish professional photos of
women – both scantily clad and
“tastefully” nude – and to let
members interact and vote for their
favorites. It will employ a
subscription-based model that
incorporates plenty of social
networking features.
The Round
A $7 million Series B round from
BlueRun Ventures and Founders
Fund. Zivity raised a $1 million
Series A round in August 2007.
The Management Team
The husband-and-wife team of
Cyan and Scott Banister cofounded Zivity, along with Jeffrey
Wescott, who is chief executive.
Scott Banister, whose title is
chairman, co-founded anti-spam
and spyware company IronPort
Systems Inc., which sold to Cisco
Systems Inc. in 2007 for $830
million. He also was an early
investor with Max Levchin at
PayPal Inc. and is a current board
member at Levchin’s social media
company Slide Inc., also backed by
Founders Fund.
Scott Banister, a co-founder of the site alongside his wife Cyan, said Zivity
could open up a new avenue for social networking and content sharing
online, much like HBO did for TV. Its subscription-based model will support
this better than the ad-supported models of sites like YouTube, which must
restrict content based on their advertisers’ guidelines. The site could also
expand to include other content, like video and blogging.
“Eventually, [content providers] will get tired of the YouTube content
restrictions and want another outlet,” Banister said. “Traditional media – like
DVDs, movie theaters, HBO – all don’t have requirements like YouTube’s
ad-imposed content guidelines. As that [online] market grows, you’ll see them
excited about another outlet for content, especially if you include a revenue
share.”
Zivity is one of the more risqué online start-ups to raise money from venture
firms. But John Malloy, a partner at BlueRun, said the company has been
miscast. “Some of the stuff written [about Zivity] has been a little
unfair…Fundamentally this is socially responsible,” he said. “It’s really about
using the Internet to get feedback from customers and users, and using the
Internet to distribute revenue and to distribute content.”
Cyan Banister, who came up with the idea for Zivity and has posed for it
herself, sees the site as providing a social good. “I’m what women would
consider the perfect size, but I have my own image issues – I was probably one
of the most modest people you’d meet,” she said. “The first time I did the
shoot it was liberating…When you have 30 other people vote on you and tell
you you’re great it’s actually really wonderful.”
VCs have tended to stay away from anything that smacked of pornography in
the past because their limited partners typically have restrictions on what types
of investments they can be involved in. Malloy said Zivity is well within those
guidelines, and most of BlueRun’s LPs declined to comment or couldn’t be
reached. California State Teachers’ Retirement System said in an email, “We
don’t make subjective comments on our general partners or their discussions
for investing.” The Founders Fund did not respond to requests for comment. ■
68
VC Dealmakers
April 2008
A look at deal activity
in the venture space
Dealmaking
Top 10 VC Deals Globally*
Company/Location
Investors
Industry
Amount
Raised ($M)
Adconion Media Group/Munich
Information Services
Announced
$80.0
2/26/08
$64.6
2/26/08
Index Ventures, Wellington Partners Venture Capital
Glam Media/Brisbane, Calif.
Media/Content/Info.
Accel Partners, Draper Fisher Jurvetson, Duff Ackerman & Goodrich, GLG
Partners, Hubert Burda Media, Information Capital, WaldenVC
Highwinds Network Group
Winter Park, Fla.
$55.0
3/12/08
Alta Communications/Burr Egan Deleage, General Catalyst Partners
EUSA Pharma Inc.
King of Prussia, Pa.
Biopharmaceuticals
$50.0
3/12/08
3i Group PLC, Advent Venture Partners, Essex Woodlands Health Ventures,
Goldman Sachs Private Equity Group, NeoMed Management, NovaQuest,
SV Life Sciences, TVM Capital
Ocera Therapeutics Inc.
San Diego
Biopharmaceuticals
$35.5
2/21/08
AgeChem, CDIB BioScience Ventures, Domain Associates, FinTech,
InterWest Partners, Montagu Newhall Associates, Sofinnova Ventures,
Thomas McNerney & Partners, Wasatch Cross Creek Capital
Vantia Therapeutics
Southampton, U.K.
Biopharmaceuticals
£18.0
3/21/08
MVM Life Science Partners, Novo, SV Life Sciences
GeoLearning Inc.
West Des Moines, Iowa
$31.0
02/26/08
Biopharmaceuticals
$30.0
03/19/08
Fidelity Ventures
Alimera Sciences Inc.
Alpharetta, Ga.
BA Venture Partners, Domain Associates, Intersouth Partners, Polaris Venture
Partners, Venrock Associates
RecycleBank Inc./Philadelphia
Energy
$30.0
03/18/08
$30.0
03/05/08
ABS Capital Partners, CIBC Capital Partners, individual investors, Piper
Jaffray & Co.
*2/21/08-3/21/08. Source: Dow Jones VentureSource
VCs have been wearing 3-D glasses of late, with
March bringing a number of investments in
companies developing three-dimensional
products for the Internet. Among the most
interesting is Gizmoz Inc., which raised $6.5
million in Series B funding led by DoCoMo
Capital to back a Web site that lets people upload
photos and create lifelike 3-D avatars of
themselves or of other people like celebrities. The
characters can then be used to create video clips
and shared on sites such as Facebook Inc.
EveryScape Inc. hopes to give Google Inc. some
competition with $7 million in Series B funds to
back a Web service that offers 360-degree views
of city streets. Google launched its own 360degree offering, Street View, last year. And DAZ
Productions Inc., which recently pocketed $4.2
million in Series A funding, is selling software to
help animators create 3-D digital images and
landscapes cheaply…
As later-stage investments continue to grow, we
may soon run out of letters of the alphabet when it
comes to round classification. In the past month,
five companies have raised Series F rounds, four
picked up Series Gs, and another two reached
Series H. Then there was TherOx Inc., which in
late February issued a series of preferred stock
very few have seen: Series J. The company, which
has nearly 14 years of research under its belt
developing a way to dissolve oxygen into the
bloodstream, raised $30 million to attain
regulatory approval. The investor that has stuck
around the longest? Kleiner Perkins Caufield &
Byers, which helped seed the company in 1995. ■
–Scott Austin
Kleiner Perkins Caufield & Byers, RRE Ventures, Sigma Partners
Invision Inc./New York
This may be the year of the unusual funding deal.
Perhaps it’s a sign there’s too much money out
there, or maybe venture capitalists are bored. For
instance, in the past month we saw DFJ Frontier
invest in comic book company Boom
Entertainment Inc., two VCs put $4.2 million in
seafood distributor CleanFish Inc., and D.E.
Shaw & Co. commit up to $15 million to healthysnacks maker Snikiddy Snacks LLC. But the most
curious of recent deals could be Zivity Corp., a
Web site that publishes professional photos of
women both scantily clad and nude, and lets paid
members vote on their favorites. BlueRun
Ventures and Founders Fund contributed $7
million in a deal that’s unprecedented for VCs,
considering its sexually suggestive theme (see
story, page 66)…
70
April 2008
Exits & IRRs
LBO Exit Of The Month
Kirtland Capital Hoists Essex Crane
Into A SPAC’s Welcoming Arms
By Paul Ziobro
For the buyout firm in need of an exit, the current environment is perilous.
Secondary buyouts have mostly disappeared, as debt remains hard to find.
Strategic buyers are also holding back, and the potential for initial public
offerings is iffy as the stock markets remain unsettled. Valuations are coming
down, threatening returns.
But at least one exit route remains open: SPACs, or special purpose acquisition
companies. Kirtland Capital took just that exit option last month, selling Essex
Crane Rental Corp., a company that rents crawler cranes and their
attachments, to SPAC Hyde Park Acquisition Corp. for $210 million. It is the
first time Kirtland has sold a company to a SPAC in its 30-year history.
A roundabout path brought Kirtland to this particular exit, but it nonetheless
looks to be a worthwhile one. Any returns from the sale will be gravy, as
Kirtland already got back all its equity in Essex Crane from a dividend
recapitalization in 2007.
Essex Crane
Rental Corp.
The Exit
Kirtland Capital is selling Essex
Crane to Hyde Park Acquisition
Corp. for $210 million. It bought
the company in 2000 for an
undisclosed sum.
The Financing
The deal is being funded with up to
$100 million from Hyde Park.
Kirtland Capital and Essex Crane’s
management are each investing $5
million of equity, while Macquarie
Capital Inc. is investing another $1
million. The balance of the deal is
being funded with a $117 million
drawdown of an asset-based credit
facility.
The Advisers
Kirtland Capital tapped Houlihan
Lokey as financial adviser and
Jones Day for legal counsel.
Kirtland bought the company in 2000 from its founding family for an
undisclosed amount, in a deal partially funded by a $180 million asset-based
loan. From 2001 until 2003, the company was focused internally, as the
economy hit the skids and construction projects dried up, said John Nestor,
Kirtland chief executive and senior managing director.
During those lean years, the company made some basic operational
improvements at the behest of Ron Schad, who joined as CEO in 2000 from
Manitowoc Co.’s crane division. For instance, it implemented tracking systems
that monitored the cranes’ locations, when the rental period was up and how
much they rented for, Nestor said. That helped when a U.S. boom in
infrastructure construction hit. From 2004 until 2007, Essex Crane’s annual
revenue and total earnings before interest, taxes, depreciation and
amortization grew at cumulative average rates of 31% and 55%, respectively.
The company had sales of $64.2 million and Ebitda of $37.2 million in 2007.
With those results in hand, Kirtland began thinking about an exit, and hired
investment bank Houlihan Lokey to shop the company. In late 2006, a deal to
sell Essex Crane to Sun Capital was in the works, but fell through after Kirtland
decided it wasn’t getting good value on the deal, Nestor said. The firm instead
opted to conduct a $50 million dividend recap that returned all of its equity.
With time on its side after the refinancing, Kirtland continued to search for the
perfect exit. It reached out to a number of investors interested in U.S.
infrastructure deals, and ultimately was connected with Hyde Park by
Macquarie Capital Inc.
Kirtland believes the Hyde Park deal will work out better than the earlier deal
with Sun would have, both for its LPs and for the company. Essex Crane
enjoyed another year of growth under Kirtland, ultimately boosting returns,
and this transaction has less debt than the earlier one would have, Nestor said.
Kirtland may not be the last buyout firm to pursue this particular exit route.
Around 73 SPACs, with $13.5 billion in capital, are currently looking for
acquisitions, according to research firm SPAC Analytics.
In a healthier exit environment, SPACs weren’t at the top of the list of potential
buyers, as their deals must endure a thorough shareholder approval process
that often takes a long time to close. But with other buyers mostly sidelined,
SPACs look increasingly attractive. “SPACs are filling a very important void
now,” said Barry I. Grossman, a partner at the law firm Ellenoff Grossman &
Schole LLP. ■
72
April 2008
Exits & IRRs
The Exit Window: LBO
A look at exit activity
in the buyout space
There’s no way around the conclusion that global exit
markets are grim. Through March 20, financial sponsor
exits via M&A totaled $24.9 billion across 129 deals, down
62% from $65.8 billion across 193 deals in the 2007 yearto-date period. The decline was particularly pronounced
among secondary buyouts, where volume fell 81% to $6.3
billion across 47 deals, from $32.8 billion across 89 deals a
year earlier. Global IPO markets aren’t any better; the
value of IPO flotations totals $1.9 billion in 15 deals as of
mid-March, down 72% from $7 billion in 30 deals at the
same time last year, Dealogic said…
Dividend recapitalizations are baaaaack. Well, sort of. These
transactions completely dried up after the credit bubble
burst, with only seven of them worth $2 billion getting done
between Aug. 1 and the end of 2007, compared with 129
worth $47 billion in the first six months of the year. But over
the past month or so, there’s been a mini-comeback, with
three of them taking place. Insight Equity conducted a
$117 million recap of lens maker and distributor Vision-
Ease Lens Inc.; Brynwood Partners took a dividend from a
$27 million recapitalization of security gate installer Metro
Door Inc.; and Wedbush Capital Partners and Inverness
Graham took a dividend – their second – from a $29.5
million recap of medical device component maker
Extrumed. Admittedly, these deals are a far cry from, say,
the $1 billion dividend that Hertz Corp. paid its buyout
backers in 2006. In fact, that may be why they got done. All
three were engineered by small buyout firms, which tend to
know their lenders well and to value good relationships with
them. Their lenders are also smaller outfits, not the big Wall
Street banks. And the companies in question either have
relatively low leverage or relatively high growth rates...
Some companies that have been in buyout hands for a very
long time have new owners. Trivest Partners is selling
aircraft repair company Avborne Heavy Maintenance Inc.
to AAR Corp. after 11 years. Fox Paine & Co. has passed
radio frequency products maker WJ Communications Inc.
on to Triquint Semiconductors Inc. after eight years. The
trend isn’t limited to the U.S., either: AIG Capital Partners
recently sold its 51.91% stake in Turkish cinema chain AFM
Uluslararasi Film Produksiyon Tic. ve San. AS to the AlfaGroup Consortium, eight years after its buyout. But
Seacoast Capital wins the patience award for its investment
in sports equipment retailer City Sports Inc., finally selling
its stake as part of a growth equity investment from
Highland Capital Partners after more than 13 years. ■
–Josh Beckerman
Top Exits By Buyout Firms Globally*
Trade Sales & Secondary Buyouts
Target Nationality
Industry
Hellenic
Telecom
Telecommunications
Organization SA - OTE
(20%) Greece
Centurion Bank
Finance
of Punjab Ltd. India
Pirelli Tyre SpA (39%)
Italy
AFM Uluslararasi Film
Produksiyon Ticaret Ve
Sanayi AS (51.91%) Turkey
Tunstall Group Ltd. U.K.
Auto/Truck
Mobile Storage
Group Inc. U.S.
Transport
Borsig GmbH Germany
Technical Concepts
Holdings LLC U.S.
Machinery
Consumer
Products
Leisure &
Recreation
Telecom
IPOs
Issuer Nationality
Industry
Honghua Group Ltd. China Oil & Gas
PT Bank Tabungan
Finance
Pensiunan Nasional
Indonesia
*2/21/08-3/20/08. Source: Dealogic
Acquirer
Deutsche
Telekom AG
Value ($M) Seller
$3,920.0 Marfin Investment
Group Holdings SA
Announced
3/17/08
Notes
HDFC Bank Ltd.
$2,380.0 ChrysCapital, ICICI Venture
2/25/08
Funds Management Co., India
Value Fund, Citigroup Private Equity
Pirelli & C SpA
$1,280.0 One Equity Partners LLC
3/11/08 One Equity was part of a group
that bought a $2.4B stake in 2006.
CTF Holdings
$1,160.0 AIG Global Investment
2/26/08 AIG invested in 2000 and has
Ltd -A
Group Inc.
seen the company triple in size
since.
Charterhouse Capital $1,020.0 Bridgepoint Capital Ltd.
3/5/08 Bridgepoint received 2.5x its
Partners LLP
money.
Mobile Mini Inc.
$700.0 Welsh Carson Anderson
2/22/08 Welsh Carson and other sellers
& Stowe LP
will get about $154M of stock
and $12.5M cash.
KNM Group Bhd
$530.0 Capiton AG
3/3/08
Newell
$450.0 Liberty Partners
2/27/08 Liberty Partners acquired the
Rubbermaid Inc.
company in 2003 for $110M.
Exchange
Hong Kong
Jakarta
Value ($M) Financial Sponsor
$409.4 Carlyle Group
$83.3 TPG Capital LP
Priced
2/29/08
3/11/08
Notes
TPG bought a 72% stake last
year.
74
April 2008
Exits & IRRs
VC Exit Of The Month
Pluck Pays Off: Business Model
Overhaul Secures An Exit
By Tomio Geron
When a young start-up decides to overhaul its business model and go in a
completely different direction, it can spell disaster.
But when Pluck Corp. made such a transformation, its venture investors stuck
with it, believing that the social media company’s executives could defy the odds.
Their faith was rewarded when the reinvented Pluck was acquired in March
by Demand Media Inc., giving investors a decent return on their money and
highlighting how a seasoned executive team and a flexible product can go a
long way toward rescuing a business model that has run into trouble.
Pluck got its start in 2003 with a desktop-based online news and blog reader
application for consumers to gather and share online content, using what is
known as Really Simple Syndication technology. The model had promise, but
by 2005 Pluck found itself butting up against competing projects from
Microsoft Corp., Google Inc. and Yahoo Inc. With the market saturated, Pluck
needed a fresh approach if it was to survive.
Pluck Corp.
The Exit
Demand Media Inc. acquired Pluck
Corp. for more than $67 million,
according to two people familiar
with the deal. Shortly later,
Demand Media raised $35 million
in series D-1 financing.
Financing History
Since it was founded in 2003, Pluck
has raised $17 million in three
venture capital rounds: a $1.5
million Series A from Austin
Ventures in 2003, an $8.5 million
Series B led by Mayfield Fund with
participation from Austin Ventures
in 2004, and a $7 million Series C
from Reuters Group PLC in 2006.
The Competition
Many companies providing social
networking services to enterprise
clients have emerged in the last few
years. A recent list by Forrester
analyst Jeremiah Owyang showed
about 70 companies in the whitelabel social networking space. Two
other such companies were
recently acquired. In March,
Mzinga Inc. acquired Prospero
Technologies LLC, while in
February ONEsite Inc. acquired
Social Platform LLC.
“We stepped back and said, ‘I don’t see a winning strategy in this space,’” said
Chris Pacitti, general partner at Austin Ventures, which seeded the company
in 2003. “It’s that sort of initial honest moment where it’s hard to say ‘We were
wrong.’”
At that critical moment for the company, its venture investors could have
abandoned it. But the start-up’s founders had a long record of success with
Austin Ventures. Co-founder and Chief Executive Dave Panos was an
entrepreneur-in-residence at the firm, and had served as an executive at Ventix
Systems and Question Technologies, two start-ups in which the firm had
invested. Fellow co-founder Andrew Busey was a founder of Living.com, another
Austin Ventures investment, and iChat, which is now a part of Apple Inc.
“If I didn’t know Dave particularly well I might have felt a little burned that it
didn’t work and say, ‘Why don’t we shut it down and move on,’” Pacitti said.
“But I knew he could execute. Also, he was very honest at that moment.”
The company decided to retool its model to focus on corporate end users
rather than a mass consumer audience, going after large media companies
and brand marketers that did not know how to collect and manage unruly
user-generated content. The fact that its product was originally built to scale
for millions of users gave it an edge, enabling it to shop its scaling abilities to
businesses that needed to publish to many consumers themselves.
By the end of 2006, Pluck had shut down its RSS reader, raised a $7 million
Series C round led by Reuters Group PLC, and launched two new services.
The first was a private-label social networking service for large Web publishers
and brand marketers to allow their users to post blogs, photos, ratings,
comments and other social-media features to sites. The second, blog
aggregator BlogBurst, republished relevant blogs on large media Web sites.
Clients include Gannett Corp.’s USA Today, Guardian Unlimited, Hearst Corp.
and Circuit City Stores Inc. Pluck consistently exceeded targeted metrics,
according to Allen Morgan, managing director at investor Mayfield Fund.
Demand Media, which owns a number of social media properties, such as
“how-to” site Expert Village, and is run by former MySpace Chairman Richard
Rosenblatt, paid an undisclosed amount for Pluck, although two people close
to the company said the price exceeded $67 million. In three venture rounds,
Pluck had raised $17 million.
“[Pluck’s outcome] proves the fundamental rules of being successful in venture
capital, which is you invest in teams,” Morgan said. ■
75
April 2008
Exits & IRRs
exits within a couple of months. Sun Microsystems Inc.
agreed to pay $1 billion in January for open-source
software company MySQL AB, of which Balderton owns
15%. And in March, AOL agreed to buy social network
Bebo Inc. for $850 million in cash, promising to give
Balderton a return of $140 million on its 15.7% stake...
The Exit Window: VC
A look at exit activity
in the venture space
Who says Microsoft Corp. is tied up with courting Yahoo
Inc.? In the two months since its public proposal to pay $44.6
billion for Yahoo, Microsoft has announced at least four deals
to acquire venture-backed companies (Danger Inc., Kidaro
Inc., Rapt Inc. and YaData Ltd.). The biggest of the bunch is
Danger, a fast-growing start-up whose technology powers TMobile USA’s popular Sidekick mobile phone. It’s an abrupt
turnabout for Danger, which raised more than $130 million
in venture capital and filed for an initial public offering in
December…
Balderton Capital is making quite a name for itself, thanks
to its former days as Benchmark Capital Europe. The
London-based firm, which broke off from Benchmark
Capital and rebranded last June, blasted two home-run
YouTube stirred the venture world in 2006 when it sold to
Google Inc. for $1.65 billion, motivating VCs to shuffle cash
into online video companies. But no online-video start-up has
attracted the number of viewers that YouTube has. Revver
Inc. was founded around the same time as YouTube and was
a pioneer in allowing producers of homemade digital videos
to share and make money from their work. But competition
was fierce, and it sold its assets for less than $1 million to
LiveUniverse, a blow to the VCs that invested $13 million.
That doesn’t bode well for other start-ups in this space…
Four VC firms scored a sweet two-for-one deal with
BladeLogic Inc., which went public in July at $17 a share
and then in March was bought by BMC Software Inc. for $28
a share. How good was this deal for VCs? Battery Ventures
said it will return between 19 and 20 times the money it
initially put into the company to investors. ■
–Scott Austin
Top Exits By Venture Firms Globally*
M&A
Target Location
MySQL AB
Cupertino, Calif.
CoGenesys Inc.
Rockville, Md.
World Wide
Packets Inc.
Spokane Valley,
Wash.
TicketsNow Inc.
Crystal Lake, Ill.
Tandem Labs
Salt Lake City
Compete Inc.
Boston
Industry
Software
Acquirer
Sun Microsystems
Inc.
Biopharm.
Teva Pharmaceutical
Industries Ltd.
Ciena Corp.
$400.00
InterActiveCorp
$265.00
Comm. &
Networks
Value ($M)
$1,000.00
$284.50
Information
Services
Healthcare
Services
Information
Services
Labcorp
$76.00
Taylor Nelson
Sofres PLC
$75.00
LED Lighting
Fixtures Inc.
Morrisville, N.C.
DoveBid Inc.
Los Angeles
Retailers
Cree Inc.
$71.33
Cons/Bus
Services
GoIndustry
$59.50
Oncotech Inc.
Tustin, Calif.
Healthcare Exiqon A/S
Services
$45.00
IPO
Issuer
Location
CardioNet Inc.
San Diego
Industry
Exchange
Med. Dev./ Nasdaq
Equip.
Amt. Raised/
Val. Post-IPO ($M)
$54/$445.45
Selected VC Investors1
ABN Amro Capital, Benchmark Capital,
Index Ventures, Institutional Venture Partners,
Intel Capital, Red Hat, SAP Ventures
Human Genome Sciences, New Enterprise
Associates, OrbiMed Advisors
Argo Global Capital, Azure Capital Partners,
Entrepia Ventures, Madrona Venture Group,
Millennium Technology Ventures, Wasserstein & Co.
Closed
02/26/08
VC Funding (M)
$35.7
02/21/08
$55.0
03/04/08
$146.5
02/27/08
$34.0
03/03/08
$18.8
Charles River Ventures, Commonwealth
Capital Ventures, Idealab, North Hill Ventures,
Split Rock Partners
Digital Power Capital
03/03/08
$43.0
03/04/08
$23.0
Catterton Partners, Ford Motor Co., GE Capital
Equity Capital Group, Mayfield, SoftBank Capital,
Sun Microsystems, Technology Crossover Ventures,
Temasek Holdings, Texas Pacific Group,
Trident Capital, Yahoo
JF Shea, North Star, Southern California Ventures,
U.S. Venture Partners
02/25/08
$167.2
02/29/08
$12.8
Priced
VC Funding
($M)
$168.60
Adams Street Partners, C&B Capital,
New World Ventures
DW Healthcare Partners
Investors
BioFrontier Partners, Foundation Medical Partners,
Guidant Compass, Hambrecht & Quist Capital
Management, Sanderling Ventures
03/19/08
*2/21/08-3/20/08. (1) Investor list includes those that backed one or more funding rounds throughout the life of the company and is not comprehensive. Some of these investors may have exited from
the company already. Source: Dow Jones VentureSource
77
April 2008
Exits & IRRs
Returns Roundup
Some Bust-Era VC Funds
Rise From The Dead
Amid a booming economy, VCs were able to mark up the
valuations of companies still in their portfolios last year.
They also took advantage of strong M&A markets and
improving public markets to lock in gains by exiting
portfolio companies. Of the $1 billion or so that these
funds have returned to the limited partners in our sample,
roughly $340 million or so was generated in the last year.
Finally, some turn-of-the-century venture funds are
showing signs of life.
Funds raised in 2000 and 2001 – which had more of a
chance to adapt as the venture investing climate changed
– are doing noticeably better than 1999 funds. Of the 1999
funds in our sample, only eight of 32 were in positive
territory as of the most recent year. In contrast, 24 of 53
vintage 2000 funds generated positive IRRs in 2007, as did
23 of 34 vintage 2001 funds.
After struggling to turn the corner to positive returns for years,
some funds raised as the tech bubble burst did just that last
year. Of the funds raised from 1999 to 2001 in our sample
below, 55 of 119, or 46%, were in positive territory as of mid2007. That’s up from just 26% at the same time a year earlier.
The fund with the best IRR in our sample, surprisingly, is a
1999 vintage fund, Clearstone Venture Partners I-B LP.
This fund was generating a net internal rate of return of
154.7% as of Sept. 30, according to data from California
Public Employees’ Retirement System. ■
By Jennifer Rossa
VC Funds From 2000, 2001 Turn It Around1
Capital
Capital
Partnership/Year
Committed ($M) Cont. ($M)
California Public Employees’ Retirement System
Sanderling IV Biomedical LP/1997
$50.0
$50.0
TL Ventures III LP/1997
$75.0
$75.0
Alta BioPharma Partners I LP/1998
$50.0
$50.0
Alta Communications VII LP/1998
$50.0
$50.0
Aberdare Ventures LP/1999
$2.5
$2.2
Acacia Venture Partners II LP/1999
$10.0
$9.8
Austin Ventures VII LP/1999
$15.0
$14.5
Clearstone Venture Partners I-B LP/1999
$2.5
$2.5
Clearstone Venture Partners II-A LP/1999
$20.0
$18.2
Convergence Ventures II LP/1999
$5.0
$5.0
InSight Capital Partners III LP/1999
$7.5
$7.5
Lighthouse Capital Partners III LP/1999
$10.0
$8.5
M/C Venture Partners IV LP/1999
$25.0
$23.1
Morgan Stanley Dean Witter Venture Partners IV LP/1999 $5.0
$4.9
New Enterprise Associates 9 LP/1999
$5.0
$4.9
North Bridge Venture Partners IV-B LP/1999
$10.0
$9.2
Oak Investment Partners IX, Limited Partnership/1999
$10.0
$10.0
Oxford Bioscience Partners III LP/1999
$2.5
$2.5
Schroder Ventures International Life
Sciences Fund II, L.P. 1/1999
$10.0
$9.5
Sequel Limited Partnership II/1999
$7.5
$7.1
TCV III (Q) LP/1999
$7.8
$7.8
TCV IV LP/1999
$25.0
$23.8
TL Ventures IV LP/1999
$75.0
$75.0
VantagePoint Venture Partners III (Q) LP/1999
$15.0
$15.0
Weiss Peck & Greer Venture Associates V LLC/1999
$5.0
$4.8
Alloy Ventures 2000 LP/2000
$10.0
$10.0
Alta BioPharma Partners II LP/2000
$65.0
$58.5
Alta Communications VIII LP/2000
$75.0
$72.0
Audax Venture Fund LP/2000
$11.3
$11.3
Battery Ventures VI LP/2000
$6.3
$6.3
Dist. in Yr.
Ended ($M)2
9/30/07
$1.0
0
$1.0
$8.3
0
0
$1.5
0
$0.4
0
$1.6
$0.1
$1.7
$1.0
$0.2
$1.8
$2.2
$0.3
Distribution
as of ($M)
9/30/07
$57.0
$94.4
$76.0
$40.6
$1.4
$1.6
$4.7
$6.6
$3.4
0
$6.1
$7.9
$5.0
$1.7
$0.8
$2.6
$4.3
$0.7
Distribution
as of ($M)
9/30/06
$56.0
$94.4
$75.0
$32.3
$1.4
$1.6
$3.2
$6.5
$3.0
0
$4.5
$7.8
$3.3
$0.6
$0.6
$0.9
$2.1
$0.3
Net IRR
as of (%)
9/30/07
10.8
24.2
22.2
-1.7
-1.7
-21.4
-6.3
154.7
-15.8
-21
-0.9
1.5
-0.8
-4.9
-9.9
-1.2
-4.6
-4.9
Net IRR
as of (%)
9/30/06
11.4
24.4
22.3
-2.1
-4.5
-24
-6.1
154.8
-14.5
-24.8
-2.9
1.5
-3.5
-13.7
-12.2
-12.2
-11.5
-11.4
$2.2
$0.2
$0.2
$7.2
$26.0
$1.1
0
0
$4.0
$19.6
0
$0.4
$10.9
$2.2
$9.8
$18.7
$43.1
$5.1
$2.5
$1.0
$34.3
$41.3
$1.9
$3.0
$8.6
$2.0
$9.6
$11.5
$17.1
$4.0
$2.5
$1.0
$30.3
$21.7
$1.9
$2.6
8.5
-13.9
14.5
4.4
-6.9
-10.6
-5.6
-9.8
1.7
-0.1
-38.9
5.3
7
-15
14.9
2.9
-26
-12.8
-6.1
-10.9
2
-0.5
-39.4
-1
78
April 2008
Exits & IRRs
Capital
Capital
Partnership/Year
California Public Employees’ Retirement System (cont.)
BlueStream Ventures LP/2000
$7.5
$7.1
Carmel Software Fund/2000
$7.2
$6.7
Commonwealth Capital Ventures III LP/2000
$10.0
$10.0
DCM III LP/2000
$25.0
$23.1
Draper Fisher Jurvetson Fund VII LP/2000
$25.0
$21.1
FBR Technology Venture Partners II (QP) LP/2000
$2.5
$2.0
FFC Partners II LP/2000
$6.0
$5.4
Focus Ventures II LP/2000
$5.0
$4.7
Gemini Israel III Limited Partnership/2000
$7.2
$6.7
General Catalyst Group LLC/2000
$4.0
$3.9
GRP II LP/2000
$5.0
$4.6
Highland Capital Partners V LP/2000
$5.0
$4.8
i-Hatch Ventures LP/2000
$3.6
$3.6
InSight Capital Partners IV LP/2000
$40.0
$37.3
Israel Seed IV LP/2000
$2.5
$2.3
Kettle Partners LP II/2000
$1.7
$1.5
Lighthouse Capital Partners IV LP/2000
$50.0
$45.0
Lightspeed Venture Partners VI LP/2000
$40.0
$34.0
M/C Venture Partners V LP/2000
$65.0
$61.6
MPM Bioventures II-QP LP/2000
$5.0
$4.9
New Enterprise Associates 10 LP/2000
$75.0
$70.5
Palomar Ventures II LP/2000
$7.5
$6.8
Partech International Ventures IV/2000
$5.0
$4.7
Prism Venture Partners III LP/2000
$5.0
$4.9
Redpoint Ventures II LP/2000
$9.0
$8.4
Sequel LP III/2000
$25.0
$20.8
Sevin Rosen Fund VIII LP/2000
$10.3
$9.8
Sierra Ventures VIII-A LP/2000
$20.0
$20.0
Spectrum Equity Investors IV LP/2000
$75.0
$72.4
Three Arch Capital LP/2000
$40.1
$35.1
TL Ventures V LP/2000
$150.0
$115.5
Trident Capital - V LP/2000
$5.3
$4.4
Trinity Ventures VIII LP/2000
$4.5
$4.0
VantagePoint Venture Partners IV (Q) LP/2000
$50.0
$47.5
Ventures West 7 U.S. LP/2000
$5.0
$4.8
American River Ventures I LP/2001
$15.0
$12.0
Applied Genomic Technology Capital Fund LP/2001
$5.0
$5.0
ARCH Venture Fund V LP/2001
$12.5
$11.3
ArrowPath Fund II LP/2001
$5.0
$3.8
Atlas Venture VI LP/2001
$6.2
$5.9
Austin Ventures VIII LP/2001
$41.5
$40.0
Bay Partners X LP/2001
$20.0
$18.0
Carlyle Asia Venture Partners II LP/2001
$42.5
$46.2
Carlyle Venture Partners II LP/2001
$50.0
$49.9
EuclidSR Biotechnology/2001
$50.0
$46.5
Fletcher Spaght Ventures LP/2001
$5.0
$4.9
General Catalyst Group II LP/2001
$25.0
$20.6
Granite Global Ventures (QP) LP/2001
$19.5
$18.5
Highland Capital Partners VI LP/2001
$35.0
$31.8
Index Ventures II (Delaware) LP/2001
$5.0
$4.7
Institutional Venture Partners X LP/2001
$10.0
$10.0
Jerusalem Venture Partners IV LP/2001
$7.5
$7.3
Menlo Ventures IX LP/2001
$15.0
$12.8
Morgenthaler Partners VII LP/2001
$10.0
$8.5
North Bridge Venture Partners V-A LP/2001
$40.0
$28.0
Oak Investment Partners X LP/2001
$25.0
$24.1
OVP Venture Partners VI LP/2001
$5.0
$3.9
Dist. in Yr.
Ended ($M)2
9/30/07
0
$2.8
0
$0.6
$1.2
$0.1
$0.9
$0.5
$0.2
$0.4
$1.6
0
$0.8
$10.2
0
0
$6.0
$9.6
$8.4
$0.4
$5.3
0
0
0
$1.0
$4.1
0
$1.5
$26.2
0
$11.3
$0.2
$0.9
0
$0.2
0
$1.5
$0.4
$0.8
$0.2
$5.6
$1.2
$27.5
$6.7
$0.5
0
0
$7.0
$1.3
$1.0
$5.0
$1.0
$2.3
$2.0
$2.9
$5.1
$0.7
Distribution
as of ($M)
9/30/07
$0.6
$2.8
$1.0
$2.1
$4.0
$0.3
$3.3
$1.0
$1.4
$3.7
$1.8
$1.4
$1.8
$24.5
$0.4
0
$29.9
$16.2
$27.7
$0.9
$30.1
0
$0.4
$0.2
$2.0
$9.5
$0.5
$5.7
$58.5
$6.3
$22.4
$1.6
$1.7
$12.7
$2.5
0
$1.7
$0.6
$1.9
$0.8
$10.7
$1.2
$37.0
$17.3
$7.5
$2.4
$3.4
$21.1
$19.8
$5.0
$7.0
$1.2
$2.7
$3.2
$10.0
$10.9
$0.7
Distribution
as of ($M)
9/30/06
$0.6
0
$1.0
$1.6
$2.8
$0.2
$2.5
$0.5
$1.2
$3.2
$0.2
$1.4
$1.1
$14.3
$0.4
0
$23.9
$6.7
$19.4
$0.5
$24.8
0
$0.4
$0.2
$1.0
$5.4
$0.5
$4.2
$32.3
$6.3
$11.1
$1.4
$0.8
$12.7
$2.3
0
$0.2
$0.2
$1.1
$0.6
$5.1
0
$9.6
$10.6
$7.0
$2.4
$3.4
$14.1
$18.5
$4.0
$2.0
$0.2
$0.4
$1.1
$7.1
$5.8
0
Net IRR
as of (%)
9/30/07
-22.2
11
-5.2
-0.7
-2.2
-27.7
7.4
-6
3
1.2
11
-0.7
7.9
14
-12.9
-24.1
2.9
8.5
15
-3.3
4.5
-9.4
-7
-15.4
4.6
3.7
-17
1.6
11.5
0.3
-12.5
1.3
5.3
3.8
0.5
-16.7
9.2
-3
3.1
0.7
2.4
-4.1
34.6
2.3
-9.3
4.9
-4.9
36.7
19.2
30.3
7.8
1.2
5.4
-0.7
-6.9
1.1
-13.3
Net IRR
as of (%)
9/30/06
-16.2
-8.1
-9.3
-5.4
-2.8
-31.3
4.1
-12.8
-7.6
3.9
0.4
-8.7
3.9
2.7
-12.4
-31.1
1.5
0.9
11.7
-5.4
3.1
-10.2
-9.4
-26.4
0
0.3
-17
0.9
8.7
-1.3
-14.1
1.6
-6
3.4
-0.2
-24.5
-11
-7.8
-2.2
-6.3
-1.8
-11.3
23.2
-0.3
-10.9
16.3
-3.6
36.6
14.4
34.3
4.4
-6.5
3.5
-8.2
-7.2
-0.9
-10.2
79
April 2008
Exits & IRRs
Capital
Capital
Partnership/Year
California Public Employees’ Retirement System (cont.)
Oxford Bioscience Partners IV LP/2001
$30.0
$30.0
Perseus Soros Biopharmacuetical Fund LP/2001
$40.0
$38.5
Prism Venture Partners IV LP/2001
$25.0
$20.6
Prospect Venture Partners II LP/2001
$100.0
$81.5
Skyline Venture Partners QP Fund III LP./2001
$5.0
$4.4
U.S. Venture Partners VIII LP/2001
$18.8
$17.0
Updata Venture Partners II LP/2001
$5.0
$4.7
WorldView Technology Partners IV LP/2001
$9.1
$8.1
Dist. in Yr.
Ended ($M)2
9/30/07
$10.1
$15.9
$3.3
$12.3
$0.6
$2.1
$0.4
0
Distribution
as of ($M)
9/30/07
$13.8
$43.7
$6.7
$28.8
$0.6
$4.1
$2.3
$1.0
Distribution
as of ($M)
9/30/06
$3.8
$27.8
$3.4
$16.6
0
$2.0
$1.9
$1.0
Net IRR
as of (%)
9/30/07
5.4
22.8
-10.6
5.7
8
-3.7
6.1
-9
Net IRR
as of (%)
9/30/06
-2.7
21.8
-13.3
-0.7
-9.1
-7.2
-1.7
-7.8
University of Texas Investment Management Company
Austin Ventures V LP/1997
Crescendo II LP/1997
Austin Ventures VI LP/1998
Morgenthaler Venture Partners V LP/1998
Prism Venture Partners I LP/1998
Ampersand 1999 LP
Crescendo III LP/1999
Prism Venture Partners II LP/1999
Crescendo IV LP/2000
JatoTech Ventures LP/2000
Morgenthaler Partners VI LP/2000
Ampersand 2001 LP
Prospect Venture Partners II LP/2001
$15.0
$15.0
$20.0
$25.7
$20.0
$20.0
$25.0
$25.0
$10.0
$10.0
$10.0
$25.0
$25.0
$15.0
$15.0
$20.8
$25.7
$20.1
$20.0
$25.0
$25.0
$10.0
$9.6
$10.0
$21.3
$20.4
11/30/07
$1.2
0
0
$23.0
0
$5.9
0
$0.5
0
0
0
$9.3
$4.9
11/30/07
$28.9
$20.3
$9.9
$40.8
$24.2
$31.3
$9.3
$14.9
$0.4
$0.8
$4.7
$10.5
$9.6
11/30/06
$27.7
$20.3
$9.9
$17.8
$24.2
$25.4
$9.3
$14.4
$0.4
$0.8
$4.7
$1.3
$4.7
11/30/07
31.94
19.73
-7.52
15.04
8.44
15.11
-20.75
-6.99
-13.74
-15.6
-5.74
16.57
6.26
11/30/06
32.47
19.86
-9.51
1.06
8.67
7.73
-21.68
-5.8
-18.34
-19.89
-5.24
-10.65
-0.39
Washington State Investment Board
InterWest Partners VI LP/1997
Menlo Ventures VII LP/1997
Morgan Stanley Venture Partners III LP/1997
Frazier Healthcare III LP/1998
Oak Investment Partners VIII LP/1998
Sprout Capital VIII LP/1998
Menlo Ventures VIII LP/1999
US Venture Partners VI LP/1999
Essex Woodlands Health Ventures Fund V LP/2000
Mobius Technology Ventures VI LP/2000
Sprout Capital IX LP/2000
US Venture Partners VII LP/2000
Frazier Healthcare IV LP/2001
$10.0
$25.0
$30.0
$40.0
$20.0
$55.0
$50.0
$15.5
$25.0
$83.3
$75.0
$39.4
$40.0
$10.0
$25.0
$30.0
$41.9
$20.0
$55.0
$47.5
$15.0
$23.7
$81.5
$69.9
$39.4
$33.9
9/30/07
$0.7
0
$2.2
$8.4
$1.4
$9.5
$2.2
$10.0
$8.3
$4.8
$20.8
$3.6
$6.2
9/30/07
$28.3
$114.6
$64.2
$15.9
$34.4
$30.7
$15.7
$16.8
$20.0
$13.6
$41.0
$5.4
$11.0
9/30/06
$27.6
$114.6
$62.0
$7.5
$33.0
$21.2
$13.5
$6.8
$11.7
$8.8
$20.2
$1.8
$4.8
9/30/07
48.9
135.6
41.3
-3.3
55.7
-5
-13.1
6.1
17.7
-4.4
3.9
-13.9
8.4
9/30/06
48.9
135.6
41.5
-6.4
55.9
-11
-18.4
-3.3
9.9
-13
-1.3
-19.3
2.5
The Regents Of The University Of California3
Hummer Winblad Venture Partners III LP/1997
Institutional Venture Partners VIII LP/1998
Sequoia Capital VIII LP/1998
InterWest Partners VII LP/1999
Versant Venture Capital I LP/1999
Redpoint Ventures I LP/1999
Sequoia Capital IX LP/1999
Venture Strategy Partners II LP/1999
Kleiner Perkins Caufield & Byers IX-A/1999
Accel VIII LP/2000
Intersouth Partners V LP/2000
InterWest Partners VIII LP/2000
Polaris Venture Partners III LP/2000
Sequoia Capital X LP/2000
Kleiner Perkins Caufield & Byers X-A LP/2000
Versant Venture Capital II LP/2001
$10.0
$30.0
$16.0
$15.0
$20.0
$30.0
$18.0
$15.0
$20.0
$14.6
$20.0
$50.0
$20.0
$28.0
$20.0
$30.0
$10.0
$30.0
$16.0
$15.0
$20.0
$28.5
$15.4
$14.0
$17.0
$8.1
$19.6
$42.5
$19.0
$17.5
$9.5
$27.0
6/30/07
$2.6
$4.6
0
0
$5.7
0
0
$0.8
0
0
0
0
0
0
0
0
6/30/07
$10.1
$25.4
$33.5
$3.6
$15.4
$5.9
$9.3
$2.2
0
0
$1.3
$10.6
$5.2
$0.4
0
0
6/30/06
$7.5
$20.8
$33.5
$3.6
$9.7
$5.9
$9.3
$1.4
0
0
$1.3
$10.6
$5.2
$0.4
0
0
6/30/07
0.7
-0.1
90.4
-4.6
11.8
-7.1
-6.1
-9.8
-23.3
-26.8
-13.6
-2.6
-3.6
-31
-17.5
2.1
6/30/06
-4.1
-1.7
90.4
-3.9
8.2
-17.4
-6.1
-14.4
-23.3
N/A
-11.2
-4.6
-4.1
-31
-17.5
-6.2
(1) The pension funds released disclaimers with the data, saying that IRRs don't accurately reflect the expected future returns of the partnership and may vary depending on how they are calculated.
The pension funds also said comparison of IRRs is difficult because the industry doesn't have standard valuation methods. Finally, the pension funds said that the IRRs aren't especially meaningful in
the early years of a partnership, and that their IRR calculations haven't been approved by general partners. (2) Calculated by Private Equity Analyst using the data provided by the pension funds.
(3) UC Regents doesn’t update all of its fund information. N/A: not available. Source: Data from the pension funds, compiled by Private Equity Analyst
81
April 2008
Indexes
California Public Employees’
Retirement System
18, 38, 39, 40,
42, 50, 76
California State Teachers’
Retirement System
8, 18
Caltius Capital Management
.406 Ventures
8, 44
3i Group PLC
5, 22
AAC Capital Partners
22
ABN Amro Capital
22
Abu Dhabi Future Energy Co.
11
Accel Partners
6, 46
Access Capital Partners
52
Adams Street Partners
52
Advanced Capital
50
AFM Uluslararasi Film
Produksiyon Tic. ve San. AS
72
AIG Capital Partners
72
Alfred I. duDupont Testamentary Trust
46
AlpInvest Partners
11, 46, 51, 52
Altira Group
38
AnaCap Financial Partners
5
Angelo Gordon & Co.
64
Apax Partners
22, 50
Ares Management LLC
44
Asyst Technologies Inc.
64
Aureos Capital
6
Aurora Capital Group
44
44
Canada Pension Plan Investment Board
8
26
Finnish Industry Investment
5, 12, 14, 26
4
Charterhouse Capital Partners
51
46
China Investment Corp.
39
Focus Ventures
12
Chrysalis Ventures
46
Founder’s Co-op
5
CIR Group
52
Founders Fund
66, 68
City Sports Inc.
85
Foundry Group
8, 58
CleanFish Inc.
68
FountainVest
Clear Channel Communications Inc.
4
FTVentures
46
Coin Group SpA
50
GIC Special Investments of Singapore
18
Colusa Indian Community of Colusa
39
GIMV NV
52
Gizmoz Inc.
68
53
Concord Venture Partners
4
Constellation Ventures
28
Global Buyout Fund LP
Constitution Capital Partners
50
Global Investment House
53
Globespan Capital Partners
12
Craton Equity Partners
Credit Suisse Group
8
46, 50, 53
DAZ Productions Inc.
68
Bain Capital Partners LLC
4, 14, 50
Demand Media Inc.
74
Development Bank of Japan
54
Dhow Gulf Opportunities Fund
54
DoCoMo Capital
68
Draper Fisher Jurvetson
61
Dubai International Capital
52
Bear Stearns Merchant Banking
28
Beecken Petty O’ Keefe & Co.
38
Bertram Capital
38
Bigwood Capital
12
Blackstone Group
BladeLogic Inc.
BlueRun Ventures
4, 5, 11, 12, 48
75
66, 68
72
12
64
28
8
Fox Paine & Co.
CMEA Ventures
Axcelis Technologies Inc.
Bear Stearns Asset Management
8
39
68
12
FirstMark Capital LLC
Flybridge Capital Partners
D.E. Shaw & Co.
BC Partners
52
22, 38, 39, 64
Five Elms Capital
52
28
First Reserve Corp.
6
52
64
Champlain Financial Corp.
AXA
Battery Ventures
52
51
72
10, 18
72
Finama Private Equity
Carlyle Capital Corp.
Avborne Heavy Maintenance Inc.
Baird Private Equity
Extrumed
Capvis Equity Partners
74
10
68
Finlombarda Gestioni SGR
Carmel Ventures
4
EveryScape Inc.
Fincentric
Carlyle Group
51, 52
Evergreen Venture Partners
22
Candover Investments PLC
Austin Ventures
Baird Capital Partners Asia
European Investment Fund
CVC Capital Partners
12, 32
Dubai Islamic Bank
53
Dubai Techno Park
52
Dubai Techno Park’s KTIC
Jasper Asia Gulf Horizons Fund
52
EDF Ventures
8
Goldman Sachs Asset Management
Private Equity Group
Goldman Sachs Group Inc.
Gores Group
39
Greenmont Capital Partners
30
Guardian Life Insurance Co. of America
58
Gulf Capital
53
H&G Capital Partners
39
Hamilton Lane Advisors
39
Harbour Group
64
Dow Jones
Private Equity Analyst
12
Employees’ Retirement System of Texas
40
3 Easy Ways to Subscribe
44
Online: www.fis.dowjones.com
52
Employees’ Retirement System
of the State of Rhode Island
Boom Entertainment Inc.
68
Endless LLP
Bridgepoint Capital
50
Environmental Technologies Fund
51
Brynwood Partners
39, 72
Essex Crane Rental Corp.
70
12, 51
63, 64
Great Hill Partners LLC
Edison Venture Fund
BNP Paribas
50
24, 48, 50, 64
Call: 877.522.8663
Email us:
[email protected]
82
April 2008
Indexes
HarbourVest Partners
51, 52
Meritech Capital Partners
12
Physic Ventures
30
12
Harvard Management Co.
12
Mesirow Financial
40
Piper Jaffray & Co.
Helion Venture Partners
53
Metro Door Inc.
72
Pitango Venture Capital
HitecVision Private Equity AS, Stavanger
52
MHR Fund Management
60
Pluck Corp.
74
Microsoft Corp.
49
Pragma Capital
52
Holland Ventures
6
4
Hopu Fund
24
Millennium Capital
53
Princeton University
46
IDG Ventures Boston
46
Morgan Stanley
52
Private Equity
10
61
Morgan Stanley Alternative
Investment Partners
46
Public Employee Retirement
System of Idaho
39
Public Employees’ Retirement
Association of Colorado
46
Public School Teachers’ Pension
and Retirement Fund of Chicago
39
Qatalyst Group
12
Qatar Islamic Bank
54
QInvest
54
Raffia Capital Inc.
54
Index Ventures
Indiana Public Employees’ Retirement Fund 40
Infinity Fund
Insight Equity
Institutional Venture Partners
International Finance Corp.
Inverness Graham
Invesco Private Capital Inc.
24
72
6
54
72
8
Investindustrial Holdings Ltd.
52
J.P. Morgan Capital Partners
28
J.P. Morgan Investment Management
39
JC Flowers & Co.
39
Kairos Capital Partners
Kansas Public Employees’
Retirement System
39
4
National Pension Service
6
National Pensions Reserve Fund
40
New Jersey State Investment Board
42
New Jersey State
Investment Council
5, 8, 42, 44
New Mexico Public Employees’
Retirement Association
New Mexico State Investment Council
New Mountain Capital LLC
40
10, 40
40
Raffia Investment Business LP
55
New York State Common Retirement Fund 50
RCP Advisors LLC
50
Nexit Ventures
52
Renaissance Partners
55
Nexxus Capital
54
Revver Inc.
75
NGP Energy Capital Management
40
RHM Pension Trust
46
Norfolk County (Mass.) Retirement Fund
39
Rincon Band of Luiseno Indians
39
40
Kellwood Co.
64
Noro-Moseley Partners
12
Riverlake Partners LLC
Kirtland Capital
70
North Castle Partners LLC
30
Riverside Co.
18
KKR Financial
26
Northern Light Venture Capital
12
Robeco NV
51
40
Saints Capital
50
Sampo Life
52
San Francisco Employees’
Retirement System
11
Scale Venture Partners
28
School Employees Retirement
System of Ohio
44
8
Seacoast Capital
85
Kleiner Perkins Caufield & Byers
Knight’s Bridge Capital Partners Inc.
Kohlberg Kravis Roberts & Co.
Lehman Brothers Holdings
8, 68
40
18, 26, 64
38
Norwest Equity Partners
Oaktree Capital Management
44, 64
Ocwen Financial Corp.
64
Ohio State University
50
Les Produits Neptune Inc.
64
Ohio-Midwest Fund
42
Levine Leichtman Capital Partners
40
One Equity Partners
12, 28
LGT Capital
52
Ontario Teachers’ Pension Plan
Liberty Mutual
46
Orchid Asia Group Management Ltd.
54
Sequoia Capital
61
Lightspeed Venture Partners
46
Oregon State Treasury
20
SFW Capital Partners
42
20
Overseas Private Investment Corp.
Lone Star Funds
Longitude Capital Partners
10, 46
Macquarie India Infrastructure
Opportunities Fund
53
Macquarie Infrastructure Partners
53
Macquarie Renaissance
Infrastructure Fund
53
Madison Dearborn Partners
48
Mainsail Partners
40
Maryland State Retirement
and Pension System
Sherbrooke Capital
30
PAI Partners
52
Shinsei Bank Ltd.
54
Partners Group
38
Silver Lake Partners
42
PBF Partners
39
Silver Lake Sumeru
12
PCG Asset Management LLC
12
Silver Leaf Capital
54
Snikiddy Snacks LLC
68
Solaia Capital Advisors LLC
44
Summit Partners
12
Sun Capital
64
Pennsylvania Public School
Employees’ Retirement System
Pennsylvania State Employees’
Retirement System
Pequot Capital
4
Masdar Clean Technology Fund,
11
MatlinPatterson Global Advisers LLC
50
Mayfield Fund
74
6
4
39, 50
8
Pequot Ventures
46
Swander Pace Capital
44
Permira
12
Swiss Re
51
Pfingsten Partners LLC
58
Target Partners GmbH
52
83
April 2008
Indexes
TBL Capital
30
Teacher Retirement System of Texas
12, 50
Teachers’ Retirement System of Illinois
42
Teachers’ Retirement System
of the City of New York
38
Temasek Holdings Pte. Ltd.
8, 24, 55
Tenaska Capital Management LLC
44
Terra Firma
Texas Christian University
TherOx Inc.
Thomas H. Lee Partners LP
Thomas Weisel Partners
Washington State Investment Board
39
Wedbush Capital Partners
72
Wells Fargo & Co.
40
39
Westwood One Inc.
63
68
WJ Communications Inc.
72
WL Ross & Co.
64
4, 64
12
52
64
18, 26, 48, 64
Trivest Partners
72
Troika Capital Partners
55
TrueBridge Capital Partners
46
UNC Management Co.
12
Union Square Ventures
49
Upstart Ventures
49
Vector Capital
12
Venrock
46
Venture Michigan Fund
46
Victoria Capital
24
Vision-Ease Lens Inc.
4
64
12
46
Virginia Retirement System
Warburg Pincus
32
TLcom Capital LLP
TPG Capital
Walden Israel
50
Wells Fargo Community
Development Corp.
Thrivent Financial for Lutherans’
White Rose Fund
Top Knobs USA
W Capital Partners
4
72
Worcester Retirement System
11
YL Ventures
12
Zivity Corp.
66, 68
84
April 2008
By The Numbers
Sovereign Wealth Funds
Number of sovereign wealth funds: 41
Investment Corp. (est. 2007)
Percentage of Americans that favors
investments by foreign governments in
U.S. financial institutions: 10%
Number of U.S.-based buyout firms
known to have sold stakes to
sovereign wealth funds in the past two
years: Four (Apollo Management
investments in U.S. companies by
Australian governments: 48%
Newest sovereign wealth fund: China
Total estimated assets of those funds:
$3.2 trillion
Number of sovereign wealth funds
created since 2005: 12
Countries mulling creating sovereign
wealth funds: Bolivia, Brazil, India,
Japan, Taiwan, Thailand
Combined estimated assets of the five
largest sovereign wealth funds: $2.1
LP, Ares Management LLC,
Blackstone Group, Carlyle Group)
Number of U.S.-based venture firms
known to have sold stakes to
sovereign wealth funds in the past two
years: Zero
trillion
Number of times the term “sovereign
wealth funds” shows up in an archive
of news stories maintained by Factiva
in 2006: Five
Number of times in 2007: 4,312
First time the term was used,
according to the Congressional
Research Service: In a May 2005
article by Andrei Rozanov of State
Street Global Advisors in the
Central Banking Journal
Oldest sovereign wealth fund: Kuwait
Number of U.S. or European banks
that have raised capital from
sovereign wealth funds following the
subprime crisis: At least five
(Barclays PLC, Citigroup Inc.,
Merrill Lynch & Co., Morgan
Stanley & Co., UBS AG)
Average stake that sovereign wealth
funds hold in those banks: Less than
10%
Percentage of Americans that strongly
opposes investments by foreign
governments in U.S. banks or financial
institutions, according to a poll: 37%
Investment Authority (est. 1953)
Sources: Sovereign Wealth Fund Institute, Dealogic, Public Strategies Inc., Dow Jones & Co.
investments in U.S. by sovereign
wealth funds of China or Russia: 10%
each
Total capital invested by sovereign
wealth funds in global M&A
transactions in 2007: $48.5 billion
Portion of all M&A this represented:
A little over 1%
Portion of all M&A sovereign wealth
fund investments represent so far in
2008: Just over 5%
Largest announced sovereign wealth
fund investment, 2007 through 2008:
Government of Singapore
Investment Corp. and Kuwaiti
Investment Authority’s $12.5
billion purchase of a stake in
Citigroup Inc.

Dow Jones Private Equity Analyst

Transcription

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