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    PE Week Wire -- Wednesday, February 8

Venture Guarantees

Venture capital investing is a high-risk activity, in which even the best fund portfolios include more losers than winners. But in Pennsylvania, the risk is being substantially reduced.

The Keystone state has just kicked off its Venture Guarantee program, which is designed to encourage additional venture investments for companies from Pittsburgh to Philadelphia. Last year, 82 Pennsylvanian companies raised around $555 million in venture capital, ranking seventh and tenth, respectively, according to the MoneyTree Survey. Not bad tallies, but politicos from Gov. Rendell on down believe the locals can do better. Well, not quite on their own, but with a little bit of taxpayer-backed help.

The Venture Guarantee program was conceived as part of a $1.5 billion economic stimulus package, although the final version is a bit different than what legislators originally had in mind. Here’s how it will work: The Pennsylvania Department of Community and Economic Development (PDCED) is working with an undisclosed I-bank to form a NewCo that would raise $250 million via a preferred equity offering. The NewCo would be monetized by state guarantees, with proceeds going out as loans to VC firms that invest in Pennsylvania-based companies. Participating VC firms must commit to invest at least an aggregate of $15 million into local companies over several years, and also have – or plan to have – an in-state office staffed by one or more partners. In exchange, between 25 cents and 33 cents for every dollar invested would be supplied by the NewCo, up to $37.5 million (or $50 million in SERS or PSERS are fund LPs). The principal would have to be returned on successful investments, but the profits all belong to the VC firm.

“This is not strictly a downside protection program, because we’ve ended up providing a leveraged/incentive model,” explains John Sider, director of venture investments for the PDCED.

The formal guidelines were only released two weeks ago, and some of the NewCo details are still being worked out. Sider says that no firms have yet applied, but that any interested ones should contact him.

And, by the way, VC firms should be very interested. This program is essentially removing one-third of all VC investment risk. If your aggregate portfolio loses money, you’re partially covered. If it makes money, you lose absolutely nothing beyond a very low fixed interest rate. But the question isn’t whether or not VC funds should be interested, but rather if this is the sort of thing that a state government should be doing.

The basic answer is yes, with some caveats. Now before castigating me as a hypocrite – and a dumb one at that – let me explain. Yeah, you too Kedrosky, who paraphrased P.J. O’Rourke in saying that giving money and put protection to VCs is like giving whiskey and car keys to teenagers.

I have long opposed most state-run direct investment programs, because I feel that venture capital is done best by professional money managers who have private sector compensation/upside and no formal political obligations. Venture Guarantee, however, is not making any direct investments. Instead, it’s backing professional money managers (i.e., properly compensated/incentivized) without political obligation. You could say that the need to invest in-state is a political obligation, but firms are only required to do so if they want the loans. Since firms still bear most of the investment risk, it’s unlikely that they’d back lousy companies just to get 25 cents on the dollar.

On the other hand, folks like Kedrosky believe that such a program would nonetheless encourage VCs to make many more high-risk/high-reward bets, since the risk is automatically lowered and the reward remains elevated. It is a valid and troubling point (troubling because it’s valid), but Pennsylvania is hedging its bets my only allowing “top-tier” firms to participate. In other words, I couldn’t raise a few million bucks, move to Harrisburg and get Venture Guarantee loans. Now I know that all VC firms claim to be top-tier, but Sider insists that the vetting process will be strict. It’s a bit vague right now, but he says that each firm will be required to prove their top-tieriness with industry benchmarks, performance documentation, etc. He also says that while the final decisions will be made public, the info gathered during decision-making would not be publicly-disclosed (although a court/public interest group might disagree if the program goes south). In addition, the guarantees only apply to aggregate in-state portfolio performance, so one or two bad deals shouldn’t sink the ship.

Like so much in venture capital, Venture Guarantee is an execution play. Luckily for taxpayers, most of the execution won’t be done by the public sector.


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    Top Three

ARYx Therapeutics Inc., a Fremont, Calif.–based developer of retro-metabolic drugs, has raised $30.4 million in Series E funding. Ascent Biomedical Ventures led the deal, and was joined by return backers MPM Capitol, Nomura Phase4 Ventures, OrbiMed, Merlin BioMed, JAFCO Life Science Inv*stments, Scottish Widows Inv*stment Partnership, Montreux Equity Partners and Novel Bioventures. ARYx has raised over $110 million in total VC funding since its 1997 inception, including a $55 million Series D infusion in 2004.

ASAlliances Biofuels LLC of Dallas has secured $148 million in private equity and subordinate notes to help build three, large-scale ethanol production plants in Nebraska, Indiana and Ohio. The total construction is expected to cost $423 million, with each finished facility able to produce 100 million gallons of fuel-grade ethanol per year. Private equity backers include American Capital Strategies, Laminar Direct Capital, US Renewables Group and Midwest First Financial. Challenger Capital Group advised ASAlliances on the deal.

Ripplewood Holdings has led the acquisition of an 18.7% stake in Commercial International Bank (Egypt) SAE from the National Bank of Egypt. The deal is valued at around $227.6 million, with other consortium participants including RHJ International and Eton Park Capital Management. Commercial International Bank is based in Cairo, is publicly-traded and was formed in 1975 as a joint venture between NBE and Chase Manhattan Bank.

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speakers and attendees, and plenty of time to network. The list below shows
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information by visiting

    VC Deals

ThisNext Inc., a Los Angeles-based social ecommerce company focused of guided product discovery, has raised $3.5 million in Series A funding, according to a regulatory filing. The deal was co-led by Clearstone Venture Partners and Anthem Venture Partners.

Boundless Network Inc., an Austin, Texas-based promotional merchandising company, has secured around $4.5 million of a $5.01 million Series A round, according to a regulatory filing. Backers include Austin Ventures and Silverton Partners.

True Partners Consulting LLC, a new tax and business advisory firm launched by 26 former Arthur Anderson partners and staff, has secured $20 million in funding from Waud Capital Partners. True Partners will be led by Cary McMillan, a onetime Anderson managing partner who most recently served as CFO of Sara Lee Corp.

ShotSpotter Inc., a Santa Clara, Calif.-based developer of a system to acoustically triangulate the origin of gunfire and trigger 911 dispatch, has raised $1.86 million in Series A funding led by Lauder Partners, according to a regulatory filing.

Finjan Software Inc., a San Jose, Calif.-based provider of Web security solutions, has raised $10 million. HarbourVest Partners led the deal, and was joined by return backers Benchmark Capital and Israel Seed Partners. Finjan has raised around $44 million in total VC funding since its 1996 inception.

Kenati Technologies, a Sunnyvale, Calif.-based based developer of Linux-based networking products and solutions, has received an undisclosed amount of VC funding from INC3 Ventures, according to The Economic Times of India.

Alfresco Software Inc., a London-based provider of open-source enterprise content management solutions, has raised $8 million in Series B funding. Mayfield led the deal, and was joined by return backer Accel Partners.

CyberNet Software Systems Inc., a San Jose, Calif.-based provider of software development lifecycle services, has raised $22.5 million in new venture funding from Softbank Asia Infrastructure Fund.

Technologie Biolactis Inc., a Laval, Quebec-based developer of lactoceuticals, has raised Cdn$7.3 million in Series A funding led by Inventages Venture Capital of Switzerland. The deal also includes a Cdn$1.4 million provision for follow-on funding.

Agdata, a Charlotte, N.C.-based provider of database marketing and information processing services to the crop-protection market, has received an undisclosed amount of venture funding from Carousel Capital.

    Buyout Deals

HMV Group, a UK-based music and book retailer, has rejected a Gbp762 million buyout offer from Permira. HMV said in a statement that the deal would have undervalued HMV, even though it represents a slight premium to a stock price boosted 20% last week by word of Permira’s interest. Permira said it was disappointed by HMV’s response, and that it still may up its offer.

GTCR Golder-Rauner has committed up to $200 million in equity capital to support the launch and build-out of Graceway Pharmaceuticals Inc., a Bristol, Tenn.-based drug startup focused on acquiring, in-licensing and developing prescription products. The company will be run by Jefferson Gregory, former chairman and CEO of King Pharmaceuticals Inc. (NYSE: KG).

Castle Harlan has acquired RathGibson Inc. from Liberty Partners for $260 million. RathGibson is a Janesville, Wis.-based manufacturer of stainless steel and alloy-welded tubing products.

Fenway Partners has agreed to acquire Easton Sports for approximately $400 million, and to combine it with existing Fenway portfolio company Riddell Bell Holdings. Teachers’ Private Capital also is participating in the deal in exchange for a minority stake in the combined company. Wachovia Securities advised Easton on the deal, while Goldman Sachs advised Riddell. The two banks also are serving as lead arrangers in connection with $415 million in senior credit facilities to be used to refinance certain existing indebtedness of the combined company and to partially finance the acquisition.

Marquette Financial Cos. has acquired a significant minority interest in The Mercanti Group LLC, a Minneapolis-based boutique I-bank. No financial terms were disclosed for the deal, which closed in January.

Frontenac Co. has acquired SMS Systems Maintenance Services Inc., a Hudson, Mass.–based provider of mission-critical maintenance programs for high-end and mid-range computer hardware. No financial terms were disclosed. Company management will retain an equity interest, while Merrill Lynch Capital will provide senior financing.

Apax Partners has completed its acquisition of ConTech Construction Products Inc., a West Chester, Ohio–based provider of civil engineering site solutions, products and services. The deal is valued at more than $1 billion. Wachovia Securities advised Apax on the deal, and also led the senior financing. Goldman Sachs Mezzanine Partners led the mezzanine financing. Company management will retain an equity interest.

Univision Communications (NYSE: UVN), a Spanish-language media company worth nearly $10 billion, may put itself on the auction block, according to The New York Times.

    PE-Related M&A

Ply Gem Industries Inc., a Kearney, Mo.-based maker of construction products, has agreed to purchase AWC Holding Co. and its subsidiaries from Linsalata Capital Partners and company management for approximately $120 million. Ply Gem is a portfolio company of Caxton-Iseman Capital. AWC (Alenco) is a Bryan, Texas-based manufacturer of aluminum and vinyl windows and doors.

EquaTerra Inc., a Houston, Texas-based provider of outsourcing and insourcing solutions, has agreed to merge with TPI Inc., a The Woodlands, Texas–based provider of BPO solutions. The combined company will be named Veritage. EquaTerra is backed by Oak Investment Partners.

Network General Corp. has agreed to acquire Fidelia Technology Inc., a Princeton, N.J.-based provider of business visibility software. No financial terms were disclosed. Fidelia has raised $4 million in venture capital from JT Venture Partners, Windspeed Ventures and Freedom Hill Capital.

Integra Telecom Inc., a Portland, Ore.–based CLEC, has agreed to acquire Electric Lightwave Inc. from Citizens Communications (NYSE:CZN). The deal is valued at $243 million in cash plus the assumption of $4 million in capital lease obligations. Integra will use $450 million in new debt financing to fund the deal, and previously had raised venture capital from firms like Nautic Partners, BA Venture Partners, Shaw Venture Partners and GE Equity.

    Human Resources

Richard Huo has joined Lincolnshire Management as a managing director, focused on providing business development help for Lincolnshire portfolio companies expanding into Asia. He most recently oversaw the launch and operations of a manufacturing facility in Shanghai for Lincolnshire portfolio company Visual Products Co.

Michael Connor has joined Vulcan Inc. as corporate treasurer. He previously served as administrative partner and CFO for Flatiron Partners.

Probitas Partners has promoted Reidan Cruz to partner. He joined the San Francisco-based firm’s New York office in early 2002 as a principal with the relationships management team.

Joseph Russick has joined The Blackstone Group as a principal in the firm’s distressed debt hedge fund. He previously was a vice president with Bennett Restructuring Funds.

Ropes & Gray has added four new partners to its bankruptcy practice in New York: Mark Bane, Mark Sommerstein, Keither Wooford and Adam Kokas. All four previously were with Kelley Drye.

Justin Tang has resigned as CEO of Chinese online travel service provider eLong Inc. (Nasdaq: LONG), in order to “pursue private equity investment opportunities.” He will remain on the eLong board of directors, and will be replaced as CEO by former McDonald’s China executive Tom SooHoo.

Private Equity Week

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February 8, 2006

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