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    PE Week Wire -- Thursday, March 3

Barbells, BDCs and Bain

Lots of stuff to write about this morning, including Bain Capital's reported bid to acquire the moribund National Hockey League (would the deal be considered a turnaround?). First up, however, is the long-delayed barbell strategy discussion:

For those who don't remember last Thursday's column, barbell strategy is when limited partners primarily make commitments to buyout firms on the micro/small and large/mega ends of the market, while mostly eschewing the vast array of middle-market opportunities. It was advocated by Barry Gonder of Grove Street Advisors during the Wharton Private Equity conference last month, and seems to be gaining traction with a growing number of institutional acolytes. My question to you, therefore, was whether or not the strategy makes sense.

The first thing that many of you asked was how "middle-market" is being defined. In general, such terms are based on current fund size, since it generally corresponds to deal-size focus. I couldn't get Gonder on the phone, but did speak with Eric Hirsch, chief inv*stment officer for Hamilton Lane Advisors, which used to advise Gonder while he was still at CalPERS, and which also has actively pursued the barbell strategy for over six years. His categories seemed appropriate, and they were: Small market funds are <$250m; middle-market are $400m-$1.5b; large-market are $1.5b-$4b; and mega-market are >$4b.

Hirsch says that barbell strategy obviously doesn't work perfectly for everyone, since CalPERS is too large to commit equal amounts of capital to the small and large/mega-markets, while some smaller systems probably can't even scrounge up the minimum requirement for Carlyle Group's new $6.5 billion (or higher) fund-raising drive. However, he says that the best returns are at those ends of the market, so the best performance will be at the market edges. Many of you also wrote in to agree, and to add that middle-market performance could continue to decline, due to a current glut of middle-market funds.

What is so interesting about this performance theory, of course, is that it goes completely against the conventional wisdom that middle-market funds have better long-term performance than do large-market of mega-market funds (small-market funds are generally accepted to be the best, albeit trickiest, bet). This is specifically believed to be true when one looks at long-term benchmarks of 15 or 20 years. The question, however, is whether market fluidity is cause for reconsideration. For example, KKR raised $316 million for a 1982 fund, $1 billion for a 1984 fund, $750 million for a 1985 fund and $672 million for a 1986 fund. Each of those KKR funds was certainly playing the large- or mega-markets for their time (deals and enterprise values were smaller in the 1980s), but would be considered middle-market by today's standards. As such, the argument is that some of today's 15 or 20-year middle-market benchmarks could include those high-performing KKR fund, and thus theoretically could be artificially skewed upward.

This point was made by many of you, and it's well taken, although it's also worth noting that other readers believe that folks like Gonder - and probably Hirsch - have an ulterior motive for adopting barbell strategy. In short, they feel that it helps justify massive commitments to massive funds, and less time spent sorting through the middle-markets. Others also stress that LPs should focus exclusively on fund managers, regardless of fund size. We'll get to all points of view tomorrow.

** Ask a stupid question get over 150 emails. Yesterday, I suggested that the only way for individuals to participate in private equity was to either be filthy rich and/or know some folks already in the market (preferably fund managers). Then I asked if I was missing something. The answer, of course, is a resounding yes. First off, I forgot all about business development companies (BDCs) like Allied Capital, American Capital, Apollo, etc. This is particularly galling since the PE Week Wire was obsessed with BDCs for much of last spring. There also are the venture capital trusts (VCTs) in London, and the occasional opportunities for corporate employees to participate in their company's venture or private equity programs. Third-highest response to a Wire column so far, behind the ones about lawn care and the Iraq War.

** No time to discuss Bain and the NHL. sorry, but it's getting late.

** Finally, a sad note from the venture capital community, as Don Feddersen passed away last Thursday at the age of 70. Don spent the 1970s running such companies as Entrex Inc. and Applicon Inc., after which he became a general partner with Charles River Ventures. He "semi-retired" in 1997, and then took on a venture partner role with Bessemer Venture Partners. He is survived by wife Catherine, daughter Kimberly, sons John, Brett and Daniel, sister Rith Sievers, twin sister Dorothy Liveley and brother David. He also had nine grandchildren.

Visiting hours will be held at the J.S. Waterman Funeral Home in Wellesley, Mass. this Friday from 1:30-3:30pm, and from 6:30-8:30pm. A service will be held Saturday at Wellesley College's Houghton Memorial Chapel at 11am. In lieu of flowers, donations may be made to Bone Marrow Transplant Research, c/o Dr. Robert Soiffer, Dana Farber Cancer Institute, 44 Binney Street, Boston, MA 02115. Directions to both the funeral home and Wellesley College can be found at www.mem.com

 

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    Top Three

Mary Ann Gray, former executive director of the Mid-Atlantic Venture Capital Association (MAVA), has been sentenced to two years in prison, after being convicted of embezzling approximately $400,000 from the group. Her attorneys had been looking for 12 months of home confinement.

Xtent Inc., a Menlo Park, Calif.-based developer of stent systems, has raised $25 million in Series C funding. Morgenthaler Ventures led the deal, and was joined by fellow return backers Advanced Technology Ventures, Latterell Venture Partners and Split Rock Partners (co-manager of St. Paul Venture Capital). The company has raised over $40 million in total VC funding, including a $15.2 million Series B round in 2003 at a post-money valuation of approximately $35 million. www.xtent.com

Evergreen Pacific Partners of Seattle has closed its inaugural buyout fund with $275 million in limited partner commitments. Limited partners include West AM, the Public School Employee Retirement System of Pennsylvania, Duke University and Mass Mutual. The firm plans to participate in traditional buyouts, management buyouts and growth equity deals for middle-market companies in the Western U.S. and Canada. www.eppcapital.com

    VC Deals

Trema, a Sweden-based provider of strategic software solutions to the financial industry, has raised 8 million euros in venture funding. Investcorp led the deal, which bought out company founders, and was joined by return backers Carlyle Group, ABS Ventures and Norsk Vekst. www.trema.com

Vizional Technologies Inc., an El Segundo, Calif.-based provider of RFID supply chain solutions, has raised $3.5 million in Series A funding. Draper Fisher Jurvetson and Zone Venture Fund co-led the deal. www.vizional.com

Phasebridge Inc., a Palo Alto, Calif.-based photonics company, has raised an undisclosed amount of second-round funding, led by Clearstone Venture Partners. www.phasebridge.com

Medsonix Inc., a Las Vegas-based medical device company focused on non-invasive pain relief, has received an undisclosed amount of venture funding from the DaVinci-Franklin Fund I. www.medsonix.com

Cittio Inc. (f.k.a. JJ Labs), a San Francisco-based provider of network monitoring and operations software, has raised $3.5 million in venture funding from Hummer Winblad Venture Partners. www.cittio.com

    Buyout Deals

GMT Communications Partners has acquired Multicom Security AB, a Sweden-based provider of fixed and mobile communications services. The deal was valued at 60 million euros, with selling parties including Industri Kapital and TeliaSonera. www.multicomsecurity.se

Gryphon Investors has acquired Consolidated Fire Protection LLC from Caltius Private Equity Partners, Westar Capital and other shareholders. The deal was done in partnership with company management, and also included Jerry Rose, former vice-chairman of Jones Lang LaSalle, and Jim Didion, former chairman and CEO of CB Richard Ellis. No financial terms were disclosed. Consolidated Fire Protection is an Irvine, Calif.-based provider fire and life safety. www.gryphon-inv.com

    PE-Backed IPOs

InterContinentalExchange, an Atlanta-based operator of the London-based Internet-based global OTC marketplaces for commodities trading, said that it plans to file for an IPO within the next several weeks. The company, which owns London's International Petroelum Exchange, sold a minority ownership position last year to TA Associates. www.theice.com

    PE-Backed M&A

NeoPhotonics Corp., a San Jose, Calif.-based maker of PLC-based integrated optical modules and subsystems, has acquired all state-owned shares of Photon Technology Co. Ltd., a Shenzhen, China-based manufacturer of optical components for broadband access and backbone optical networks. The deal gives NeoPhotonics approximately one-third of all outstanding Photon Technology shares, in exchange for an undisclosed amount of cash and stock. NeoPhotonics has raised nearly $100 million in venture capital funding since its 1996 inception, from firms like Venrock Associates, Institutional Venture Partners, Bay Partners, Draper Fisher Jurvetson, Nth Power, Oak Inv*stment Partners, SBV Ventures and Rockport Capital Partners. www.neophotonics.com www.photontec.com

Mellon Financial Corp. (NYSE: MEL) has acquired Derivatives Portfolio Management LLC, a Somerset, N.J.-based provider of fund administration and back-office outsourcing to the alternative asset management market. No financial terms were disclosed. DPM had raised $4 million in venture funding nearly three years ago from Edison Venture Fund and Milestone Venture Partners. www.dpmllc.com

GPC Biotech AG (Nasdaq: GPCB) has acquired the material assets of Axxima Pharmaceuticals AG, a Munich-based drug discovery company that filed for insolvency last December. The deal is valued at 13.7 million euros in stock. Axxima had raised more than 50 million euros in VC funding from such firms as TVM-Techno Venture Management, AlpInvest Partners, Life Science Ventures, Heidelberg Innovation, SV Life Science Advisors and Novartis. www.axxima.com

    PIPE Deals

Allos Therapeutics Inc. (Nasdaq: ALTH), a Westminster, Colo.-based drug company focused on cancer therapies, has agreed to sell $50 million of exchangeable preferred stock to Warburg Pincus, at a price of $22.10 per share (7.5% discount from 20-day trailing average). The deal is expected to close tomorrow. www.allos.com

Refocus Group Inc. (OTC BB: RFCG), a Dallas-based medical device company focused on eye disorders, has held a first close on half of a $14 million Series A-1 funding commitment from Medcare Inv*stment Fund III. A second close is expected to occur within the next year. www.refocus-group.com

    Human Resources

The Aurora Funds has promoted both Chris Kroeger and Grant Jackson to the role of principal. Kroeger joined Aurora Funds in 2003 as an associate, while Jackson joined in May 2004 as a senior associate. www.aurorafunds.com

ATP Private Equity Partners, a Copenhagen-based fund-of-funds manager, has promoted Susanne Forsingdal and Klaus Ruhne to the position of partner. Forsingdal joined ATP in 2003, after having served as senior vice president of inv*stor relations at Danske Bank. Ruhne also joined in 2003, after having served as a director of corporate finance with Danske. www.atp-pep.com

Gary Neuser has joined Credit Suisse First Boston as head of private client services. He previously served as senior vice president of UBS Wealth Management, and before that in various executive roles with Merrill Lynch. www.csfb.com

    Firm & Fund News

Hana Bank, Cambridge Capital Partners and IMM Inv*stment Corp. have held a $50 million first close for a jointly-managed private equity fund that will participate in middle-market buyouts, growth financings and recaps in both the U.S. and Korea. It hopes to close on an additional $50 million to $100 million by year-end. www.hanabank.com www.cambridgecapital.com

El Dorado Ventures has closed its seventh fund with $200 million in limited partner commitments. It also has promoted Scott Irwin to the position of general partner. Gary Kalbach, who co-founded EDV in 1986, will remain as a founding partner, but will not play an active role in the new fund. www.eldorado.com

Gold Hill Venture Lending Partners has closed on a new venture debt fund with $215 million in limited partner commitments. The firm was formed in 2002 by four senior lending officers from Silicon Valley Bank, which is a limited partner in the fund. www.ghvl.com

August Capital of Menlo Park, Calif. has received $283 million in limited partner commitments for its fourth fund, according to a regulatory filing. The only inv*stor listed was Horsley Bridge Partners. www.augustcap.com

Global Vision AG Private Equity Partners, a Germany-based fund-of-funds manager, said that its sixth vehicle (which still has not yet held a final close) has made LP commitments to Institutional Venture Partners XI, Carlyle Partners IV and Sofinnova Capital V. www.globalvision-ag.com

    In Memoriam

Don Feddersen passed away last Thursday at the age of 70, after a battle with leukemia. He spent the 1970s running such companies as Entrex Inc. and Applicon Inc., after which he became a general partner with Charles River Ventures. He "semi-retired" in 1997, at which point he took on a venture partner role with Bessemer Venture Partners. He is survived by: wife Catherine, daughter Kimberly, sons John, Brett and Daniel, sister Rith Sievers, twin sister Dorothy Liveley and brother David. He also had nine grandchildren.

Visiting hours will be held at the J.S. Waterman Funeral Home in Wellesley, Mass. this Friday from 1:30-3:30pm, and from 6:30-8:30pm. A service will be held Saturday at Wellesley College's Houghton Memorial Chapel at 11am. In lieu of flowers, donations may be made to Bone Marrow Transplant Research, c/o Dr. Robert Soiffer, Dana Farber Cancer Institute, 44 Binney Street, Boston, MA 02115. Directions to both the funeral home and Wellesley College can be found at www.mem.com

 

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March 3, 2005













 



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