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    PE Week Wire -- Friday, May 5

Let's have a quick open-book quiz before sneaking out of work early for the weekend...

Who should be nervous?
Public pension fund managers in Oregon, Washington and any other state whose portfolio is heavily weighted toward mega-LBO funds. Why? Because KKR’s ability to raise $5 billion via a public flotation in Amsterdam could be the first phase of mega-LBO firms weaning themselves off the traditional LP teat.

KKR and its mega-ilk are obsessed with increasing their capital accounts, in order to compete with one another (kind of like Cold War nuclear proliferation). This is why Blackstone Group keeps raising its fund target instead of closing its fund, or why Bain Capital not only raised a new fund 14 months after closing its last one, but why it also doubled the new fund’s target in midstream. Oh, and TPG apparently is busting the $15 billion mark.

It is in the mega-firm community’s best interest, therefore, to have an evergreen model that doesn’t require investment committee presentations, consultant reviews, etc. This is particularly true if a firm’s older partners want to benefit from some brand equity while slowing down their actual investment activity. In the past, however: (A) Firms weren’t growing quite so fast and (B) Such a model was difficult to both capitalize and retain private equity-type confidentiality.

KKR, however, has shown that there are billions of private equity fund dollars available in the public markets. Even better, they are in Europe, where reporting regulations are far more lax than in the U.S. An argument could certainly be made that firms like KKR, Blackstone, etc. will ultimately form small “traditional” funds to keep some “value-added” limited partners (i.e., partner alma matters and favored charitable organizations), but raise most of their money via public offerings overseas. The only downside might be a reduction in LP pillaging management/transaction fees, but these are details that are sure to be worked out.

Such a strategy would neglect state pension funds, whose only real value-add is that they can – and do – write the biggest checks. If that paper can instead be produced in Amsterdam, all the better. Oregon, et. all still would have ready access to middle-market buyout and VC funds, but they implicitly rely on mega-funds as hedges. It might be time for such systems to reconsider their long-term alternative portfolio allocations, before someone does it for them.

What Is Over-Valued?
Massive Inc., the in-game advertising company scooped up yesterday by Microsoft. First, it was overvalued by the Wall Street Journal, which estimated a sale price of between $200 million and $400 million. A reliable source close to the deal says it was below $200 million, and “not just $199 million.”

Second, even Microsoft paid a bit too much if one only were to consider Massive’s current balance sheet. But strategics make M&A decisions based on tomorrow, not today, and Microsoft believes that the company will “help deliver dynamic, relevant ads across Microsoft’s online services, starting with Xbox Live and MSN Games.” It’s a smart bet, and also a strong ROI for early Massive backers like Draper Fisher Jurvetson, Newlight Associates and Tobat Capital.

Who’s Talking?
A cacophony of current and former Intel Capital executives, who are responding to the piece I wrote on Monday. The consensus? That group president Arvind Sodhani is correct when he says Intel Capital will neither be shut down nor spun out. Too much symbiosis. This, of course, hasn’t prevented me from writing a 1,700 word analysis of the matter for June's edition of Venture Capital Journal (the Wire is really just my early-morning job).

While you wait impatiently for May to end, one important point that I neglected to mention Monday: One of Sodhani’s most substantive structural changes was to loosen a deal-making dichotomy that had “strategic investors” conducting deal-sourcing/due diligence and “treasurers” formulating term sheets. Both sides now have far more free reign – in part because compensation is now tied more to IRR – although “strategic investors” presumably are better at writing term sheets than “treasurers” are at due diligence. If Intel Capital is required to make headcount cuts, expect it to come from the remaining treasury staff.

Who's Sick?
Some attendees of last week's NVCA meeting at the Fairmont Hotel in San Jose. Apparently a bunch of folks came down with gastroenteritis following the event, which has prompted an investigation by the Santa Clara County Public Health Department.

Where Will Dan Be?
Toronto next Friday. Hope to see you there. In the meantime, have a great weekend.


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    Top Three

VNU NV announced a pair of developments to help secure shareholder approval for its proposed buyout by AlpInvest, Blackstone Group, Carlyle Group, Hellman & Friedman, KKR and Thomas H. Lee Partners. First, it said that the consortium had raised its offer from €28.75 per share to €29.50 per share, which lifts the deal’s overall price from around $9.5 billion to around $11 billion (including debt). Second, it lowered the shareholder approval threshold from 95% to 80 percent.

Aerovance Inc., a Berkeley, Calif.-based drug company focused on respiratory and inflammatory diseases, has raised $60 million in Series C funding. The deal is split into two tranches, including an initial $32 million infusion and an additional $28 million based on Aerovance hitting certain milestones. Clarus Ventures led the deal, and was joined by Alta Partners and return backers Apax Partners, Lehman Brothers, NGN Capital and Burrill & Co. Aerovance was spun out of Bayer in 2004.

Synesis Life Ltd., a UK-based insurance startup formed by three former Prudential executives, has secured financial backing from JPMorgan, Royal Bank of Scotland and Warburg Pincus. No financial terms were disclosed, except that the deal should allow Synesis to accept between £7 billion and £10 billion worth of liabilities over the medium-term.

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    VC Deals

Payformance Corp., a Jacksonville, Fla.-based provider of electronic billing and payment solutions, has raised $3 million in Series E convertible preferred stock, according to a regulatory filing. Wachovia Capital Associates was joined by return backers Stonehenge Capital and ABS Capital Partners.

Radar Networks Inc., a San Francisco-based developer of a semantic applications platform for building Web 2.0 services, raised around $4.84 million in Series A funding from Leapfrog Ventures and Vulcan Capital, according to a regulatory filing.

Ingent Inc., a Munich, Germany-based provider of information retrieval solutions for computer applications, has raised $2.06 million in Series A funding led by Wellington Partners, according to a regulatory filing.

GI View Ltd., an Israel-based developer of endoscopic devices for viewing the GI tract, reportedly has raised $10 million in third-round funding. Israel Healthcare Ventures led the deal, and was joined by Delta Ventures.

XCome Technology Ltd., a Taiwan-based provider of software applications for telecom operators and handset manufacturers, has raised an undisclosed amount of Series A funding from iD TechVentures.

Polymita Technologies, a Spain-based provider of business process automation software, has raised €2.5 million in VC funding from Molins Capital Inversión and Adara Ventures.

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    Buyout Deals

Merrill Lynch Global Private Equity has completed its acquisition of NPC International Inc., a Lenexa, Kan.-based franchisee and operator of 790 Pizza Hut franchises in 26 states.

Prides Capital Partners has led a public-to-private acquisition of Pegasus Solutions Inc. (Nasdaq: PEGS), a Dallas–based provider of technology and services to hotels and travel distributors. The deal is valued at approximately $275 million, with Prides joined by Tudor Investment Corp. and Belfer Management.

Bain Capital, Carlyle Group and Thomas H. Lee Partners is considering a joint bid for arts and crafts retailer Michaels Stores Inc. (NYSE: MIK), according to Reuters. The final deal could be worth more than $5 billion. Michaels Stores stock traded up 2.7% on the news.

Perkins, Macintosh and Perkins Ltd. has raised an undisclosed amount of private equity funding from Lime Rock Partners. PMP is a manufacturer of land drilling rigs and rig components for the international oil and gas industry. It has offices in both Scotland in the Ukraine.

Spire Capital Partners has formed Ariston Global Partners, a platform investment/acquisition company focused on communications services companies for hardware providers and communications carriers. Ariston will be co-led by Steve Dubnik and Kevin Dickens, and already has made an investment in TeleSciences Inc., a Mr. Laurel, N.J.-based provider of software solutions to communications service providers for mediation and customer self service.

Oaktree Capital Management has agreed to buy UK ice cream company Richmond Foods PLC for around £182.2 million. The public-to-private deal represents a 24% premium to Richmond’s closing stock price on April 4, which is one day before Richmond announced that it had received buyout interest.

UPC Wind Partners, a Newton, Mass.-based wind farm developer, has raised an undisclosed amount of new private equity funding from Madison Dearborn Partners and a member of the D.E. Shaw group.

    PE-Backed IPOs

Northstar Neuroscience Inc., a Seattle-based medical device company focused on neuro-stimulation therapies for neurological diseases and disorders, priced 7.1 million common shares at $15 per share (above $12-$14 range), for an IPO take of approximately $106.5 million. It will to trade on the Nasdaq under ticker symbol NSTR, while Citigroup and Cowen & Co. served as lead underwriters. The company has raised around $78 million in VC funding since its 1999 inception, from firms like Mayfield, Boston Scientific, Domain Associates, Canaan Partners and VNI Investors.

    PE Exits

Houghton Mifflin Co., a Boston–based textbook publisher, has launched a $300 million dividend recap that will provide some liquidity to joint owners Bain Capital, Blackstone Group and Thomas H. Lee Partners. The floating-rate senior PIK note sale also could presage a company sale, according to Moody’s Investors Service.

Lockheed Martin (NYSE: LMT) has agreed to acquire Savi Technology Inc., a Sunnyvale, Calif.-based provider of RFID supply chain management systems. No financial terms were disclosed, although suggests a sale price of around $400 million. Vector Capital sponsored a 1999 management buyout of Savi from Raytheon, and the company since has raised around $110 million in VC funding from firms like Vector, Accel Partners, Dorset Capital, K1 Ventures and Mohr Davidow Ventures.

    PE-Related M&A, a New York–based domain name registration company, has sold its Corporate Services division to Corporation Service Co. for an undisclosed amount. Vector Capital acquired last year in a public-to-private buyout.

United Fixtures Holdings, a South Bend, Ind.-based steel-storage racking and retail display company, has acquired Interlake Material Handling Inc., a Naperville, Ill.–based manufacturer and marketer of storage racking systems and solutions in North America. No financial terms were disclosed. Wynnchurch Capital Partners acquired United Fixtures in June 2005.

Western States Opportunity LLC has completed its $53.5 million acquisition of LDF Inc., the parent company of Chicago-based Labe Bank. The deal was financed via an equity private placement led by a $50 million infusion from Castle Creek Capital Partners.

Heiploeg Beheer BV, a Dutch shrimp company controlled by Gilde Investment Management, has agreed to acquire Curacao-based shrimper Nautica Nova. No financial terms were disclosed.

    Firm & Fund News

Brooke Private Equity Advisors of Boston is raising $100 million for its BPEA Life Sciences Fund I, according to a regulatory filing. It already has secured around $26 million in commitments from LPs like the University of Arizona Foundation, the Sierra Health Foundation and the M.J. Murdock Charitable Trust.

Syncom of Silver Springs, Md. is looking to raise up to $350 million for its fifth early-stage VC fund focused on early-stage companies in underserved markets, according to a regulatory filing. DAV/Weatherly Financial is serving as placement agent.

Austin Ventures has held a $520 million final close on its ninth fund.

    Human Resources

David Harper has joined Harbet Management Corp. as a Birmingham, Ala.-based director of private equity, according to The Deal. He previously was with Comcast and, before that, with Legg Mason.

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May 5, 2006

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