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    PE Week Wire -- Monday, October 30

Lagging Indicators...

Thomson Financial and the NVCA today released their latest private equity performance numbers, and I’m trying to analyze them in the context of Sevin Rosen’s “VC model is severely damaged” argument. I see some validation for Steve Dow & Co., and also some contradiction (between Dow and the numbers, not between Dow and this company).

Dow believes that VCs are blindly adhering to the following article of faith: Short-term ROI isn’t very good, but long-term investment in the VC asset class will outperform most major public indices. After all, some variation of that line has been in every Thomson/NVCA performance press release that I can remember (including today’s). So “stick with us,” the VCs tell their LPs, because "we’ll make you money in the end."

The “blind” part is that such statements do not seem to acknowledge that the 10-year VC performance figures are around one year away from a harrowing fall. In fact, it may have already begun.

10-year horizon VC performance through Q2 2005 was 27.4%, then dropped to 22.7% at the end of Q1 2006 and currently stands at 20.8% (performance data lags by one quarter). Now imagine what will happen once the data begins to include all of the bubble-era Internet and telecom deals. We’ll be looking at brutal ten-year returns at least through 2009, and probably a bit longer. Dow’s basic point here is that the VC model isn’t nearly-damaged – it’s been damaged for quite some time, but the long-term numbers just have not yet reflected it.

But it also is noteworthy that the three-year and five-year VC performance data has begun to tick up a bit (discussing one-year returns is like discussing how a wine tastes one day after it’s been barreled). Dow would certainly counter that neither the latest three-year (9%) and five-year (-3.5%) VC returns are outperforming much of anything – and he’d be right – but the trend-line’s upward swing should be enough to at least instill some optimism that investors have learned from past mistakes.

Perhaps it’s simply that the “too much money chasing too few deals” paradigm has become a bit less severe. Certainly possible. But it’s also worth considering that the real lagging indicator here is the recent upward swing, not the older downward one. (Note: Thomson Financial signs my paychecks, but I’m not involved in the data collection).

*** The numbers themselves are available at the NVCA website. You’ll notice that short-term buyout figures continue to be extraordinary. It also is worth pointing out that the LBO J-Curve is far less relevant today than is the VC J-Curve, thanks to an explosion of financial engineering via dividend recaps, portfolio company management fees and the like...

*** Names of those working on Highland Capital’s retail fund -- being run by Tom Stemberg -- continue to trickle out. On Friday it was Ted Phillip, and today it’s former Staples exec Todd Krasnow (who will help on a part-time basis). More to come…


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    Top Three

TA Associates has completed a €153 million leveraged buyout of eDreams, a Barcelona, Spain-based online travel company. TA was joined by company management, while sellers included 3i Group, Apax Partners, Atlas Venture and DCM-Doll Capital Management.

Spot Runner Inc., a Los Angeles-based Internet ad agency for local businesses, has raised $40 million in Series C funding. New backers include WPP, CBS Corp., Interpublic Group, Allen & Co. Tudor Inv*stment Corp., media executive Lachlan Murdoch and financier Vivi Nevo. Return backers include Index Ventures and Battery Ventures.

IBM (NYSE: IBM) and Lehman Brothers (NYSE: LEH) have formed a $180 million fund to invest in mid-stage to mature Chinese companies across a range of industry sectors. The companies may be public or private.

    VC Deals

IMI Intelligent Medical Implants AG, a Zug, Switzerland–based developer of neuro-stimulation devices, has raised €15 million in Series B funding. Global Life Science Ventures and Abingworth Management co-led the deal, and were joined by Quantum Technology Partners and Series A backer PolyTechnos.

Rhythm NewMedia Inc., a Mountain View, Calif.-based provider of mobile video advertising insertion, has raised $18 million in Series B funding. Carlyle Venture Partners led the deal, and was joined by return backers Lightspeed Venture Partners, Morgenthaler Ventures and Rembrandt Venture Partners.

XenSource Inc., a Palo Alto, Calif.-based provider of open-source virtualization solutions, has secured $15 million of a $21 million Series C round, according to a regulatory filing. Return backers include Accel Partners, Kleiner Perkins Caufield & Byers, Radar Partners and Sevin Rosen Funds. XenSource previously had raised around $23 million.

iDev Technologies Inc., a Houston, Texas-based developer of medical devices for endovascular interventional use, has secured $14.2 million in Series B funding. RiverVest Venture Partners led the deal, and was joined by return backer PTV Sciences.

Go2 Directory Systems, an Irvine, Calif.-based mobile directories company, has raised $13 million in new VC funding from Geosign Corp., according to VentureWire. This is the company’s first outside capital infusion since a 2002 management buyout sponsored by Hancock.

Monitor110 Inc., a New York-based provider of real-time Internet monitoring service for institutional investors, has raised $11 million in Series C funding. Draper Fisher Jurvetson led the deal, and was joined by return backers like DFJ Gotham Ventures and Acadia Woods Partners.

Thumbplay Inc., a New York-based online retailer of mobile entertainment content, has raised $10 million in Series C funding. Bain Capital Ventures led the deal, and was joined by return backers SoftBank Capital and i-Hatch Ventures. Thumbplay also secured a $5 million line of credit with Silicon Valley Bank., a Monterey, Calif.-based provider of private label ecommerce shopping solutions, has raised around $10 million in additional Series A-1 funding, according to a regulatory filing. The round total now stands at $35.65 million, with Oak Investment Partners serving as deal lead and Pagemill Partners serving as placement agent.

Intrusic Inc., a Burlington, Mass.-based provider of information security solutions, has raised $8 million in Series B funding. North Bridge Venture Partners led the deal, and was joined by fellow return backers DFJ New England and Draper Fisher Jurvetson.

Echopass Corp., a Pleasanton, Calif.-based provider of call and contact center solutions, has secured $6.06 million of a $9.73 million Series E round, according to a regulatory filing. Shareholders include Advanced Equities, Canaan Partners, New Enterprise Associates and Outlook Ventures.

uShip Inc., an Austin, Texas-based provider of an online marketplace for moving and shipping, has raised $5.1 million in Series B funding, according to a regulatory filing. DAG Ventures was joined by return backer Benchmark Capital.

Aruba Networks Inc., a Sunnyvale, Calif.-based provider of wireless LAN technology, has raised around $5 million in additional Series D funding, according to a regulatory filing. This brings the round total to around $30 million. Artis Capital Management led the overall round, and was joined by Matrix Partners, Sequoia Capital, Trinity Ventures and WK Technology Funds.

Quantum Secure Inc., a San Jose, Calif.-based provider of policy-based physical security management solutions, has secured $3.54 million of a $5.63 million Series A round led by Dunrath Capital, according to a regulatory filing.

Top10 Media Inc., a Cambridge, Mass.–based operator of user-generated online communities, has raised $3.5 million in Series A funding and acquired blog aggregator, according to VentureWire. Highland Capital Partners led the deal, and was joined by return backer Schooner Capital.

LucidPort Technology Inc., a Mountain View, Calif.-based fabless semiconductor company that develops UWB solutions, has raised $2.5 million in Series B funding, according to a regulatory filing. Backers include Draper Richards and Draper Associates.

Duality Inc., a Mountain View, Calif.-based provider of “virtual mobile enterprise” communications services for SMEs and verticals within large organizations, has raised $2 million in first-round funding from Alsop Louie Partners, according to a regulatory filing.

Transonic Combustion, a Camarillo, Calif.-based developer of emission-reduction and gasoline efficiency technologies, has raised an undisclosed amount of VC funding from Khosla Ventures, Rustic Canyon Partners and Venrock Associates. The news was first reported at

Netaphor Software Inc., an Irvine, Calif.-based provider of software for printer asset management, has raised an undisclosed amount of Series A funding from vSpring Capital.

    Buyout Deals

Fortress Investment Group has completed its public-to-private acquisition of Canadian resort operator Intrawest Corp. (NYSE: IDR) for $35 per share. The total deal was valued at $2.8 billion (including assumed debt).

Austin Ventures has acquired and recapped All Star Directories, a Seattle–based publisher of online education directories. No financial terms were disclosed. Austin said that the deal resulted from a partnership with entrepreneur-in-residence Elisabeth DeMarse (former BankRate CEO), while All Star Directories was advised by media banker DeSilva + Phillips.

Hard Rock Café reportedly will receive second-round bids from such groups as Permira, TDR Capital Apollo Management and Pilot Group (MTV co-founder Bob Pittman’s firm). Hard Rock is owned by UK-based Rank Group, and is believed to be worth nearly $1 billion.

Steel Partners has made a $194 million unsolicited offer to buy Japanese instant-noodle company Myojo Foods Co. Ltd.

Production Services Associates Inc., a Deerfield, Ill.–based provider of production services for the direct mail and plastic card industries, has completed a recapitalization sponsored by Norwest Equity Partners. No financial terms were disclosed for the deal, which included participation by existing management shareholders.

    PE-Backed IPOs

Opnext Inc., an Eatontown, N.J.-based optical components maker, has filed for a $150 million IPO. It plans to trade on the Nasdaq under ticker symbol OPXT, with Goldman Sachs serving as lead underwriter. Hitachi is the company’s primary shareholder, while others include Clarity Partners and Cross-Atlantic Capital Partners.

ACA Capital Holdings Inc., a New York-based specialty finance company focused on asset management services and credit protection products, has set its proposed IPO terms to around 12.2 million common shares being offered at between $15 and $17 per share. It plans to trade on the NYSE under ticker symbol ACA, with Credit Suisse, JPMorgan and Bear Stearns serving as co-lead underwriters. Shareholders include Bear Stearns Merchant Banking, Stephens Group and Aegon USA.

Capella Education Co., a Minneapolis-based provider of online post-secondary education services via the Internet, has set its proposed IPO terms to four million common shares being offered at between $17.50 and $19.50 per share. It plans to trade on the Nasdaq under ticker symbol CPLA, with Credit Suisse serving as lead underwriter. Shareholders include Forstmann Little, Technology Crossover Ventures, Maveron, Insight Venture Partners and Cherry Tree Ventures.

Spirit Aerosystems Holdings Inc., a Wichita, Kan.–based non-OEM designer and manufacturer of aerostructures, has set its proposed IPO terms to around 52.08 million common shares being offered at between $23 and $25 per share. It plans to trade on the NYSE under ticker symbol SPR, with Credit Suisse, Goldman Sachs and Morgan Stanley serving as co-lead underwriters. Onex Partners is the company’s majority shareholder.

    PE-Backed M&A

Turin Networks Inc., a Petaluma, Calif.-based provider of IP and multiservice optical transport solutions, has acquired the product portfolio and most material assets of White Rock Networks, a bankrupt provider of next-generation optical transport products for metro networks. The deal reportedly is valued at less than $4 million. Turin has raised nearly $190 million in total VC funding since its 1999 inception, from firms like Bay Partners, Baker Capital, DCM-Doll Capital Management, Motorola Ventures, RWI Group, Sequoia Capital, Telos Venture Partners and Van Wagoner Capital. White Rock of Richardson, Texas had raised around $160 million from 3i Group, Cypress Semiconductor, Dali Hook Partners, Fremont Ventures, Inv*stor Growth Capital, Mayfield, Meritech Capital Partners, Oak Inv*stment Partners and Pacesetter Capital.

    PE Exits

ECI Partners has sold UK-based holiday company Kirker Travel to Kuoni for an undisclosed amount. ECI had acquired Kirker in a 2002 management buyout.

    Firms & Funds

Warburg Pincus has closed its first dedicated real estate fund with $1.2 billion in capital commitments.

Novak Biddle Venture Partners has closed its fifth fund with $227 million in capital commitments. Returning limited partners include Common Fund, FLAG Venture Partners, Verizon, ATP Private Equity Partners, Howard Hughes Medical Institute, Indiana University, Northern Trust, Notre Dame, Park Street, Silicon Valley Bank, the State Retirement Plans of Virginia and North Carolina, University of California, University of Richmond and Virginia Tech. New LPs include Carnegie Mellon University, the Church Pension Fund, Georgetown University, the Hillman Family, Kenyon College, Little Hawk Venture Opportunity Fund, Lumina Foundation, Pantheon Ventures, Princeton University, Purdue University, University of Minnesota and the University of Virginia.

HSBC reportedly is considering a re-launch of its direct private equity business, according to Private Equity Online. The bank spun out Montagu Private Equity three years ago.

Ethos Private Equity of South Africa has closed its fifth fund with around $750 million in capital commitments.

Morgan Stanley has agreed to acquire a minority stake in hedge fund manager Avenue Capital Group. No financial terms were disclosed, but Bloomberg reports that Morgan Stanley paid around $280 million for just under 20% of Avenue, which has $12 billion in assets.

Morgan Keegan of Memphis, Tenn. is raising a $50 million private equity fund-of-fund, according to a regulatory filing.

    Human Resources

Novak Biddle Venture Partners has promoted four professionals to general partner: Philip Bronner, Andrea Kaufman, Tom Scholl and CFO Joy Binford. The firm also hired Janet Yang as a principal. She previously worked with a China-based IT company and San Francisco-based VC firm Draper Richards.

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October 30, 2006

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