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    PE Week Wire -- Tuesday, April 26

VC Data Takes A Dive

Q1 venture capital disbursement figures were released this morning by the MoneyTree Three of PricewaterhouseCoopers, the National Venture Capital Association and Thomson Venture Economics (publisher of the PE Week Wire). The basic story is that VC activity was down from the preceding quarter, with just 674 U.S.-based companies raising approximately $4.63 billion. That represents a 14% deal volume and 15% inv*stment volume decrease from the $5.44 billion raised by 776 U.S.-based companies in Q4 2004. The number of deals was a bit higher than during the first quarter of 2004 (674 vs. 665), while disbursement volume was significantly lower ($4.63 billion vs. $5.03 billion).

The big question, of course, is why did disbursement activity drop, particularly when anecdotal evidence suggests that VCs are as busy as ever? The following are some popular explanations, including two that I donít think hold much weight.

IPO market scaring life science-focused VCs:
The most noticeable drop in Q1 data is in the life sciences space (as broadly defined), where there were 31% fewer dollars disbursed than in Q4 2004. For example, life sciences disbursements accounted for 31.33% of all VC disbursements in Q4 2004, but just 25% in Q1 2005. This margin thins a bit when compared to all of 2004 (29% vs. 25%), but is still significant.

The data drop was prompted by a relative lack of massive, late-stage pharma deals. This, in turn, was likely caused by increasing concern over the current public exit environment in general, and for pharma in particular. Not too long ago, VCs felt it was best to buy into a clinical-stage company, because it could quickly be flipped via an IPO. No longer. Instead, many VCs seem to feel itís better to get in a bit earlier, thereby giving themselves time to let the public markets loosen up (unrelated: All PE folks -- not just life sciences ones -- should be pretty worried about the IPO market -- take a look at what happened to Accuride).

U.S.-based VCs doing more deals in Europe and Asia
The MoneyTree data only reflects deals for U.S.-based companies, which means that they do not include the apparent boost in activity overseas by U.S.-based VCs (not to mention in Canada). I donít have statistics to back this up (as Q1 European/Asian figures not yet available), but it is almost certainly one reason why domestic data is dropping while domestic VCs seem so overwhelmed.

Q1 is usually slower than Q4
Generally true. Seven of the last nine first quarters have had lower disbursement totals than have their Q4 predecessors. The only exceptions were Q1 1999 and Q1 2000. Big part of the rationale here is that VCs feel more legal and accounting pressure to finish up deals before moving to a new calendar, while the Q1-Q2 wait isnít as important.

VCs have been busier, but busier fund-raising
Nope. Sure thereís been a lot of fund work in Q1, but not nearly as much as in Q4 2004.

VCs are doing more deals, but keeping them in stealth mode (i.e., not reporting them)
This is the trendiest excuse explanation, and itís been trumpeted by some of the nationís most successful, early-stage VCs. The last time we heard this was, conveniently, in Q3 2004, when data also was down. Of course, we didnít here it when numbers increased in Q4 2004, which makes one want to ask Moritz, et. all if stealth deals took a quarter off.

The reality is that while there has been an actual increase in stealth deals, it isnít enough to really move the data needle much one way or another. First of all, these deals are typically for very young companies, which means that they are for small dollar amounts. As such, it would take an enormous increase in deal completion to affect multi-billion figures. Moreover, many ďstealthĒ deals are actually reported to MoneyTree by their VCs, but with the condition that they remain confidential (i.e., included for aggregate data purposes, but no further info publicly disclosed).

MoneyTree reports 16 such deals for Q1. This is, admittedly, not a great showing, and is down a bit from the norm. On the other hand, lots of so-called stealth deals actually are included, by name, in the quarterly data. The BusinessWeek Dealflow blog, for example last week ďuncoveredĒ six stealth deals, but half of them are included, by name, in the MoneyTree data (BA Systems, FilmLoop and Spatial Photonics). Again, the numbers may be a bit artificially low, but not nearly so much as to explain a 15% decrease.

The Q1 VC disbursement press release is available at

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    Top Three


Accuride Corp., an Evansville, Ind.-based maker of trailer and heavy-duty truck wheels, priced 11 million common shares at $9 per share, for a total IPO take of approximately $99 million. The company originally hoped to raise $290 million by pricing 13.9 million shares between $17 and $19, but later cut its share and pricing expectations to 10 million and $10-$12, respectively. Nonetheless, it still couldnít hit its reduced goals. Accuride was majority-owned by Kohlberg, Kravis, Roberts & Co. prior to the IPO, while other significant shareholders included Trimaran Capital Partners, RSTW Partners and Albion Alliance.

Valero Energy Corp. (NYSE: VLO) has agreed to buy fellow oil refiner Premcor Inc. (NYSE: PCO) for $3.4 billion in cash, and another $3.5 billion worth of Valero stock. Once finished, the combined company will be the largest U.S. oil refiner, besting both Exxon Mobil and ConocoPhillips. The Blackstone Group currently maintains a 21% stake in Premcor.

Clearstone Venture Partners has raised more than $200 million for its third fund, which will focus on early-stage opportunities in the IT sector. Limited partners include CalPERS, CalSTRS, the State of Michigan, the Pennsylvania State Employeesí Retirement System, J.P. Morgan Pooled VC Private Inv*stors and the University of California. Clearstone has offices in both Santa Monica, Calif. and Menlo Park, Calif.

    VC Deals

Norwest Equity Partners is leading a $31 private equity deal for two farmer-backed ethanol plants: Frontier Ethanol LLC near Gowrie, Iowa, and Horizon Ethanol LLC near Jewell, Iowa. Also participating is ethanol producer the Broin Cos., and local farmers.

Novazone Inc., a Livermore, Calif.-based provider of ozone-based solutions to improve the safety and freshness of food and water, has raised $10.6 million in Series A funding. Foundation Capital led the deal, and was joined by Keiretsu Forum.

Arena Solutions Inc., a Menlo Park, Calif.Ėbased provider of on-demand product lifecycle management software for mid-sized manufacturers, has raised $15 million in fourth-round funding. BA Venture Partners led the deal, and was joined by Otter Capital, Arthur Rock and Warren Hellman.

Prospex Medical Inc., a Minn.-based medical technology incubator, has raised $1.5 million in Series A funding. Polaris Venture Partners and New Enterprise Associates co-led the deal, and were joined by Prospex co-founder Michael Berman.

Solace Systems Inc., an Ottawa-based provider of carrier-scale multi-service message routing solutions, has raised an undisclosed amount of private equity funding. EdgeStone Capital Partners led the deal, and was joined by Teachersí Private Capital.

Reconnex, a Mountain View, Calif.-based provider of enterprise network security solutions, has raised $3.5 million in additional Series B funding from Levensohn Venture Partners. The company has now raised $11.3 million in total VC funding, including earlier infusions from Norwest Venture Partners and Outlook Ventures.

Telarix Inc., a Vienna, Va.-based provider of interconnect business optimization software for global telecom carriers, has raised $3 million in VC funding from SpaceVest.

ActivBiotics Canada Inc., a Toronto-based drug company focused on treating infections caused by the bacterium C.difficile, has raised US$5 million in funding from VenGrowth Private Equity Partners. ActivBiotics Canada is a newly-formed Canadian arm of Lexington, Mass.-based ActivBiotics Inc.

    Buyout Deals

Veronis Suhler Stevenson has acquired Facts On File Inc., a New York-based publisher of print and online reference materials for schools and libraries. No financial terms were disclosed.

CVC Capital Partners formalized the withdrawal of its offering for Swiss flooring company Forbo Holdings AG, by rescinding its application from the European Commission.

    PE-Backed IPOs

Apollo Management is rolling up three chemical companies in its portfolio, and then hopes to raise $800 million via an IPO. The three companies are Borden Chemical Inc. (acquired last August), Resolution Specialty Materials LLC (acquired in 2000) and Bakelite AG (agreed to be acquired). The new company is named Hexion Specialty Chemicals Inc., and is planning to trade on the NYSE under ticker symbol HXN.

Ruthís Chris Steak House Inc., a Metairie, La.-based restaurant operator, has filed to raise $235 million via an IPO of common stock. The company plans to trade on the Nasdaq under ticker symbol RUTH, with Banc of America Securities and Wachovia Securities serving as lead underwriters. Ruthís Chris is controlled by private equity firm Madison Dearborn (79.3% pre-IPO position), while other significant shareholders include Wachovia and Goldman Sachs.

New Skies Satellites Holdings Ltd. has set its proposed IPO terms to 11.9 million common shares being offered at between $18 and $20 per share. The Bermuda-based communications satellite operator was acquired late last year by The Blackstone Group.

    PE-Backed M&A

VeriCenter Inc., a Houston, Texas-based provider of IT infrastructure and managed services, has acquired substantially all the assets of Agiliti Inc., a St. Paul, Minn.-based provider of managed hosting solutions. VeriCenter will retain Agilitiís team to operate the managed hosting and data center operations, while Agilitiís professional services team has spun off to form a new company focused on IT integration consulting. No financial terms of the acquisition were disclosed. VeriCenter has raised $12 million in VC funding from Intel Capital, Broadband Venture Partners and BMC Software, while Agiliti had raised over $60 million from Affinity Capital Management, American Express, Dell Ventures, Delphi Ventures, Norwest Equity Partners and the Rahn Group.

Beacon Power Corp. (Nasdaq: BCON), Wilmington, Mass.-based designer of products for electric power and grid voltage and frequency regulation, has agreed to acquire NxtPhase T&D Corp., a Vancouver-based supplier of digital and fiber optic products to the electric power and grid monitoring market. NxtPhase has raised approximately $60 million in VC funding from GrowthWorks, Perseus, GE Equity, Canadian Science and Technology Fund, Reliant Energy Ventures, Mitsubishi Corp., Hydro-Quebec CapiTech and Ventures West Management. The combined company has received a commitment for $4.4 million in PIPE funding from Perseus.

Tandem Health Care Inc., a Maitland, Fla.Ėbased provider of long-term care services, has agreed to acquire 15 nursing care, assisted living and independent living facilities from Diakon Lutheran Social Ministries. The acquired facilities are in Pennsylvania and Delaware. No financial terms of the transaction were disclosed. Tandem is a portfolio company of Behrman Capital.

Pennfield Holdings LLC, a portfolio company of Cleveland-based Resilience Capital Partners, has acquired Midwest Scr*w Products, an Eastlake, Ohio-based manufacturer of machining solutions for the semiconductor, fluid power, aerospace and industrial markets. No financial terms were disclosed.

    Firm & Fund News

Levensohn Venture Partners of San Francisco has closed its third fund with $60 million in limited partner commitments.

    Human Resources

Francesco Mainolfi has joined The Richcourt Group as chief inv*stment officer, a new position. He most recently served as principal inv*stment officer with the World Bank Pension Fund, where he oversaw the hedge fund team. Richcourt Group is an international hedge fund-of-funds management firm majority-owned by Hamilton Lane.


Meridian Automotive Systems Inc., a Dearborn, Mich.-based auto-parts maker, is planning to seek Chapter 11 bankruptcy protection, according to The Wall Street Journal. The company was formed via a 2001 roll-up of three auto parts companies, which was sponsored by Winward Capital Partners, and which also involved Bank of America and CSFB.

Venture capital disbursements by Dutch private equity firms increased by nearly 60% between 2003 and 2004 (1.1 billion euros to 1.7 billion euros), according to PricewaterhouseCoopers Corporate Finance, on behalf of the Dutch Private Equity and Venture Capital Association.


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April 26, 2005


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