PE Players Get Smaller... oh, and some more CalPERS stuff Three huge stories in the private equity world yesterday, so let's get to them: 1. CSFB has decided to spin out its leveraged buyout business, DLJ Merchant Banking Partners. The move will occur early next year, with CSFB retaining control of three existing DLJ Merchant Banking Funds, including a $5.4 billion vehicle that is approximately 90% committed. DLJ Merchant Banking already was in market with a fourth fund targeted at $3.5 billion to $4 billion, and will use that vehicle to anchor the spinout. The interesting part of this decision isn't simply that it's happening, since similar moves have been made recently by fellow financial giants like Morgan Stanley and Deutsch Bank. Even CSFB was in on the action late last year, when it said that it would spin out the healthcare wing of its affiliated VC firm Sprout Group, while simultaneously bailing on the technology wing. No, what is interesting is the rationale given by CSFB: that the LBO business was coming into conflict too often with its investment banking business. For example, DLJ Merchant Banking might bid on a deal against LBO Firm X, which would have hired CSFB to arrange to bid's debt financing. I have no doubt this is true, since its was the explicit reason given several months ago when a handful of DLJ Merchant Banking pros - including group head Larry Schloss - left CSFB to hang their own shingle as Diamond Castle Holdings. The guys over there wouldn't talk about CSFB yesterday (seems they got religion after slamming their former employer n a WSJ article), but it's impossible to ignore the irony. CSFB let some of its best people walk away because, in part, it refused to either accept strict firewalls or spin out its buyout group. Now, once those folks are gone and about to begin raising a new fund (PPMs will be sent out the first week in January), CSFB makes its move. If only it had gotten its act together a bit sooner. 2. A major player in the private equity law world is in big trouble, as virtually its entire fund formation group has decided to switch ships. At least seven private equity partners from Testa, Hurwitz & Thibeault LLP soon will sign on with Proskauer Rose LLP. Among those leaving are Robin Painter, Stephen Mears, Malcolm Nicholls and David Tegeler. This all follows the recent defection of Thomas Beaudoin for Wilmer Cutler Pickering Hale & Dorr, and leaves Testa Hurwitz without many folks to serve its many general partner and limited partner clients. One VC I spoke to this morning said that he would follow the defectors anywhere, and a rival attorney suggested that the competitive landscape has definitely shrunk. No noise yet about Testa trying to pry a fund formation team loose from another firm, but its only other remaining option might be to shutter the practice. No one at Testa Hurwitz was talking on the record yesterday, but that is likely to change today. 3. The CalPERS story continues to build some steam, and all of the info is now readily available at www.cfac.org. So many apologies for the linking problems yesterday. Lots of good blogging on this topic by Matt Marshall at www.SiliconBeat.com, which makes sense since he was the first person to report that a settlement had been reached. From my perspective: CFAC executive director Peter Scheer tells me that his group has done some long division, and discovered that CalPERS is paying an averaged carried interest of 20 percent. He also called this the "industry average." Maybe this is true, but I doubt it. I don't know of any firms that charge less than 20%, and lots of them that charge 25% or 30 percent. So either CalPERs is getting a great deal, or these numbers are general enough to prevent a conclusive analysis. I'd go with the latter, but will do some further research to back up that assertion.
Credit Suisse First Boston has decided to spin out its leveraged buyout business, citing conflicts with investment banking clients. The move will occur gradually, with CSFB retaining management control of the three existing DLJ Merchant Banking funds, and the unnamed spinout managing a new fund that currently is in the process of being raised. CSFB will maintain its mezzanine and private equity secondary groups. www.csfb.com Testa, Hurwitz & Thibeault LLP is about to lose most, if not all, of its private equity fund formation team. The group, including Robin Painter, will be headed to Proskauer Rose LLP. www.tht.com Onset Ventures of
Amphora Discovery Corp., a Durham, N.C.-based drug discovery company, has raised $20 million in Series C funding. 3i Group led the deal, and was joined by fellow new investors Novartis Venture Fund and Aventis Capital. Return backers included ARCH Venture Partners, MPM Capital, Venrock Associates and Versant Ventures. The company has raised $68 million in total VC funding since its 2001 inception, including a $23 million Series B round in 2002. www.amphoracorp.com Sequoia Communications, a San Diego-based RF semiconductor company, has raised $15 million in Series D funding. Gabriel Venture Partners led the deal, and was joined by return backers Nokia Venture Partners, Tallwood Venture Capital, Cadence Design Systems and Huntington Ventures. Tim Chang, a principal with Gabriel Venture Partners, will join the Sequoia board of directors, in conjunction with the funding, which officially closed back in September. www.sequoia-communications.com Blingo Inc., a San Francisco-based Internet search engine operator, emerged from stealth mode today. The company is hoping to differentiate itself by offering users the possibility of instantly winning prizes. It has received an undisclosed amount of venture capital funding from Athlon Ventures. www.blingo.com H2Scan Corp., a Valencia, Calif.-based provider of hydrogen leak detection and process monitoring systems, has raised $2.54 million in Series B funding. Investors include Chrysalix Energy LP, Pasadena Angels, Tech Coast Angels and company founder and CEO Dennis Reid. www.h2scan.com Ittiam Systems Technologies Ltd., a Endforce Inc. (f.k.a. SmartPipes), a Dublin Ohio-based provider of interoperable endpoint security policy enforcement, has raised $7.5 million in VC funding. The deal was co-led by Kleiner Perkins Caufield & Byers and Invesco Private Capital. www.endforce.com Inimex Pharmaceuticals Inc., a Vancouver-based drug company focused on nosocomial pneumonia, has raised Cdn$2 million in additional Series A funding, to close out the round at Cdn$8 million. British Columbia Discovery Fund and the B.C. Medical Innovations Fund participated on the final tranche. Earlier buyers included BDC Venture Capital, Canadian Medical Discoveries Fund advised by MDS Capital and the Working Opportunity Fund managed by Growthworks Capital. www.inimexpharma.com WAY Systems Inc., a Woburn, Mass.-based provider of wireless POS solutions, has raised $8.1 million in Series B funding. Investors included Visa International, Transaction Network Services, Bill Melton (founder of Verifone) and George Wallner (founder of Hypercom). www.wayinc.com
GTCR Golder-Rauner has partnered with veteran healthcare executive Robert Moccia to form Chester Valley Pharmaceuticals Inc. The Malvern, Pa.-based company will acquire, in-license and developer branded prescription dermatological products for sale within the Jacobson Partners has agreed to acquire substantially all the assets of the Marietta, Ga.-based Airline Products business of Stewart & Stevenson Services Inc. The deal is valued at $60 million in cash, plus certain deferred compensation and the assumption of certain liabilities. www.ssss.com Huron Capital Partners has launched a healthcare industry initiative that will search for, and acquire, a medical device of healthcare services platform company. It will be led by Mark Smith, who most recently served as CEO of Huron portfolio company Prism Enterprises Inc. www.huroncapital.com
Adobe Systems Inc. (Nasdaq: ADBE) has acquired Okyz SA, a France-based maker of 3D collaboration software. No financial terms were disclosed. Okyz raised VC funding in 2003 from Viventures. www.okyz.com
Seabright Insurance Holdings Ltd., a Seattle-based provider of worker compensation insurance, has set its proposed IPO terms to 7.5 million common shares being offered at between $9 and $11 per share. The company is majority-owned by Summit Partners. www.sbic.com
JVP (a.k.a. Jerusalem Venture Partners) has promoted principals Allon Bloch and Adam Fisher to the position of general partner. Bloch joined the firm in 2000, and focuses on enterprise software and media technology. Fisher was hired in JVP's Israeli office in 1996 as an analyst, and specializes in semiconductor networking and storage companies. www.jvpvc.com David Gilroy has joined Hyde Park Capital Advisors, where he will serve as managing director of I-banking, and be responsible for opening an office in Brad Hoffman has joined Galen Capital Group as a managing director. He most recently co-founded Surgifund Inc. and, before that, worked with venture firm Ashford Capital. www.galencapitalgroup.com Terry Daniels, president of private equity firm Quad-C Management, has resigned from the board of Red Robin Gourmet Burgers Inc. (Nasdaq: RRGB). The move was made following Quad-C's recent divestiture of its remaining Red Robin shares. www.redrobin.com
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December 8, 2004 
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