Housatonic Raises, Closes Fund Five

Housatonic Partners has closed its fifth fund at target with $325 million in commitments, according to a regulatory filing. The Boston and San Francisco-based private equity firm collected the capital for Housatonic Equity Investors V, L.P. from 85 investors.

The firm entered the market in January with a $250 million target and $325 million hard cap, which it hit after two months in the market. Housatonic’s prior vehicle was a $250 million fund which closed in 2007. Past investors include Morgan Stanley Alternative Investment Partners and Bay Hills Capital, a fund of funds manager based in San Francisco.

Founded in 1994 by Will Thorndike with the support of founding investors Eliot Wadsworth II and Michael C. Jackson, Housatonic (pronounced “hoos” not “house”) Partners does buyouts and recaps of small-to-mid-sized business services, media and communications companies. The firm did ten deals in 2008, earning itself a ranking alongside the buyout heavyweights on Pitchbook Data’s top 50 deal-doing list.

Portfolio companies include Onrad, a Riverside, Calif.-based teleradiology company, OnRamp Access, an Austin, Texas-based data center services company, and HemaSource, a provider of medical consumables to the plasma and whole blood collection industries. Last year the firm teamed up with Sverica International to acquire Oasis Records Management LLC, an Irish record storage company. It was the firm’s fourth investment in this industry.

Housatonic typically invests $5 million to $30 million in its deals, which target the companies with 20% or higher Ebitda margins.

The firm did not respond to requests for comment.

This post has been updated to reflect information from the firm.


Ontario Teachers’ Returns Rebound in 2009

TORONTO (Reuters) - The Ontario Teachers’ Pension Plan, one of Canada’s top investors, said on Tuesday the value of its investments bounced back in 2009 after major losses a year earlier, but not enough to stave off a funding shortfall.

Teachers’, which administers the pensions of 289,000 active and retired educators in Ontario, said it had an annual rate of return of 13 percent last year as confidence returned to financial markets, and reported C$10.9 billion ($10.8 billion) in investment earnings.

The fund’s net assets were C$96.4 billion as of Dec. 31.

“We spent 2009 taking care of the business of the plan during the tail end of the financial market crash, while taking advantage of the market turmoil to make some investments that are already starting to pay off, and fortifying the plan for the future,” said Chief Executive Jim Leech.

But that was not enough to stop the plan from slipping into a funding shortfall of C$17.1 billion, meaning that in the long term it would not be all to pay full benefits to pension plan members unless the deficit is made up.

In 2008, Teachers’, Canada’s largest single-profession pension plan, suffered an 18 percent investment loss as equity and other holdings were slammed by the global financial crisis.

At yearend 2009, the fund’s inflation-sensitive asset class holdings rose to C$45.9 billion from C$44.9 billion at the end of 2008. The equities portfolio climbed to C$41.2 billion from C$34.9 billion a year earlier. Fixed income assets, net of related liabilities, rose to C$6.4 billion at 2009 yearend from C$5.3 billion in 2008.

Leech said the rebound last year came as confidence returned to markets but added that it did not reflect true economic growth.

“We should not expect this kind of market growth going forward,” he warned. “In 2008 and continuing into the first quarter of 2009 we saw a crisis of confidence among investors. It caused market mayhem. After the markets bottomed out in March 2009, confidence edged back up and with that came a return to more reasonable valuations. We expect it will still be some time until true economic growth takes hold.”

FUNDING SHORTFALL

That means it will take time and certain actions for Teachers’ to address the funding shortfall and guarantee an asset base that can pay benefits over the next 70 years.

The plan has been hit by historically low real interest rates that continue to prevail, and projected liabilities are greater than projected assets.

“With this shortfall, the plan was 89.2 percent funded at the beginning of 2010,” Teachers’ said in its 2009 annual report, published on Tuesday.

Low real interest rates, or the rate above inflation, increase pension costs because they affect projections of how much money will be required to fund future needs.

Leech said the Teachers’ sponsors are reviewing alternatives to address the funding shortfall, but that the fund does not face any immediate problems paying out benefits.

He said the plan cannot assume it will earn enough on its investments to cover the shortfall and that other alternatives are being reviewed.

A private equity group led by Ontario Teachers’ Pension Plan said on Monday it has acquired Exal Group, the world’s largest specialty maker of aluminum containers, for an undisclosed amount.

($1=$1.00 Canadian) (Reporting by Pav Jordan; editing by Peter Galloway)


CIT Sells Edgeview Back to Partners

CIT Partners has quietly sold Edgeview Partners back to its employees, peHUB has learned. CIT acquired the Charlotte, N.C.-based mid-market boutique consultancy in mid-2007.

CIT’s 2009 bankruptcy left Edgeview Partners in limbo, causing three of its partners to leave the firm, we reported in October. Before leaving, Co-founders Drew Quartapella and Matt Salisbury offered to buy Edgeview back from CIT, but the lending giant was unresponsive until recently. Yesterday Edgeview’s partners closed the deal to acquire the firm.

CIT sent peHUB the following statement:

Our decision to divest Edgeview supports our ongoing efforts to streamline the cost structure of our corporate finance business. We will continue to provide financial sponsors and middle market companies a broad range of financial products and advisory services through our existing industry specific advisory resources.

As part of the deal, Partner Bill Morrissett returned to the business. Going forward, Edgeview will be led by Morrissett, David Patterson, Ted Garner and John Tye, all of whom did not found Edgeview, but the former two were original employees. The firm’s ownership includes the four partners as well as directors and officers. Managing Director John Polluck will remain with the firm as a non-investing partner for the time being. Edgeview plans to have an ongoing relationship with CIT, where the entities will refer financing and M&A opportunities to each other, a person familiar with the situation said.

It’s curious that co-founders Quartapella and Salisbury did not return to the firm as part of the deal, considering they offered to buy it back themselves. In October, Quartapella told peHUB he may be interested in returning to the firm after CIT’s bankruptcy situation was worked out. At that time he was serving as a consultant to Edgeview while investing capital from UK hedge fund J.O. Hambro.

Update: Edgeview commented on the absence of its founding partners: “They were welcomed back but decided not to take on the commitment for personal reasons,” said Managing Director Ted Garner. He added, “I’d say those guys were interested in doing other things than being part of the long term commitment that this represents.”

Previously:

CIT Mess Leaves Edgeview Partners In Limbo


Allegiance Capital Expands to Seattle

Allegiance Capital, a Dallas-based mid-market investment bank, has opened a new office in Seattle. It will be led by Michael Sherry, who previously founded Sherry Capital Advisors.

PRESS RELEASE

Allegiance Capital, an international investment banking firm primarily serving privately-held middle-market companies, opens an office in Seattle, Wash. today. The new Seattle location is part of Allegiance Capital’s ongoing expansion, which is being driven in part by a trend of international investment in U.S. companies.

“We are dramatically increasing the number of cross-border deals under our management,” said David Lonsdale, President.  “U.S. business owners looking to sell or recapitalize often have more options than they realize. There are very attractive offers being made for good companies despite the current economic climate.”

Allegiance Capital educates its clients, primarily family-owned and entrepreneur-driven businesses, and helps them successfully complete exit strategies, strategic partnerships or financings depending on each client’s specific goals. Founded in 1998, the Dallas-based company opened offices in Spain and China in 2009 and was recently named “Boutique Investment Bank of the Year” by M&A Advisor Magazine.

Michael Sherry, a veteran dealmaker of more than 200 transactions and 25 years’ experience in mergers, acquisitions and capital formation, will lead the Seattle team. The firm has identified several significant opportunities in key West Coast industries ranging from high-tech to renewable energy and natural resources.

“I’m thrilled to be part of the Allegiance Capital team and believe we offer a unique advantage to business owners with our deep insight into the strategic and private equity buyers, as well as our global business perspective,” said Sherry.

Mr. Sherry is currently working with investors from Asia and Europe, as well as numerous U.S. based groups.

“The importance of an international perspective cannot be overstated, particularly for companies facing the Pacific Rim,” Sherry said. “Additionally, many on our team have ‘lived life’ as successful entrepreneurs and sold family and entrepreneurial businesses several times over. We know what our clients are dealing with and what they need from an investment banker: a trusted, pragmatic counselor.”

“We are confident that Mr. Sherry will provide exceptional counsel and service to clients on the West Coast,” said Lonsdale. “He’s a trusted dealmaker with an outstanding track record. We’re very glad to have him aboard.”

About Allegiance Capital

Allegiance Capital Corporation is a full-service investment banking firm specializing in the middle market (companies with revenue from $20 million to $500 million), with offices in Chicago, Dallas, New York, Madrid, Minneapolis/St. Paul, Seattle, and Shanghai.  Through its global network, Allegiance Capital assists companies in every aspect of selling and financing a business, including debt restructuring, mezzanine financing, buy out management, strategic partnering, consulting and other related services.  Its Special Situations group handles financial restructuring and distressed mergers and acquisitions.  For more information, refer to the company website: www.allcapcorp.com.


Carlyle Raises $1.1 Billion Financial Services Fund

The Carlyle Group has held a $1.1 billion final close on its first financial services fund. The fund, led by Olivier Sarkozy, has made three investments to date: Bank of N.T. Butterfield & Son Ltd., BankUnited and Boston Private Financial Holdings, Inc. (Nasdaq: BPFH).

PRESS RELEASE

Global private equity firm The Carlyle Group today announced it has raised $1.1 billion for its first financial services fund, Carlyle Global Financial Services Partners (CGFSP). The Financial Services team, which has made three investments to date, focuses on financial services companies around the world, including banks, insurance companies, asset managers and financial service providers.

“We are grateful for the support of our investors and the confidence they have placed in us. We have been exceptionally disciplined and have maintained our focus on investing where we can add the most value: mid-market and regional financial institutions that need both additional capital and the confidence that comes with an investment from Carlyle,” said P. Olivier Sarkozy, Carlyle Managing Director and Head of the Financial Services team.

Carlyle Co-Founder David M. Rubenstein said, “Olivier and his team have made three promising investments already, which, for a first-time fund, demonstrated to investors along the way that we had assembled a talented group at the right time to capitalize on a range of opportunities in the financial services space.”

In June 2007, Carlyle established its Global Financial Services Group, which now has 12 investment professionals, including Managing Directors James Burr, former Corporate Treasurer of Wachovia Bank, and Randal K. Quarles, former Under Secretary of the U.S. Treasury for Domestic Finance.

From offices in New York and Washington, DC, the team reviews a broad range of financial services opportunities around the globe, leveraging its blend of operational and financial expertise and industry relationships to generate opportunities on behalf of its limited partners with attractive risk adjusted returns.

CGFSP has made three investments, comprising 30 percent of its fund: Bank of N.T. Butterfield & Son Limited (3/2010); BankUnited (5/2009) and Boston Private Financial Holdings, Inc. (NASDAQ: BPFH) (8/2008).

*  *  *  *  *

The Carlyle Group is a global private equity firm with $88.6 billion of assets under management committed to 67 funds as of December 31, 2009. Carlyle invests in buyouts, growth capital, real estate and leveraged finance in Africa, Asia, Australia, Europe, North America and South America focusing on aerospace & defense, automotive & transportation, consumer & retail, energy & power, financial services, healthcare, industrial, infrastructure, technology & business services and telecommunications & media. Since 1987, the firm has invested $59.6 billion of equity in 952 transactions for a total purchase price of approximately $233.0 billion. The Carlyle Group employs more than 860 people in 19 countries. In the aggregate, Carlyle portfolio companies have more than $84 billion in revenue and employ more than 398,000 people around the world. www.carlyle.com <http://www.carlyle.com/>


Prosper for Startups? MicroVentures Forms P2P Angel Marketplace

Venture capital has spent the past year becoming more accessible, via institutional efforts like office hours and the emergence of omnipresent superangels. Another crack in the old boy network comes today, via the launch of a P2P startup equity platform called Microventures.

The company is essentially an equity riff on Prosper or Kiva, in which startups are able to request between $50,000 and $250,000 from accredited investors. MicroVentures takes a fee only if the issuer raises its desired amount, and provides free services that ensure the issuer is in regulatory compliance.

“What we’re doing is creating a marketplace for entrepreneurs who don’t have the means to go out and find venture capitalists, and for investors who might not have access to startup deal-flow,” says MicroVentures founder and CEO Bill Clark, who previously was a portfolio manager in PayPal’s merchant risk management unit.

Today’s launch is mostly about PR, since the platform cannot be fully operational until it receives its broker-dealer license (a process Clark says is almost finished). The initial goal is to build up the stable of accredited investors, and then begin posting investment opportunities in a few months.

Even though investors must be accredited to use the MicroVentures platform, they will not initially be able to invest more than $5,000 per company. Clark views this as an effort at investor protection, but my guess is that it will change quickly if MicroVentures manages to gain traction.


Grey Mountain Halfway Toward Second Fund

Grey Mountain Partners, a lower middle market private equity firm, is halfway to its $250 million fundraising target for its second vehicle, according to an SEC filing. The firm, based in New York, launched fundraising last March. This week Grey Mountain Partners Fund II LP closed on $124.8 million in commitments from 18 investors.

Harken Capital Advisors, a division of Compass Securities Corp., and Helix Associates, a division of Jefferies & Co., are serving as placement agents in the effort. Grey Mountain’s partners have committed 1.5% of commitments of all partners to the fund. The firm received a pledge from Guardian Life Insurance Company of America last year.

Grey Mountain was formed in by Jeff Kuo, former head of Oasis Foods, and Rob Wright, formerly of Three Cities Resaerch, to invest in companies with less than $30 million in revenue or $5 million in Ebitda. The firm focuses on companies in manufacturing, distribution, services, software, packaging, energy, financial services, defense and chemicals.

Investments include AQS Inc., a business technology company, Bolttech Mannings, a manufacturing service provider, Distribution International, an industrial product distributor, Herr-Voss Stamco, Inc., a maker of metal coil equipment, Infra-Structures, Inc., a business services company, and Robbins LLC, a maker of rubber compounds.


DRI Crosses Fundraising Target, Doesn’t Stop

DRI Capital, a private equity firm which invests in drug royalty streams, has raised $600 million for its second fund, a source familiar with the situation said. The firm originally targeted $500 million for Drug Royalty II LP, but has continued to accept new commitments.

DRI Capital’s first fund was a 2006 vintage with $800 million $240 million in commitments. Update: The $800 million total includes debt; $240 million was equity.

Investors like the fund because it has predictable cash flows and provides quarterly returns in the same way a mezzanine fund would, the source said. Further, DRI follows strict guidelines for choosing drugs to invest in. The drugs must be FDA-approved, and are often for the treatment of chronic disease. This takes much of the risk and uncertainty out of the investments, the source said.

Atlantic Pacific Capital is the firm’s placement agent.

According to Buyouts magazine, the fund may allow commitments of up to $700 million, which is the hard cap. Investors to the fund include San Diego County Retirement Association, Arizona Public Safety Personnel Retirement System, Los Angeles Fire and Police Pensions, Louisiana State Employees Retirement System, New Mexico Educational Retirement Board, San Bernardino County Employees’ Retirement Association, Buyouts reported.


Monte Brem Opening Stepstone’s Beijing Office

Monte Brem, founder and CEO of Stepstone Group, has relocated to Beijing to set up the private equity consulting firm’s first international office. The San Diego and New York-based firm plans to add a few professionals in Asia before eventually opening a European office.

Founded in 2006, Stepstone offers investment advice for direct private equity programs, co-investments and private equity secondary investing. Brem was previously President of Pacific Corporate Group. Chief Investment Officer Tom Keck and Managing Directors Jose Fernandez, Jay Rose, as well as VP Brey Jones, all hail from PCG as well.

A previous report from Private Equity Insider noted that Brem’s motivation for opening a China office is convenient for his personal life; Brem has plans to marry Li Yingru, the private equity director of China Investment, the publication reported. Stepstones’s relationship as an advisor to the sovereign wealth fund ended when Brem and Yingru’s personal relationship began.

Appearing on CNBC from China earlier this month, Brem discussed Stepstone’s focus on consumer-oriented businesses for its investments as the Chinese government shifts from an export-driven economic model toward a consumption-driven model. Here’s the video from March 11:


Eleven Funds Worse Than Elevation

Earlier today, I explained why Elevation Partners is far from the “the worst run institutional fund of any size in the United States?” Of course, this raised a follow-up question: So, what is the worst run institutional fund of any size in the United States?

I don’t think it’s possible to give a definitive answer, at least when it comes to private equity and venture capital. After all, final judgement on these funds can only come once all the investments are realized. But we certainly can identify funds that are in trouble.

To do so, I turned to CalPERS, which likely has more VC/PE fund investments than any other U.S. institution. CalPERS publicly discloses performance data for each of its 642 general partners, through the end of Q3 2009. I ranked each of those firms by IRR, excluding any fund closed in 2007 or later (such funds are relatively young, and their IRRs can be unfairly depressed by the fabled J-curve). I also removed non-U.S. funds, which means you won’t see things like Permira Europe IV, Polish Enterprise Fund VI, Candover 2005 Fund or Carlyle Japan Partners.

So, without further ado, we’ll do this via slideshow (which has become something of its own issue today)

[slideshow]

[slide title="Opportunity Capital Partners IV"]
OCP IV is a $100 million fund raised in 2001. It’s almost completely called down, with a -30% IRR through the end of Q3 2009.

The firm’s website says it “primary investment focus is providing capital to later stage companies seeking acquisition and expansion financing. OCP focuses primarily on businesses in the areas of communications, including media broadcasting and wireless, applied technology and traditional manufacturing segments. We invest in companies with exclusive licenses or franchises, proprietary products or processes or other unique features and characteristics that provide a clear and sustainable competitive advantage. OCP invests only in companies with experienced, compatible management teams that adequately cover each of the businesses’ key functional areas. Our preferred investment range is $2,000,000 to $10,000,000.”

Our records show that OCP has not since raised another fund.

[slide title="Aberdare II Annex Fund"]
In 2006, Aberdare raised around $15 million for an annex to its $50 million second fund (raised in 2001). The annex IRR is -27.5%, with no money returned so far. The overall fund is doing a bit better, but is still in the red (matches the logo).

According to CalPERS: “Aberdare Ventures is a small, highly collaborative team, deeply experienced as both venture investors and operators of healthcare technology companies. Aberdare’s investment focus is driven by years of experience growing biopharmaceutical product companies and therapeutic medical device companies.”

[slide title="Nogales Investors Fund I"]
It’s things like this that make LPs not want to do first-time funds. Nogales’ debut vehicle closed with around $100 million, but sports a -27.4% IRR.

According to CalPERS, Nogales I is “a private equity fund specializing in small- to medium-sized U.S. companies that participate in markets or have geographic locations traditionally underserved by other sources of investment capital. They have a successful history of making control and non-control equity and equity-related investments in small- to medium-sized businesses…. Their goal is to develop a close partnership with management and build a company that generates superior returns for their investors while at all times maintaining the highest levels of fairness and integrity.”

Again, this is according to CalPERS. The fact that superior returns are lacking is something to take up with their webmaster…

[slide title="Sevin Rosen Fund VIII"]
This is our first pure VC fund on the list, and was a $600 million vehicle raised in 2000. Actually, it was larger but then got scaled back.

It has a -25.4% IRR,  but didn’t stop Sevin Rosen from raising a follow-on fund (and repeatedly trying to hit the 10-spot). Like many of its VC fund managers, CalPERS doesn’t provide a description. But here’s the Sevin Rosen website.

[slide title="Nogales Investors Fund II"]
It’s things like this that make LPs not want to do second-time funds. Los Angeles-based Nogales raised $245 million for this vehicle in 2006, and its currently underwater with a -24.7% IRR. Total distributions equal the number of Super Bowls won by the Cincinnati Bengals.

On the upside, this is still a very light portfolio, with barely 25% of its capital called so far.

[slide title="Convergence Ventures II"]
CV II was a $132 million fund raised in 1999 by Convergence Partners, a Mountain View, Calif.-based firm that is a self-confessed member of the walking dead. It has a -23.3% IRR, is fully drawn and has yet to return a single distribution.

Lots of Internet stuff in the portfolio, which makes its failure that much more remarkable. How do you screw up a 1999-vintage Internet VC fund based in Silicon Valley?

[slide title="Tallwood II"]
Tallwood II is actually the first institutional fund raised by Tallwood, which originally launched as an angel effort in 2000 serial entrepreneur and Dado Banatao.

It’s a $180 million fund raised in 2002, and has a -23.3% IRR and virtually no distributions. It later raised around $23 million for an annex fund that also is underwater.

[slide title="Inroads Capital Partners"]
This was a $50 million VC fund formed to invest in minority- and female-owned companies. It was based in Evanston, Ill., and has proven to be a disaster.

The fund’s IRR is -22.5% and is entirely called down with one active portfolio company. Not surprisingly, the firm no longer exists.

[slide title="Rosewood Capital V"]
Rosewood Capital V is a $200 million fund closed in 2006. It sports a -22.1% IRR and virtually no distribitions.

This is the most recent fund from Rosewood Capital, “a San Francisco-based private equity firm focused exclusively on equity investments in consumer growth companies… Rosewood backs profitable consumer companies driven by exceptional management teams and proven business models. The firm pursues both minority and majority transactions with an average equity investment size of $10-40 million.”

[slide title="Carlyle/Riverstone Renewable Energy Infrastructure Fund"]
This $685 million fund was raised as part of a larger partnership between Carlyle Group and Riverstone. And it’s lousy. The vehicle has a -21.2% IRR, is almost completely called down and has zero distributions.

Amazingly, Carlyle/Riverstone raised more than $3 billion for a follow-on fund (makes a bit of sense, since “renewables” are hotter today than in 2001). On the other hand, the relationship has been strained by all that pesky pay-to-play activity in New York…

[slide title="Acacia Venture Partners II"]
This $120 million fund raised in 1999 has an IRR off -20.7%, and is completely called down.

The San Francisco-based VC firm still has an active website, but we can’t find a record of it successfully raising a third fund. The focus is/was on healthcare services deals.

[/slideshow/]


No, Bono Is Not “The Worst Investor In America”

Is Elevation Partners “the worst run institutional fund of any size in the United States?” That was the assertion of a Wall Street 24/7 post earlier this week, and a bunch of readers have emailed me for reaction.

So I decided to take a dive into the media/tech-focused firm’s portfolio, from a financial perspective. What I found was hardly cause for celebration, particularly for a shop whose high-profile partners include Bono, Roger McNamee and Fred Anderson. At the same time, however, calling Elevation “the worst” is to give hyperbole a bad name.

The knock on Elevation is that three of its largest investments are major duds: Palm, Move.com and Forbes Digital Media. So let’s look at them one by one:

PALM

This is the most complicated Elevation investment, in that it actually is four separate investments. They look like this:

  • 2007: $325m Series B convertible preferred shares ($8.50 conversion price)
  • 2008: $51m Series C convertible preferred shares ($3.25 conversion price). This deal was originally $100m, but Palm exercised its right to buy back $49m. It also included 3.6m warrants at a $3.25 strike price.
  • 3/09: $49m of common stock (8.2m shares at $6 per share). This was a rollover of the proceeds from Palm’s buyback of Series C convertible shares.
  • 9/09: $35m of common stock (2.2m shares at $16.25 per share)

As you may have heard, Palm is getting battered by the public markets. Its stock was trading above $17 per share last October, but closed yesterday at just $3.70 per share. Lots of reasons for the spiral, including a paucity of available smartphone applications, a disastrous decision to use Sprint as the exclusive carrier for Pre devices and a subsequent addition of Verizon without adequately training Verizon employees on its proprietary operating system. Conventional wisdom is to expect a sale.

So let’s imagine that the company was indeed sold, at $3.70 per share. If you value the convertible shares at cost – which Elevation did as of its last quarterly LP report – and convert the warrants, you find that Elevation’s position is valued at just over $416 million. This is compared to a total investment of $460 million. As I said, bad but not disastrous.

You can certainly quibble with Elevation holding the convertible shares at cost, Palm’s enterprise value/debt levels are such that Elevation wouldn’t get washed out even were Palm to file Chapter 11. You also can argue that Elevation should never have invested $460 million of a $1.8 billion fund into a single portfolio company (and I wouldn’t disagree), but that’s a “pot committed” discussion for another day.

MOVE.com

Elevation invested $100 million into Move.com back in 2005, when the company was still known as Homestead HomeStore. This also was convertible preferred stock, at a $4.20 per share conversion price. There also is a 3.5% annual dividend that expires at the end of this year.

Move.com appears to have been trading around $4.75 per share when the deal closed, but I assume the deal was struck just a few weeks earlier when it was trading below $3 per share. It closed yesterday at $2.04 per share.

Elevation never converted any of the shares (just like with Palm), which means it still carried the investment at cost. And also like with Palm, the Move.com financials indicate that Elevation has plenty of downside protection. Likely upside, of course, remains lacking.

FORBES

In 2006, Elevation invested around $300 million into the online operations of Forbes Inc. This has, of course, been a disaster. We do not know how far the value of this minority-stake investment has fallen, but let’s conservatively put it at 75 percent.

I’ve learned that Elevation has a time-based put on the Forbes investment, but that its time has not yet arrived. So again we have some downside protection, but now it would serve more as salvage than salvation.

—————–
The most recent fund performance data for Elevation is from the end of Q3 09, and is publicly available via the Washington State Investment Board. At the time, the fund was around 70% committed with a positive IRR of 12.7 percent. I am assuming that this includes the at-cost valuations for the Palm and Move stock, plus a $17.46 per share price for Elevation’s Palm common stock.

If my math is correct (and I hope that it is), the Elevation portfolio at the end of Q3 was worth around $1.66 billion (including a decent return from its sale of gaming company BioWare/Pandemic Studios). That would be on cost of around $1.26 billion (thus the positive IRR).

Just taking into account the Palm changes, that portfolio value today would still be just a hare over $1.5 billion. This does not, of course, include further decline in Elevation’s Forbes investment, the new investment in Yelp or any other portfolio value changes. Moreover, some LPs might agitate for Elevation to revalue its Palm and Move convertibles, but the vast majority probably won’t.

Even if we assume that Elevation is underwater – which some of its investors do indeed believe – it’s hardly “the worst” fund out there. Again, this is not an endorsement, and I’m glad that I didn’t invest (not that I had the option) – particularly given the management fees which are not included in the above math. Moreover, I think Elevation’s ability to raise another fund is very much in question, although its recent hiring of new partners is clear indication that it plans to try (newbie economics is mostly with Fund II). And, yes, Elevation’s fortunes are very much tied to those of Palm.

So I’ll keep watching, because a final verdict is not yet in.


Family Offices Slightly Less Disgruntled with Private Equity

Ah, the family office LP. They’re often small, secretive, uninterested in risk, and difficult to penetrate. They’re also the lifeblood of many private equity shops. In a recent survey of 34 family offices, data service Preqin found that family offices are actually not as hostile to private equity as they’re perceived to be. In fact, 64% of those said they will establish some new relationships with private equity firms in 2010.

So keep that in mind, placement agents. Also keep in mind that Preqin chose its survey subjects from its own database, and I assume a family office would only be included there if there was already some connection to the private equity industry.

But it’s actually their attitudes that matter here.

Apparently family offices counter-intuitively feel that the big bad buyout barons really do care about their needs. Just over half of those surveyed, or 52%, said they agree GP and LP interests are aligned and only 44% disagreed. That’s a shocker because in a December survey of all types of investors in private equity, a whopping 57% said interests weren’t aligned. So out of all your LPs, the family offices are less likely to be disgruntled.

But that may be because the family offices believe the big pension funds and endowments will do their dirty work of pushing back on terms for them. One investor credited any improvements in terms to the efforts of large pension funds, saying simply, “Family offices aren’t big enough and don’t have the capacity to push for these changes.”

So say you’re courting family offices for an investment. Which qualities do they admire best, besides, perhaps a “family man”? Unsurprisingly, they care about track record and experience. Other random requests include fewer professionals in the key man clause, GPs using non-recourse loans from banks for their commitment, and greater transparency of fees.

Their wish list also included stability of teams, quality deal flow, and a unique investment strategy. Just as important is an understanding of the needs of a family office. They require lots of TLC in the form of a close relationship and good communication. I believe the word used was “hand-holding.”

On the plus side, family offices are more flexible with investment strategies. They’re not constrained by regulators and able to move very quickly on commitments. Lastly, family offices take a longer-term perspective on investments, all of which aligns itself quite nicely with private equity.

Download report from Preqin, a useful data service which infuriatingly uses a “q” with no “u” in its name.


Pamlico Capital: New Name, Smaller Fund

Wachovia Capital Partners declared its independence from Wells Fargo yesterday, spinning off into a new firm called Pamlico Capital.

I spent some time on the phone with managing partner Scott Perper, and here are some highlights in notes form:

* The spin-off is unrelated to the proposed Volcker Rule, whereby banks would be required to divest in-house private equity groups. Perper says discussions over what to do with WCP began shortly after the Wells Fargo acquisition in late 2008. He also said that there were never discussions about merging WCP with Norwest Equity Partners, which receives all of its fund capital from Wells Fargo.

* Perper: “Our conversations with Wells Fargo were about what was the right longterm strategy for our group going forward. If you look at the cast majority of our transactions, we found that the vast majority had come from our network, rather than from the bank platform. So it made a lot of sense for us to become independent going forward.”

* In 2007, WCP raised $1.8 billion for a new fund that include commitments from both Wachovia and third parties. As part of the spin-off from Wells Fargo, the firm has reduced the fund’s size to $1.1 billion, with around $600 million remaining in dry powder. Perper declined to say whether Wells Fargo was the only LP to reduce its stake, although did stress that the bank still had unfunded commitments that it plans to honor.

* The Pamlico Capital team has been together for 22 years. Before being known as Wachovia Capital, it was First Union Capital Partners.

* The entire WCP team has moved over to Pamlico Capital. No stragglers remaining with Wells Fargo.

* The new firm name, Pamlico Capital, is named after the Pamlico Sound in North Carolina, which is the nation’s second-largest estuary.


In Search of Thunder Lizards

Godzilla isn’t the inspiration most angel investors point to when explaining their investment philosophy. But Mike Maples – whose portfolio of early stage investments includes such well-known names as Twitter and Digg – may be on to something.

The Silicon Valley-based angel investor this week rolled out a newly named investment fund called Floodgate, which will make investments of $150,000 to $1 million, principally in Internet and technology companies. In building up the portfolio, Maples, says, Floodgate will focus on finding and funding a class of ultra-promising startup teams that he calls thunder lizards.

“I thought it was a good metaphor for the disruptive startup,” says Maples, who defines a thunder lizard as one of the tiny minority of venture-funded companies each year that grows up to be worth north of $700 million.

Floodgate’s team includes Maples and Ann Miura-Ko, a Ph.D candidate at Stanford and former analyst at Charles River Ventures who has been sourcing deals with him for the past couple of years. Investment capital comes from what remains of a $35 million fund Maples raised in March of 2008. Since raising the fund, Maples says he’s averaged about two deals a quarter and that “we’re still early in the investment cycle.”

Before getting into angel investing, Maples co-founded Motive, a broadand software company that went public on Nasdaq, was delisted, and subsequently sold to Alcatel-Lucent, and managed marketing for Tivoli Systems, a software developer that is now part of IBM.  Maples, a Stanford grad, says he moved back to Silicon Valley about five years ago with the idea of doing some angel investing, deciding to wait and see if it would develop into something more. “I set my alarm clock for 2010 and decided to either make this a truly fulltime job or just have it be a hobby.”

Maples defines his specialty as super angel investing – and co-invests commonly with others in the space including First Round Capital, Baseline Ventures and Ron Conway. Companies in Floodgate’s portfolio, in addition to Digg and Twitter, include AdNectar, a digital marketing platform developer, Chegg, a textbook rental site, IMVU, a virtual world developer, and Wordnik, a site about words. The fund has had one IPO exit to date – of Solarwinds, a provider of network management software.

Maples says he also has a preference for companies that innovate on the fly. Twitter, for example, came out of a podcasting startup, Odeo, that he invested in as an angel. When Odeo didn’t work out, its founder, Evan Williams, offered to give him his money back. Maples says he rejected the offer, and suggested instead that he put the money into Williams’ next startup, which turned out to be Twitter.


Choking on Dry Powder: Private Equity’s Frantic Scramble to Deploy Capital

It’s nice to have dry powder when so many buyout firms are struggling to raise funds, but there’s a danger that comes with hoarding one’s capital.

Private equity firms have a five-year investment period. If M&A doesn’t pick up, and fast, some ‘05 and ‘06 vintage funds may have to give their money back or ask for fund extensions. A smaller fund means lower fees and, for those that associate success with size, a blow to those delicate private equity egos.

Earlier this week Phil Canfield of GTCR and I discussed the coming expiration-driven M&A flood. We agreed that we don’t expect many private equity firms to willingly part with their capital, and a blogger called Anal_yst wrote a more extensive blog post arguing the point. What that all means is there’s about to be a mad rush of buyout pros desperate to “put money to work,” however they can (but I’m not talking about your firm, dear reader, you would never do that, just everyone else).

So let’s just take a rough look at the numbers fundraising and deal numbers of from the last four years. Here’s the breakdown of US fundraising and deal totals:

$158 billion raised in 2005
$123 billion in deal value

$204 billion raised in 2006
$439 billion in deal volume

$292 billion raised in 2007
$414 billion in deal value

$261 billion raised in 2008
$74 billion in deal value

$64 billion raised in 2009
$39 billion in deal value

In each year except 2006, funds raised outpaces deal values. That margin increases when you consider that the deal value we’ve listed includes debt, and the amount of actual equity deployed is a fraction of that total. In the credit-crunched ‘08 and ‘09, fundraising blew deal volume out of the water. At this point, some firms may be wondering if they bit off more than they could chew. Luckily those ‘08 and ‘09 vintage funds have a few more years to blow their cash. But ‘05 and ‘06 vintage funds that sat on their cash when M&A was easy are cutting it close.

It reminds me of the SPAC story line from 2008. You may remember the rash of SPACs that were raised in late 2007. The “Return of SPACs” was heralded as the major investment banks began underwriting them in 2008, helping bring the shell IPO out of the back-alley and onto Wall Street. Then 18 months passed, and many of them hit their deadlines without finding deals, and the asset class retreated to the sidelines once again. I doubt private equity will go the way of the SPAC, but it’s a similar situation, on a much larger scale.


The LP Collusion Canard

Back in 2008, Dow Jones reported that a group of large institutional investors had formed a lobbying group to collectively press for more LP-friendly fund terms. The story was later refuted by some of the reported participants (one Canadian pension plan rep called it “poppycock”), but not before I wondered if such an effort could be viewed as a form of collusion.

Fast forward to last week, when Private Equity International’s David Snow raised the “C” word in reference to the ILPA guidelines drafted last fall. This was followed up yesterday by WSJ scribe Peter Lattman, who reported that “at least three large private equity firms have retained outside counsel to examine potential antitrust issues.”

In other words, some general partners believe in an LP cartel, with the ILPA guidelines being used as the preferred means of intimidation. Let us count the reasons why they’re wrong:

1. The ILPA guidelines were designed as a set of best practices, not a hard-and-fast checklist. More importantly, I have yet to find any LP who is using them as the latter (including among those LPs who helped draft them). LPs have demonstrated over and over that they’ll budge on even the most fundamental ILPA guidelines if they believe it’s in the best interest of their financial performance. For example, on the same day that the ILPA guidelines were formally announced, turnaround firm KPS Capital Partners announced that it had raised $800 million in “top-off” commitments to its third fund. The new money flowed freely – indications were due just 16 days after initial request – despite a 25% carried interest structure and a 50/50 fee split. If an LP tells you that he’s passing because your fund doesn’t meet all the ILPA guidelines, chances are that’s just his cowardly way of saying: “We don’t think your fund is going to do very well.”

2. There is virtually nothing in the ILPA guidelines that LPs haven’t been asking for since time immortal. Stronger alignment of interests, an end to transaction fee splits, etc. The only difference is that they’re now neatly organized in a 16-page PDF. That’s called codifying, not colluding.

3. GPs regularly talk about the “industry standard” of 2 and 20. Wouldn’t that be GP-side collusion, under the same thesis? If not, how are the ILPA guidelines anything other than an argument for revised industry standards?

4. The GP assumption here is that many institutional investors have banded together to force unsavory terms down the throat of body GP. This would presume that the LP community is at least mildly cohesive when, in reality, it most often resembles a third-grade basketball team. The bigger and more athletic kids sometimes talk to each other, but mostly are looking for their own shots. The smaller and less coordinated kids get court-time, but mill about aimlessly with perhaps just a touch or two per game. In short, it’s a mess.

LP communication has certainly improved a bit over the past year – and some LPs certainly have regular conversations with peers – but there are still no central forums (online or offline) in which the full spectrum of LPs can interact (even ILPA is exclusionary, banning the vast array of funds-of-funds). Moreover, LPs still like to keep things from one another – as evidenced last year when many large Quadrangle Group LPs didn’t know how their peers were planning to vote on the proposed (and failed) investment cycle stoppage.

5. Some GPs may have heard stories about how an early version of the ILPA guidelines were originally drafted by a group of large LPs who then brought ILPA on board to give them legal cover from possible collusion charges. It’s a timeline I’ve also heard from LP sources, albeit one that is strongly denied by ILPA. Even if accurate, LP intent hasn’t matched LP action (KPS is far from the only example). LPs are certainly investing in fewer funds today than in past years, but that is mostly due to larger economic concerns (possible double-dip, etc.) and overall PE/VC performance worries (debt-laden portfolios, middling returns, etc.). Yes, LPs have a bit of leverage on GPs right now, but that’s cyclical and will revert back. It always does (see 2002 compared to 2006).

To be clear, I am not an antitrust lawyer. Nor do I expect to ever play one on TV. But, to me, this charge of LP collusion just doesn’t pass the smell test. Per usual, I’m interested to hear your thoughts…


Ten Most Active VC Firms of 2010 (So Far…)

We’re still a few weeks away from Q3 venture capital deal data, but fired up the old database to see which firms have been the most active so far.

It’s mostly the usual suspects, although Benchmark Capital and Redpoint Ventures moved into the Top 10 with much faster investment paces than they exhibited last year.

What follows is based on our VentureXpert database, based on global investment pace (the MoneyTree numbers, on the other hand, are only for investments in U.S. companies). It only includes “institutional” VCs, as opposed to super-angels (many of whom would probably top the list). Per usual, just a reminder that money in doesn’t always correlate to money out:

[slideshow]

[slide title="NEW ENTERPRISE ASSOCIATES"]
NEA has the venture market’s largest fund, so it’s not too surprising that it tops this list. The firm has invested in 15 companies so far this year, including first-time investments for Nordic Windpower, Rhythm Pharmaceuticals, Solar Junction, Ra PHarmaceuticals and One Block Off The Grid.

[slide title="KLEINER PERKINS CAUFIELD & BYERS"]
When is 14 deals in 10 weeks considered sluggish? When the firm closed 14 deals in the preceding month (December ‘09).

Still, tied for second place ain’t too shabby for Kleiner Perkins, which is another firm with lots of cash to invest. New portfolio companies in 2010 include TransMedics, Pulmonx, UpWind Solutions, ReputationDefender and Amyris Brasil.

[slide title="INTEL CAPITAL"]
Intel Capital was the busiest VC shop last decade, and so far this year has made 13 investments. It also recently announced a big commitment to Brasil, and somehow got press for a promise to keep making VC investments (great PR, dumb journalism).

New investments this year for Intel Capital include Betaworks Studio, July Systems and SpectraWatt.

[slide title="REDPOINT VENTURES"]
Redpoint’s year has been marked by one of its portfolio companies doing a memorable Super Bowl ad (HomeAway) and anticipation over the Solyndra IPO, but it also has managed to do 13 new deals.

Portfolio additions include Clicker Media, Plastic Jungle, Posterous and Tantalus Systems. Last year, Redpoint invested in just 25 different companies.

[slide title="SEQUOIA CAPITAL"]
Sequoia may be tied for third place with Intel Capital and Redpoint, but it takes the prize for most new portfolio investments with eight (no idea what the prize is… should be send flowers?)

New newbies are: Implantable Provider Group, Prudent Energy, Acton Pharmaceuticals, Beijing Jiuhe Changpin Technology, Hantele Telecom Science & Technology, Huayi Network, Blipify and Snaptu.

[slide title="BENCHMARK CAPITAL"]
Benchmark matched Intel Capital with 12 investments so far this year, which is a heady pace considering that Benchmark invested in just 33 companies all of last year.

Portfolio additions include Clicker Media, GaiKai, Nicera Networks, Rambus and Scale Computing.

[slide title="POLARIS VENTURE PARTNERS"]
Polaris apparently wasn’t too concerned about dry powder issues, despite launching a new fundraising drive earlier this year (word is the firm will close on around $500m early next month).

The bi-coastal firm has deals so far in 2010, including a new one called Saga Investments and today’s seed deal for JIBE. Last year, Polaris invested in 51 different companies.

[slide title="VENROCK"]
No more Tony Sun, but the deals keep coming. Venrock closed 11 transactions since New Year’s Day, including for new portfolio plays Chelsae Therapeutics and Smartling.

Last year, Venrock invested in 52 different companies.

[slide title="HONORARY MENTIONS"]
Three firms tied for 10th place with 10 deals each: Bessemer Venture Partners, Draper Fisher Juvertson and Menlo Ventures.
[/slideshow]


FBAR Panic Was All A False Alarm

Limited partners and individual investors in private equity funds and hedge funds may remember last year’s FBAR scare: IRS officials created confusion as to whether investors in offshore private equity and hedge funds would have to file a Report of Foreign Bank and Financial Accounts (FBAR) for tax purposes. Last week the Treasury backed away from those statements, allowing investors to breathe a sigh of relief.

I spoke with Seth Entin, a tax lawyer at Greenberg Traurig, on the topic.

peHUB: So what exactly is FBAR?

Entin: It’s a one or two page disclosure form administered by the IRS. It’s used to disclose if you have an ownership in an offshore financial account. It’s designed not just for tax purposes but also to detect money laundering and other crimes as well.

Before the IRS said everyone needed to file one, how was it used?

People used to invest in foreign hedge and PE funds and didn’t think they had to file these. So most people who invested in foreign funds never filed it. Then a few statements were made by IRS officials that said if a US investor owns an interest in a foreign PE or hedge fund, you have to put it on an FBAR, not only for this year, but for all prior years.

And what happened then?

There was a backlash. The IRS extended the deadline for this reporting because of the uproar. At the same time, they decided to revisit it.

Why the backlash? What are the concerns from taxpayers and advisors?

Not wanting to get fined. Failure to comply carries a steep fine, especially for people over the years who weren’t doing the filing. There would have been a lot of cleanup work for US investors. It takes a big compliance burden off of US investors.

But this week they came out with proposed regulations that say for right now, under the current law, you don’t have to file it. So we’re back to where we were.

So it was all a misunderstanding over interpretation?

Not exactly. There was uncertainty, because the IRS made an argument that it was reported on, and then they back tracked.

Why did the IRS back track?

It was two things. People in the industry made some respectable arguments that under the technical rules, reporting shouldn’t be required. People brought to the attention of IRS some decent arguments why it shouldn’t be required. And also, the IRS may have been colored by the practical difficulties imposed on people with these types of investments. While they may reconsider it in the future, for now it’s not required.

What does mean for investors in PE funds?

They can sleep better at night if they weren’t filing an FBAR, but they should be aware that there are proposals in Congress about changing things.


PSERS Gets Ready To Commit

The Pennsylvania State Employees’ Retirement Board has released the agenda for tomorrow’s board meeting.

Among the items are proposed fund commitments to Advent International’s fifth Latin America Fund and J.H. Whitney’s seventh fund. The firm also will recommend bringing in both Francisco Partners and Weathergage Capital for fund presentations.

PSERS already has relationships with each of the aforementioned firms. www.sers.state.pa.us


European Space Agency Launches VC Fund

The European Space Agency has launched The Open Sky Technologies Fund, an early-stage VC that will back companies that apply space technologies and satellite applications to terrestrial industries. It will be managed by Triangle Venture Capital Group, and so far has closed on 15 million of its 100 million target.

PRESS RELEASE

For years, ESA has been bringing space technologies down to Earth through its Technology Transfer Programme and Business Incubation initiatives. Now, the Agency will strengthen these initiatives by supporting new businesses using space innovations through a dedicated venture capital fund.

The Open Sky Technologies Fund (OSTF) is an early-stage venture capital fund aimed at nurturing the most promising business opportunities arising from space technologies and satellite applications for terrestrial industries. The OSTF will be managed by Triangle Venture Capital Group on ESA’s behalf.

Michel Courtois, ESA Director of Technical and Quality Management, formally signed an agreement with Bernd Geiger, Managing General Partner and founder of Triangle, at ESA Headquarters on 4 March.

The fund has attained an initial ‘first closing’ value of EUR15 million, with the target of raising up to EUR100 million by June 2011. It will source investment opportunities across all 18 ESA Member States identified through ESA’s Technology Transfer Programme Office (TTPO) and its partners.

“The OSTF is ESA’s first step into the venture capital world but represents a logical next step from our existing technology transfer activities,” said Director Courtois. “The TTPO has built up an extensive technology transfer network in cooperation with the European Space Incubation Network ESINET that is part of the European Business Incubator Network (EBN). ESA has set up a quartet of ESA Business Incubation Centres which have helped to create more than 70 companies so far.

“But for these incubated companies to continue to grow they need access to investment capital. With the OSTF, ESA is supporting young and entrepreneurial companies which are putting innovative ideas from space technology, services and applications to terrestrial uses. This will help to increase the benefits coming back from space to European citizens.”

This first European venture capital fund dedicated to the space community will be run for ESA by Triangle, a recognised player in Europe’s venture capital community. Triangle has been working exclusively with spin-offs from universities and research centres for the past 13 years.

Triangle has become a leading early-stage technology investor, with four funds managed to date. The company has a long-standing affinity with the sector and related expertise, including investor status in a prominent ESA spin-off company iOpener Media, which uses satnav-derived location-based service technology to facilitate realtime integration of real-world objects such as Formula 1 racing cars into virtual gaming environments. iOpener is part of the ESTEC Business Incubation Centre (BIC) in Noordwijk, the Netherlands.

About ESA’s Technology Transfer Programme Office

Established in 1990, ESA’s TTPO has transferred more than 200 space technologies to non-space sectors, bringing tangible benefits to European citizens and strengthening Europe’s industrial competitiveness. It has also set up four ESA BICs in Noordwijk in the Netherlands; Darmstadt and Oberpfaffenhofen in Germany and Rome in Italy.