Secrets worth keeping?
Regardless of what will eventually be decided by a Californian superior court, general partners will not, repeat not, be vindicated on the IRR-disclosure issue. By David Snow.
Apparently, not even the most eloquent opponents of IRR-disclosure – in the case discussed here, the lawyers of Howard Rice Nemerovsky Canady Falk & Rabkin – can present a compelling argument that GPs are harmed when the public knows their internal rate of return (IRR) numbers.
Howard Rice is currently representing the Regents of the University of California (UC) in its fight with a coalition of UC employees and the San Jose Mercury News over the university's private equity portfolio. An Alameda court recently ruled that the university was required to disclose, among other things, IRR data of its 88 private equity partnerships, worth $646m. The court's reasoning behind this decision was that, under a “balancing of interests” test, the public interest in disclosure of the
IRRs outweighed the university's “claimed need” to keep them secret.
In August, the university filed an appeal, claiming that the court's decision was flawed. Instead, the university and its lawyers argue, the court should have determined whether or not IRRs constitute “trade secrets,” which are exempt from California's Public Records Act. Internal rates of return are trade secrets, the lawyers argue. After having come to that conclusion, the court should have then determined whether there was a risk that the failure to disclose these “trade secrets” would “tend to conceal fraud or work injustice.” Since there is no real danger of fraud or injustice inherent in IRR concealment, the appeal reasoned, the superior court's decision should be reversed.
In arguing why IRR-level data should be kept secret, the University of California and its legal counsel have chosen an interesting approach. But, simply put, what they fail to do convincingly is to explain why a general partner would suffer from this type of disclosure. Instead, the appeal spends the most time arguing that it is Cambridge Associates, the consulting firm and the university's private equity advisor, which has the most to lose.
Under California civil code, a trade secret is defined, in part, as “deriving economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use.” The appeal argues that “the economic value [of IRRs] is shown by the fact that Cambridge Associates sells its data… Release of the IRR data to the public would impair or destroy Cambridge Associates' ability to sell that information to its clients.”
Why all the sweat and toil to conceal a series of aggregate, and rather arbitrary, return figures? Because the disclosure push might not stop at the IRR
And here we all thought that the IRR debate had to do with the general partners' ostensible need to guard their information. On that subject, the university's “Petition For Writ of Mandate” is underwhelming in its argumentation. Private equity firms, it states, “keep performance information confidential to prevent competitors from using it to harm the partnerships' ability both to attract investments and to invest in portfolio companies.” While the appeal is explicit and convincing in explaining how making IRR information freely available would harm those who sell it, it does not explain how, exactly, IRR data can be used by competitors to “harm” the investment partnerships from which it is taken.
Implicit in the Writ's reasoning is the necessary condition that a “harmed” fund's IRR be bad. Applying this to a real-life scenario, Fund A would tell an investor not to invest in a competitor's fund, Fund B, because Fund B's last fund is currently showing a negative 40 per cent IRR. One is cognisant, however, that any interested investor in Fund B would themselves insist on viewing the secret IRR numbers prior to investing so as to make an independent assessment of Fund B.
The argument holds a bit more water when it gets to “the partnership's ability… to invest in portfolio companies.” Feasibly, Fund A could approach a target investment and warn its executives not to accept an offer from Fund B, because Fund B is a train wreck as indicated by its poor fund performance. But let's be honest – how much extra ammunition does an IRR on a Web site give a competing private equity firm in this regard?
The second “prong” (pardon the jargon) of California's trade secret definition is that the secret must be “the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” The University of California presents this as meaning that if an industry convention is to keep IRRs secret, then by definition, IRRs are trade secrets. Again, the prime evidence for this is argued to be confidentiality agreements between GPs and Cambridge Associates. The appeal mentions that it is industry practice to keep performance data confidential. “This is more than enough to satisfy this prong of the trade secret test,” it concludes.
Threat beyond the IRR
The strongest argument in the appeal, one which the university presents as an incontrovertible fact, is that IRR disclosure harms UC's private equity program in that certain “top-tier” GPs have and will bar it from investing. This is certainly true – in August, top-tier Sequoia Capital told indiscrete-by-law UC to remove itself from all Sequoia partnerships. Another firm, Three Arch Partners, has reportedly also barred the university from a new fund.
However, a sad truth behind these purges, and one not indicated in the Writ, is that the venture capital firms that kicked out UC did so not because, as guardians of trade secrets,
they had to, but because, as prestigious, private investors, they preferred to.
Howard Rice is right in its determination that presenting IRR-level data as GP trade secrets is not the strongest argument. But one legal observer described the firm's approach as an “everything but the kitchen sink” approach to keeping UC faithful to its non-disclosure agreements. Why all the sweat and toil to conceal a series of aggregate, and rather arbitrary, return figures? Because the disclosure push might not stop at the IRR. Many GPs – and indeed LPs – feel the real question is whether groups will ultimately be forced to disclose sensitive information that is pertinent to underlying portfolio companies. To most practitioners, this constitutes serious trade secrets – secrets that, for commercial reasons, are really worth keeping. And worth fighting for.
Deals & Exits
Blackstone leads $4.2bn water acquisition from Suez
A trio of New York-based private equity firms comprised of The Blackstone Group, Apollo Management and Goldman Sachs Capital Partners has agreed to acquire water treatment and process chemical provider Ondeco Nalco from French-Belgian energy conglomerate Suez in a transaction valued at $4.2bn.
The transaction will be funded by $3.2bn of senior and subordinated debt with the remainder funded by equity from the three firms. John Ford, a spokesperson for The Blackstone Group, said all firms will contribute equally to the equity investment. He added that Blackstone originally won the auction, beating out Apollo and Goldman Sachs Capital Partners, but then invited the two firms to participate in the deal. Ondeco Nalco is a leader in providing water treatment and process chemicals and services to companies, mainly in industrial sectors. The company has operations in 130 countries and serves more than 60,000 customers. The company had revenues of more than $2.6bn in 2002.
CD&R preps $350m Sirva IPO
After five years of buying and building, New York buyout firm Clayton, Dubilier & Rice is preparing to take public its “relocation services” platform, Sirva, with the goal of raising as much as $350m. According to documents filed with the Securities and Exchange Commission, Clayton Dubilier owns 80.1 per cent of Sirva. The filings did not specify what percentage of the company Clayton Dubilier will own post-IPO.
The Sirva platform was formed in 1998 with the purchase of North American Van Lines. The next year, the firm merged that company with Allied Van Lines to form Allied Worldwide. In 2002 the company changed its name to Sirva, received additional capital from Clayton Dubilier, and acquired a string of moving and moving-related companies. Sirva, based in Westmont, Illinois, also operates in the UK, under the name Pickfords, in Asia under the name Allied Pickfords, and in France under the name Maison Huet, among other divisions.
In all, Clayton Dubilier has invested $178.5m in SIRVA, according to SEC documents. The firm has committed capital to the platform from two funds it manages – Clayton Dubilier & Rice Fund V and Clayton, Dubilier & Rice Fund VI.
CSFB to acquire healthcare publisher
New York-based CSFB Private Equity, through its portfolio company Advanstar Communications, has agreed to acquire the healthcare industry magazine and related custom project service division of The Thomson Corp. for $135m.
The transaction, expected to close this fall, will be funded by an equity contribution from DLJ Merchant Banking Partners III, a fund managed by CSFB, borrowings under Advanstar's credit facility, and other debt sources.
The Thomson publishing subsidiary, with titles including RN Magazine, Medical Economics and Patient Care, targets primary and specialty healthcare segments as well as nursing, dental and veterinary professionals. The portfolio's total revenue for 2002 was $87.7m.
Bain Capital leads purchase of Bombardier unit
Boston-based Bain Capital has agreed to buy the recreational products business of Canadian jet manufacturer Bombardier for C$1.225bn ($873m). Bain Capital acquired the division with Canadian private equity firm Caisse de Depot et Placement du Quebec and members of the Bombardier family, according to a press release.
The Bombardier recreational products division markets such products as Sea-Doo watercraft and Ski-Doo snowmobiles. The company also sells “go-karts” and outboard motorboat engines.
Anasazi sees windfall in $160m disposal
Boston-based Anasazi Partners, along with its operations consulting partner C.P. Baker & Co., has sold of health food producer ZonePerfect Nutrition to Abbott Laboratories for $160m.
Abbott Laboratories, a global manufacturer of pharmaceuticals, nutrition-als and medical products, paid for the company in cash. Anasazi acquired ZonePerfect in 1996, when it was still known as Eicotech. Its total initial investment came out to $2.5m, according to Bagus Tjahjono, managing director at C.P. Baker. Anasazi had maintained 80 per cent ownership while company employees retained the rest.
Bain Capital buys Keystone Automotive in $440m deal
Bain Capital has acquired accessory company Keystone Automotive from its current owners Advent International, Littlejohn & Co. and GE Commercial Finance in a deal valued at $440m. Exact terms of the deal were not disclosed. Robert Taylor, a partner with Advent International, said the three selling firms made about 4.5 times their original investment on the exit.
Keystone is the largest catalog distributor in the US of aftermarket specialty automotive speed and performance parts and accessories for cars, sport utility vehicles and light trucks. Advent, Littlejohn and GE acquired Keystone in 1998 for an undisclosed amount. “When we bought the company in 1998, it was a regional player with $170m in sales,” Michael Klein, president of Littlejohn & Co., said. “We built it into a nationwide distribution company with service in 39 states.”
“Keystone had a great business model,” Taylor said. “This is a passionate consumer segment. I think Bain Capital sees the future growth potential.”
Fox Paine acquires insurer for $120m
San Francisco-based private equity firm Fox Paine & Co. announced it completed the acquisition of insurance company United National Group.
Fox Paine made a contribution of more than $120m as part of the transaction, according to a press release. United National's former owners will retain a 20 per cent interest in the company going forward.
United National supplies excess and surplus lines of insurance for people that are already insured. The company also provides property and casualty insurance. The group will use the investment as a way to expand operations and it has already formed an offshore affiliate.
Lightyear invests in bankrupt medical products business
It appears that Fox Paine's pain is Lightyear's gain. New York-based private equity firm Lightyear Capital has announced it is to acquire the assets of bankrupt medical supply company Maxxim Medical, which was the subject of a $570m privatisation by San Francisco-based firm Fox Paine & Co. in 1999.
Terms of the deal were not disclosed. Maxxim Medical filed for bankruptcy in February and had agreed to restructure $20m of debt with some of its bank lenders. The company listed liabilities of more than $100m, according to law firm Saul Ewing. It is unlikely that Fox Paine will recover any of its equity investment, a source familiar with the transaction said.
Fox Paine acquired the business in 1999. The firm backed Maxxim's chairman, chief executive officer and president Kenneth Davidson in the deal, who left the company in 2000. Senior bank financing was led by Chase Manhattan. Goldman Sachs provided mezzanine financing. Goldman Sachs and participants in Fox Paine's funds provided the high yield debt financing. The company's current president and CEO, Thomas Cochill, was brought in last October.
Leeds Weld sees 9x return on Datamark
New York-based education investment specialist Leeds, Weld & Co. has agreed to sell outsourced provider of integrated enrollment marketing services company Datamark to eCollege for approximately $72m.
Leeds Weld invested about $9m in the company three years ago. The investment will generate returns of close to nine times the firm's original investment, according to a source close to the deal.
Datamark provides outsourced marketing services for for-profit colleges and traditional universities. Services include mass mailings to prospective students, mailings based on student response and other similar services.
Texas Pacific Group sells stake in discount travel site in $665m deal
Texas-based LBO house Texas Pacific Group is selling its stake in discount travel Web site Hotwire.com. Publicly-traded IAC/InterActiveCorp, which brands itself as an “interactive commerce” company, will acquire Hotwire for $665m, and also will throw in $20m of options and warrants. Texas Pacific's return from the transaction will be about three times their original investment of $100 million, a source close to the deal said.
The company will become part of IAC's new division, IAC Travel. IAC estimates 2003 gross bookings for Hotwire of approximately $700m and net revenue of approximately $110m. The company will remain a separate subsidiary and brand within IAC. Hotwire was founded in the fall of 2000 by Texas Pacific, which had a 25 per cent stake, and airlines American, America West, Continental, Northwest, United and US Airways.
Littlejohn agrees to acquire GE's abrasive division
Littlejohn & Co. has announced an agreement to acquire GE Superabrasives, a supplier of manufactured diamond and other polychrystalline products, from General Electric. Terms of the deal were not disclosed.
GE Superabrasive's products are used in the machining, cutting, grinding, polishing and drilling of metal and metal alloys, composites, glass, plastics, wood and ceramics. The company is a division of GE Specialty Materials and is led by Tanya Fratto, who will continue as chief executive officer of the business, which will be renamed after the acquisition closes.
It was Littlejohn's second deal with GE in September . Earlier, Bain Capital announced it would acquire automotive part and accessory company Keystone Automotive from Advent International, Littlejohn and GE Commercial Finance in a deal valued at $440m.
Funds & Buyside
Goldman Sachs closes largest mezzanine fund
After seven months of fundraising, financial services group Goldman Sachs has closed its third mezzanine fund on $2.7bn, the largest such fund raised to date. The fund, Goldman Sachs Mezzanine Partners III, has institutional investors, high-net-worth investors as well as capital from Goldman Sachs and its employees. It will target investments in North America and Europe in the $40m to $200m range.
GS Mezzanine Partners is run out of Goldman Sachs' principal investment area, which is led by Richard Friedman. The firm's second fund, GS Mezzanine Partners II, closed on $1.3bn in 2000. It is approximately 90 per cent invested and has made 20 commitments.
See also this month's Sixty Seconds Interview with Robin Doumar of Goldman Sachs Mezzanine Partners on page 72.
Castle Harlan closes fourth fund on $1.16bn
New York-based private equity firm Castle Harlan has closed its fourth private equity fund on $1.163bn, below its original target of $1.25bn. The fund, Castle Harlan Partners IV, is almost twice the size of the firm's third fund, which closed in 1997 on $632m. Investors in the fund include the pension funds from Oregon, Ohio, Michigan and North Carolina. The endowments of the Massachusetts Institute of Technology and New York Presbyterian Hospital also invested, as did funds of funds including HarbourVest Partners and Pantheon Ventures. The firm raised about $500m to $550m from new investors, with the remainder of the capital coming from returning LPs.
The firm will look to do deals with an enterprise value between $100m to $750m. Castle Harlan has already made two acquisitions with the new fund.
In April, the firm acquired automotive accessories company Advanced Accessory Systems, a manufacturer of automotive roof racks and towing systems in North America and Europe, from JP Morgan Partners in a buyout valued at approximately $260m.
Carlyle unveils plans for $400m mezzanine fund
Washington D.C.-based private equity house The Carlyle Group, has announced plans for a $400m mezzanine fund. At its annual investor meeting in September, Carlyle said the fund, the first to be raised by the firm, will primarily focus on the US and will be used to finance leveraged buyouts and recapitalisations.
Carlyle also hired three executives from Los Angeles-based investment management firm TCW Group to run the fund: Leo Helmers, Rufus Rivers, and James Shevlet. Helmers and Rivers will work in New York, and Shevlet will report from the Los Angeles office.
Lehman acquires Crossroads Group
New York-based financial services group Lehman Brothers has agreed to acquire the operating assets of Dallas-based fund of funds firm The Crossroads Group. Terms of the deal were not disclosed, according to a press release. Crossroads, founded in 1981, has committed more than $2bn to more than 200 private equity partnerships. The firm is led by chairman and chief executive officer Brad Heppner, who will maintain his position and become co-head of Lehman Brothers' private funds investment group along with Anthony Tutrone. “Crossroads brings something difficult to build, which is 22 years of history with great relationships with the right general partners,” Tutrone said. “They have a robust database that will help our entire institution and a world-class back office.” Brad Heppner said the two firms have been working on projects for the past year and through working on those projects, the firms realised a more formal merger would be beneficial for both parties.
RCP Advisors closes debut fund of funds on $90m
Chicago-based RCP Advisors has closed its debut fund of funds on $90m.
The firm, which focuses on investing in small- and mid-market LBO funds, had an original target of $100m to $125m. The investor base is comprised of institutions, high-net-worth individuals and family offices.
The fund is already about 75 per cent committed, with a goal for an end-of-the-year close, and it will be invested in 12 or 13 funds. RCP Advisors has committed capital to funds managed by Arsenal Capital Partners, H.I.G. Capital, Harvest Partners and KPS Special Situations.
SG Phoenix sets $50m goal for its first fund
New York-based venture capital firm SG Phoenix has established its first fund, Phoenix Venture Fund, with a target of $50m. The fund currently has $20m in commitments and a close date set during the first half of next year. According to co-founder Andrea Goren, the firm will focus on PIPE and take-private transactions involving North American, small-cap companies. Goren will be joined by Phil Sassower, a New York-based private investor who previously owned Phoenix Enterprises and has been involved with the type of deals on which the fund will be focusing for more than 20 years. The fund is not committed to any particular industries.
OrbiMed announces $300m close on healthcare fund
New York-based venture capital fund OrbiMed Advisors, which focuses solely on healthcare investing, has announced the closing of a $300m fund. The fund will be called Caduceus Private investments II and will focus primarily on drug development, drug discovery and medical device companies. The fund will target mid-stage and later-stage private companies at all stages of development. Individual investments are expected to range between $5m and $20m.
Scimitar acquires Corning's VC arm
Venture capital firm Scimitar Capital Partners has acquired the venture capital portfolio of glass and telecommunications group Corning. Terms of the deal were not disclosed. Corning Innovation Ventures will become a part of Scimitar, but will maintain offices in Corning, N.Y The firm will continue to be led by president Greg Smith.
Corning established its venture subsidiary in 2000 with $50m to invest in telecommunications and technology companies that could help with Corning's main lines of business: optical fiber, cables, and products for the life sciences and semiconductor market. Some investments included LightPointe, Akara and Optium.
Ironwood holds first close for debut fund on $20m
New York-based private equity firm Ironwood Partners has announced an initial close of its debut fund on $20m. The Ironwood Manufacturing Fund is seeking to raise an ultimate $50m. Ironwood will invest in US-based companies in the manufacturing, distribution and industrial services sectors with up to $100m in enterprise value. The fund will invest in buyouts, recapitalisations, and growth financing rounds. The firm will also look to grow portfolio companies through addon acquisitions as well as organic growth
New Utah firm focuses on Rocky Mountain market
Salt Lake City-based Harvest Growth Partners has announced its formation as well as its first investment. The firm will focus on Mountain West middle market companies with values between $10m and $200m. The firm is led by principals Burton Stohl, Greg Larson and Eric Petersen. The firm's debut investment was a $1m commitment to construction and demolition waste hauler Metro Waste. Other Utah-based venture capital firms include Wasatch Venture Fund, vSpring Capital, Peterson Capital, Utah Venture Partners, and Alpine Consolidated.
Conning & Co spins out Conning Capital Partners
Connecticut-based private equity firm Conning Capital Partners has spun out from its parent company, Conning & Co., into a separate management company named CCP Fund Managers.
CCP Fund Managers was formed and is entirely owned by the former CCP Partners. It currently manages approximately $600m in three separate funds, Conning Capital Funds III, V, and VI. Global reinsurance group Swiss Re, which owns Conning & Co., will continue to sponsor and maintain a significant investment in CCPFM's $307m Fund VI.
CCPFM focuses on investing in financial services and healthcare services companies. The firm targets companies with a market capitalisation of $25m to $500m, with investments ranging from $5m to $30m per company.
Apax boosts medical device team
International private equity firm Apax Partners has hired medical device industry executive Gregory Casciaro as a partner to support the firm's activities in that sector. Casciaro will be based in Apax's Menlo Park office and will help generate deals and work with Apax's current portfolio companies in the medical device sector.
Casciaro joins the firm from Orquest, where he served as president, chief executive officer and director. Orquest was sold to DePuy AcroMed, a division of Johnson & Johnson. Orquest manufactures and distributes a bone graft substitute called Healos. Prior to Orquest, Casciaro was president and chief executive officer of General Surgical Innovations, which makes minimally invasive surgical devices. That company was sold to Tyco International's US Surgical in 1999.
Morse joins Lehman merchant banking
New York-based investment bank Lehman Brothers has brought David Morse aboard as a managing director at its merchant banking division, where he will source, execute and manage private equity investments. Morse joined the firm from Hampshire Equity Partners, where he was a founding partner. While there, he completed 13 investments in a variety of industries. Prior to Hampshire, he spent time at GE Capital and Chemical Bank.
Advent names Berman investor relations partner
Boston-based Advent International has named Beverly Berman a partner responsible for investor relations and fund marketing activities. Berman will develop and manage new and existing limited partner relationships. Prior to joining Advent, Berman was a partner at placement agent C.P. Eaton & Associates, where she was responsible for screening alternative investments, including private equity and hedge funds. She has also served as a director in Credit Suisse First Boston's customised fund investment group. In addition, she has worked as a portfolio manager of alternative investments for Colorado PERA, the state pension.
AlixPartners opens in Los Angeles
Corporate turnaround and performance improvement firm AlixPartners has opened an office in Los Angeles led by principals Duross O'Bryan and Christine Spadafor Clay. The office will serve the West Coast and will focus on, among other things, providing performance-improvement services to the portfolio companies of private equity firms.
O'Bryan joins the firm from PricewaterhouseCoopers, where he was the partner-in-charge of the dispute analysis and investigation practice for the western US. Spadafor Clay joins the Los Angeles office from AlixPartners' Chicago office. She joined AlixPartners in 2002 from The Boston Consulting Group. “As demand for our particular brand of services has increased steadily on the West Coast, we have decided to commit resources to establishing a strong presence there with an office in Los Angeles, led and staffed by local professionals of the highest caliber,” Michael Grindfors, president of AlixPartners, said in a statement. AlixPartners is focused on corporate restructuring and performance improvement. The firm helps manage operational, financial, analytical and legal challenges. The firm has other offices in New York, Chicago, Dallas, Detroit, London, Milan and Munich.
Quantum hires three VPs
Michigan-based private equity firm Quantum Value Partners has hired David Harper, Greg Salchow and Daniel Salliotte as vice presidents. They will be working from the firm's Detroit office. Harper joins Quantum after serving as VP and chief financial officer of Noble International, a publicly traded automotive supplier and distribution company. He previously served as a consultant to Blackwolf Ventures, co-chief executive officer and CFO of Moore Medical Corp., CFO of Primedia as well as various managerial positions with United Technologies and International Dairy Queen. Salchow had previously been a VP and equity analyst with Raymond James & Associates and covered the automotive sector. His background includes several years of equity research experience. Salliotte comes aboard from SPX where he served as group VP responsible for business development for the Fluid & Material Handling Group. Prior to SPX, Salliotte served as a manager in the consulting group at Deloitte & Touche and worked for a boutique M&A firm.
ATV brings wireless industry veteran aboard as GP
Palo Alto-based venture capital firm Advanced Technology Ventures (ATV) has appointed Bill Wiberg partner. Wiberg had previously been a general partner with wireless-focused Orange Ventures, and president of Lucent Technologies' Cellular and PCS Wireless Networks division. Before that, he served as a general partner with Bowman Capital's Private Equity Group where he helped manage the company's venture capital investments, primarily in the wireless sector. He has 22 years of operating and investment experience in telecommunication, networking and venture capital, according to a statement. Wiberg will focus on new investments across several of ATV's core technology markets including communications, IT infrastructure, and software and services.