Abandonment issues
A new firm scours the market for its trademark transaction – the elusive ‘orphan’ deal.

Protostar Equity Partners is hoping to find GPs willing to part with their orphans.

The New York firm defines an ‘orphan’ as a portfolio company that has long ago ceased to capture the energies and attentions of a GP group.

Many GPs are loath to admit that any of their beloved portfolio companies can be labeled orphans, but these litter the market in epidemic proportions, according to Joseph Haviv, a partner at Protostar. “These tend to be the tails of very old funds, where there are just one or two companies left,” says Haviv. “There is often an element of administrative burden.”

Haviv adds that the problem of orphans is exacerbated if the firm in question has a much larger follow-on fund to manage. Charged with the responsibility of tending to recent, large transactions, GPs are forced to neglect the older, smaller portfolio companies, whose fates will have only a minimal impact on the firm’s overall performance.

In addition, the funds in which the orphans reside may not have any uninvested capital left, and LPs from follow-on funds frown on cross-fund investing – after all, these investors didn’t commit to the new fund only to see it used to prop up companies from the old one.

Protostar is prepared to play step-GP to these under-nurtured companies. Haviv and another Protostar partner, Andrew Kohn, were formerly partners at New York buyout firm First Atlantic Capital. Their new firm, says Haviv, is populated with professionals who have “true-blue operating backgrounds, and who will work with the underlying businesses to help create value. At heart, we remain traditional buyout players.”

What sets Protostar apart is their focus on buying companies from other private equity groups too distracted to structure traditional exits. This includes, in addition to independent GP groups, corporations seeking to shut down private equity divisions.

It was this type of situation that led to Protostar’s debut deal, the proposed $100 million ( 79 million) buyout of CIT Group’s portfolio of direct investments. The financial services conglomerate decided to exit the direct private equity game after having acquired interests in 47 companies. CIT reported a $60 million loss on its private investments in the fourth quarter.

Haviv says: “This is a perfect fit for us. We are willing to span the spectrum of size and performance and industry. [The CIT deal] includes a combination of buyout and VC investments, and has a variety of asset classes and both control and minority investments.”

In fact, secondary transactions of direct portfolios from institutions are not uncommon these days. Global Asset Capital and Hamilton Lane last year bought out the venture capital portfolio of Vivendi. In March, W Capital bought the venture investments of Tredegar Corp. Dime Bank, British Telecom and Lucent all have jettisoned direct investment portfolios in similar fashion.

But very few GP orphan deals have yet been seen in the private equity market. Or if they have, they haven’t been disclosed.

Nothing personal
Haviv says his firm is “in discussions” with private equity firms regarding this kind of deal, but has yet to complete one. “It really depends on what the economic picture the GP has of their existing holdings,” Haviv says of GP attitudes toward his type of liquidity offer. “There certainly have been sensitivities to the reactions of LPs. But if a GP can show that this leads to liquidity and targeted returns, after a stage of general discomfort, people will move forward and understand that this transaction can benefit all parties.”

To date, Goldman Sachs’ secondary group, led by Geoff Clark, has been the biggest backer of secondary direct deals. The firm is funding the CIT deal through its GS Vintage Funds II vehicle.

In the UK, Goldman Sachs backed Vision Capital’s purchase of four portfolio companies from Morgan Grenfell Private Equity, which had been acquired by Deutsche Bank. In fact, the assets were part of Morgan Grenfell’s Fund III, while Fund IV investments are to be managed by Deutsche Bank spin-out group MidOcean Partners. This may be the purest example of an actual orphan transaction to have occurred in the market.

In the meantime, it is easy to predict what is behind GPs reluctance to unload old portfolio companies: loss of face. No private equity professional sets out on a deal with the intention of eventually turning the keys over to another firm. Many GPs may view Haviv’s solution as an exit without honour.

But other types of secondary transactions that were once viewed with suspicion are starting to become commonplace. Even a few short years ago, an LP asking to transfer his or her partnership interest to another investor was frequently met with hostility by GPs, who saw it as a blow to the firm’s prestige. Now, while secondary deals remain discrete, they are taken at face value – as tools for liquidity, nothing personal.

Deals & Exits

Clayton Dubilier in $1bn Kinko exit
Clayton Dubilier & Rice’s seven-year stewardship of Kinko’s came to an end in late December with the announcement that the chain of copy centers would be sold to FedEx, allowing the private equity firms to realise a profit of roughly $1 billion (€800 million). (See also 60 Second Interview, p. 68).

The Kinko’s sale was significant in that it represents Clayton Dubilier’s biggest exit success in years. A trade sale, it was also a nice, straightforward means to liquidity. Recent months have seen the firm return capital to LPs through more creative means, such as leveraged recapitalisations, which allow equity sponsors to use proceeds to pay special dividends to investors.

Last April, Clayton Dubilier recapitalised Jafra Cosmetics in a $275 million transaction. Just a year ago, the firm did a recap on portfolio company Remington Arms, a gun maker.

For portfolio companies Riverwood, a packaging business, and SIRVA, a moving services company, Clayton Dubilier has taken them public, the latter through a traditional IPO and the former through a merger with Graphic Packaging, a public company.

These creative paths to exits are a bit of a headache, and lack the elegant finality of a trade sale, so the big sip of liquidity that was Kinko’s was certainly refreshing.

Avenue Capital enters control game
New York based distressed debt specialist Avenue Capital, which has $5 billion (€3.9 billion) in capital under management, is “joining forces” with Greenwich, Connecticut-based Pegasus, a firm it has on occasion partnered with on transactions.

Marc Lasry, a co-founder and managing partner of Avenue Capital, said his firm had typically sought to buy debt securities in troubled companies, convert to equity and sell out at a profit. Pegasus, on the other hand, was experienced in taking control of target companies and would complement Avenue Capital with that strategy.

Founded in 1995, Avenue Capital last year raised a $2 billion fund for investment in Asia and a $3 billion fund for US activity. The firm recently has been looking at distressed middle-market companies in need of capital at a time when buying these companies is relatively cheap.

With the Pegasus team on board, Avenue Capital now has a private equity arm and plans to raise capital for a control-oriented distressed fund of as much as $500 million. Pegasus, founded in 1996, currently has $800 million under management. In 2002, Pegasus Capital invested $25 million in offroad vehicle company Cannondale Corporation. The previous year, it teamed with distressed specialist KPS Special Situations Fund to acquire steel and metal products company Genesis Worldwide for $20.5 million.

Vestar buys French funeral group for €293m
SCI, a Houston-based funeral and cemetery operator, has signed an agreement to sell 75 percent of its French operations to New York-based private equity firm Vestar Capital Partners. SCI will retain the remaining 25 percent.

The business, known as Groupe OGF, posted sales of €515 million ($648 million) in 2003 and is the leading undertaker in France. It organised 138,000 funerals last year and erected 20,000 tombstones, and is the owner of 40 of France’s 100 crematoriums.

Under the terms of the deal, Vestar will own 65 percent and the management team 10 per cent.

In recent years, profit margins in the funerals sector have been falling due to an increase in cremation rather than burial. Burials have a wider range of associated services and fees.

The deal completes the retreat of SCI from its European businesses, following its sale in 2002 of UK funeral group Dignity Caring Funeral Services to private equity firm HSBC Private Equity (now Montagu Equity) for £220 million. It will allow SCI to reduce debt and focus on its North American activities.

Vestar opened its first European office in Paris in September 2000, and then added an office in Milan six months later. It has US offices in New York and Denver and invests in companies worth between $100 million and $3 billion from a $4 billion fund.

Summit bets $90m on options brokerage
Boston-based Summit Partners has taken a $90 million (€71 million) minority stake in OptionsXpress, based in Chicago.

OptionsXpress, founded three years ago, provides options instruments to individual investors, according to a press release. The company has more than 70,000 accounts. The company will continue to be managed by founders Gray, Bennett and David Kalt.

Summit Partners, formed in 1984, specialises in growth equity investing, a strategy that favors minority and majority stakes in growing companies with low- to noleverage structures. The firm’s most recent investment was an equity stake of undisclosed value in cosmetics company Physicians Formula.

Summit Partners’s latest fund closed with more than $2 billion in commitments in 2001. The firm also manages an early stage venture fund, a subordinated debt fund and a hedge fund.

Clarity backs US newspaper platform
Los Angeles-based venture capital firm Clarity Partners, alongside a private equity consortium including New York-based BMO Halyard Partners, Washington D.C.-based ACON Investments and Toronto-based Knight Paton Media, are joining forces with the Lozano family, the owners of La Opinion, an influential Spanish-language newspaper in Los Angeles, to form the first national Spanishlanguage newspaper company.

The private equity group, through platform company CPK Media, acquired New York-based El Diario/La Prensa in July 2003. The new platform company, called Impremedia LLC, will merge La Opinion and El Diario/La Prensa.

Steve Rader, a managing general partner of Clarity Partners, and chairman of Impremedia, led the deal. He said the new company would span two key target markets in the US’s Spanish-speaking population, Los Angeles and New York. Prior to joining Clarity Partners, Rader was instrumental in acquiring and building Univision, now the largest Spanish-language television network in the US.

Clarity Partners was formed in 2000 by Rader and a group of media and communications specialists, including co-founders of Global Crossing David Lee and Barry Porter. The firm raised an $800 million (€646 million) fund.

Its stated goal is to establish between six and eight major media and communications platforms. In 2001, Clarity teamed with a group of private equity firms to establish a wireless platform through the acquisition of Itasca, Illinois-based PrimeCo Personal Communications, in a deal valued at between $450 million and $600 million.

BMO Halyard Partners, based in New York, is the private equity investment arm of BMO Financial Group. It manages a $450 million fund. ACON Investments, based in Washington, D.C., is affiliated with Texas Pacific Group. Knight Paton Media is a newspaper investment consultant.

AIG spends $746m on El Paso power plants
AIG Global Investment Group has agreed to acquire 25 power plants from El Paso, a Houston-based natural gas conglomerate, for $746 million (€603 million) plus the assumption of $174 million in debt.

AIG is acquiring the assets on behalf of two private equity funds: AIG Highstar Generation and Northern Star Generation. The power generation facilities are located in seven states across the US and together have a generation capacity of roughly 1,850 megawatts.

AIG Highstar has been a major acquirer of energy spinouts as large corporations in this space shed assets. In March the group teamed with CSFB Private Equity on a $306 million buyout of Duke/UAE Ref-Fuel from Duke Energy. AIG Highstar has also bought assets from CMS Energy Corp and Williams Companies. AIG Highstar closed a $400 million fund in 2000.

Littlejohn carves out GE abrasives division
Greenwich, Connecticut-based buyout firm Littlejohn & Co. has completed its acquisition of the superabrasives business of General Electric.

Terms of the deal were not disclosed. The newly independent company, to be called Diamond Innovations, manufactures synthetic diamond and cubic boron nitride crystals used in drilling and related industrial activities. The company is based in Columbus, Ohio, but also has a manufacturing facility in Dublin, Ireland.

Littlejohn was formed in 1996 when its founder, Angus Littlejohn, left New York buyout firm Joseph Littlejohn & Levy (now called JLL Partners). The firm recently agreed to acquire a majority stake in technology testing company Wyle Laboratories. In 2002, the firm bought senior debt in PSC, a maker of bar-code scanning equipment that filed Chapter 11 bankruptcy.

Behrman bolsters defense platform
New York- and San Francisco-based Behrman Capital has acquired Hunter Defense Technologies, a maker of military and “homeland defense” products, for $90 million (€71 million).

The deal comes seven months after Behrman Capital’s acquisition of ILC Industries, a Bohemia, New York, maker of components for the aerospace and defense industries, for $303 million.

Based in Solon, Ohio, Hunter Defense provides air filtration and heating products to the US Department of Defense, according to a press release. The air filtration products are designed to protect against nuclear, biological and chemical attacks. The company also makes heating equipment for military vehicles, tents and shelters.

Founded in 1992 by brothers Darryl and Grant Behrman, one of Behrman Capital’s first investments was in Condor Systems, a defense contractor. Behrman Capital also focuses on information technology, business services, contract manufacturing and outsourcing. In 2001 the firm closed a $1.2 billion fund. In February 2002 Darryl Behrman died unexpectedly of a heart attack.

Ripplewood backs Time Warner spinout
Bolstering its global direct marketing platform, New York-based private equity firm Ripplewood Holdings announced its acquisition of Time Life Inc. from the former AOL Time Warner.

The Ripplewood portfolio company through which the deal is being done, Direct Holdings Worldwide, was formed with the April acquisition of online retailer Lillian Vernon Crop, a seller of specialty household, gardening, kitchen and children’s products, in a $60 million (€47 million) going-private deal.

Ripplewood is partnering with ZelnickMedia on the deal. ZelnickMedia is run by media veteran Stauss Zelnick, the current chairman and chief executive officer of Direct Holdings, and a former CEO of BMG Entertainmen

Terms of the transaction were not disclosed. The Time Life addition will bring Direct Holdings’ annual revenue to approximately $500 million. Time Life had revenues of $350 million in 2003, according to reports.

Under the agreement, Direct Marketing receives a long-term license for the “worldwide use of the Time Life brand in the direct marketing of music, video, books and educational software,” according to the press release.

Founded in 1961, Time Life markets music and video products with an historic emphasis on television advertisements. Titles include “Sounds of the ’80s” and “The Best of Beavis and Butt-Head.” This is the second AOL Time Warner spinout to a private equity firm in less than two months. The conglomerate, which changed its name to Time Warner following a disastrous merger between America Online and Time Warner, in late November announced the $2.6 billion cash sale of its Warner Music Group to a consortium led by Boston buyout firm Thomas H. Lee Partners and including Bain Capital and media and telecom specialist Providence Equity Partners.

Gryphon Investors buys Eight O’Clock Coffee for $100m
San Francisco-based middle-market buyout firm Gryphon Investors has completed its acquisition of Eight O’Clock Coffee Company, a retail-focused roaster and packager of coffee.

Gryphon Investors did not disclose financial details of the deal, but earlier press reports indicated a $107.5 million (€85 million) transaction value.

Eight O’Clock Coffee was originally a division of The Great Atlantic & Pacific Tea Company, itself a division of the beleaguered A&P supermarket chain. The company sells coffee under the Eight O’Clock and Royale brands. The 145-year-old Eight O’Clock Coffee will continue to operate out of its Montvale, New Jersey, headquarters.

Gryphon Partners is currently raising a fund, its second discretionary vehicle. The firm launched in 1997 with a pledge fund, meaning investors could participate on a deal-bydeal basis. Gryphon is headed by president and managing general partner David Andrews.

Its current limited partners include the public pension funds of Oregon, Washington, Colorado and Pennsylvania. Gryphon Partners has also managed the personal wealth of general partners from buyout firms Kohlberg Kravis Roberts & Company, Texas Pacific Group and Oak Hill Partners. The firm seeks to invest between $25 million and $75 million in equity per deal.

Funds & Buyside

Where next for One Equity?
The recently announced $58 billion (€46 billion) acquisition of Bank One by JP Morgan brings what could be a group of kindred souls into the JP Morgan Partners fold.

Chicago-based Bank One’s private equity division, One Equity Partners, is, like JP Morgan Partners, a contented captive. The firm is led by Richard Cashin, the former president of Citigroup Venture Capital, one of the granddaddies of captive merchant banking.

Formed in 2001 when most other banks were thinking of ways to ditch their private equity divisions, One Equity Partners, by contrast, received a capital commitment from its parent company for $500 million per year, according to a source close to the firm. “Cashin has a tremendous mandate from [James] Dimon,” Bank One’s chairman and chief executive officer, the source says.

One Equity has 27 investment professionals in Chicago, Detroit, New York and Frankfurt. The firm has done innovative deals throughout the US, in the UK and in Germany.

In short, One Equity looks a bit like JP Morgan Partners – global, integrated and happily captive.

Jeff Walker, head of global private equity firm JP Morgan Partners, knows a thing or two about mergers. What originally began as Chemical Venture Partners eventually absorbed (and partially expelled) the private equity teams of Manufacturers Hanover, Chase Manhattan, Hambrecht & Quist, Beacon Group, Robert Fleming Holdings, and JP Morgan. (See also Privately Speaking, p. 30.)

But can the two firms become one? For one, the combined parent company may not be willing or able to fund direct private equity at the same level.

One Equity mostly does buyout deals, while Walker’s group does venture, growth equity and buyouts. JP Morgan Partners has an elaborate firm culture of networking. The grizzled veterans at One Equity, including Cashin, former MascoTech executive Lee Gardner and former Ford CEO Jacques Nassar, might not buy into the JP Morgan Partners global family concept.

Egos might get in the way – Walker is described as easy-going but shrewd, Cashin is brilliant and “irreverent,” according to a person who knows him.

Finally, JP Morgan/Bank One is not likely to want two competing buyout teams under the same roof. So if there is, in fact, not room enough for two buyout teams at JP Morgan, someone’s gotta leave.

Kodiak Venture raises $316m for Fund III

Kodiak Venture Partners, the Waltham, Massachusetts-based seed and early stage specialist, has closed its third investment vehicle.

Kodiak drew capital commitments totaling $316 million (€251 million) for a vehicle that will make investments of between $250,000 and $10 million in the communications, semiconductor and software sectors. The firm will focus on the eastern US and Canada.

Kodiak’s previous fund closed in 2001 on $290 million. Its debut fund closed in 1999 on $70 million. The firm was most recently part of a $10 million investment in GTESS, a provider of outsourced services for the healthcare industry. The round was co-led by General Catalyst Partners, another Boston-area firm that recently closed a third fund.

Domain Associates breezes through $500m fundraising in three months
Domain Associates, the venture capital firm from Princeton, New Jersey specialising in life sciences, has closed its sixth fund, Domain Partners VI, on $500 million.

The fundraising took approximately three months, starting this past September. About 80 per cent of the committed capital came from existing institutional investors including fund of funds, corporate pension funds, university endowments and foundations.

Domain generally invests in the life sciences sector in three segments: biopharmaceuticals, specialty pharmaceuticals and medical devices. Klausner says the firm looks to invest between $15 million to $20 million in total over the course of each deal.

Founded in 1985, Domain Associates is one of the largest US venture capital firms to focus on the biotechnology industry. The firm usual plays an active role in its investments, usually taking the lead in the fundraising round it participates in.

Domain’s previous fund closed back in February 2001 on $464 million. The fifth fund was oversubscribed, surpassing its $350 million target set when fundraising began in September 2000.

Michigan creates $150m state venture fund
The governor of the state of Michigan has signed a bill creating a $150m (€117m) fund to back firms investing in local startups. The fund is similar to a spate of state venture programs that have swept through Oklahoma, Iowa, Arkansas, Utah and Ohio.

The fund will provide capital to Michigan venture capital firms to invest in information technology, life sciences, advanced manufacturing, and alternative energy technologies.

The new legislation calls for Michigan’s state government to raise capital through the issuance of debt carrying a guaranteed minimum return, to be committed to local venture funds. The debt will be serviced by proceeds from the underlying venture funds. The state government is required to service the debt should venture profits not sufficiently cover it.

The fund is structured as an evergreen vehicle, meaning that proceeds from underlying funds will be reinvested into subsequent local investment vehicles.


Francisco hires Sprout’s head of IT investment
Menlo Park, California-based private equity firm Francisco Partners has hired technology investment specialist Keith Geeslin as general partner. For the last 20 years, Geeslin has worked for New York-based Sprout Group, the venture capital affiliate of Credit Suisse First Boston, where he served as managing partner and most recently served as head of the firm’s IT investments.

Before joining Sprout, Geeslin served as a general manager of a division of phone networking company Tymshare and held various positions at its Tymnet subsidiary. Before that, he was a staff member of the US Senate Commerce Committee working on telecommunications industry policy.

In November, Sprout announced it was cutting the size of its $1.44 billion Sprout IX fund by 25 per cent to $1.08 billion, and that it was trying to refocus its diversified investment strategy by spinning out its healthcare investment group into a separate, independent entity. Along with that announcement, Sprout also said Geeslin would be leaving the firm by the end of 2003.

With $2.5 billion of committed capital under management, Francisco Partners targets majority and minority investments in technology companies with transaction values ranging from $30 million to $2 billion. The firm has an exclusive, longterm relationship with Sequoia Capital.

In June 2003, Francisco and Shah Management jointly acquired semiconductor test and diagnostic equipment manufacturer NPTest from oilfield and information services company Schlumberger in a $220 million all-cash acquisition.

Goldman Sachs Private Equity promotes Phil Cooper to chairman
New York-based Goldman Sachs Private Equity Group, the fund of funds arm of financial services giant Goldman Sachs & Co., has promoted managing director Philip Cooper to chairman of the unit.

For the last eight years, Cooper as headed the $11 billion Goldman fund group, where he managed more than 70 professionals in New and London. The firm’s approximately 140 investments include private equity funds in the United States, the United Kingdom, continental Europe, Latin America and Asia.

Goldman Sachs also promoted two managing directors, Geoff Clark and Mike Miele, as new co-heads of the private equity group.

Goldman Sachs Private Equity Group is separate from Goldman Sachs Capital Partners, which makes direct investments into companies. The private equity group invests in funds with strategies that include leveraged buyouts, growth financings, natural resources, venture capital and distressed securities.

Most recently the group invested in Altor Equity Partners, the Stockholm-based mid-market buyout firm that held a final close on its debut fund at €650 million.

TA Associates doles out three promotions
Boston-based private equity firm TA Associates has promoted David Lang to managing director, and both Jonathan Meeks and Ajit Nedungadi to principal.

Lang, who was previously a TA principal, focuses on healthcare informatics and services, software and technology from TA’s Boston office. He joined TA in 1990 as an associate and rejoined again as a vice president in 1995 after getting an MBA.

Meeks joined TA’s Boston office as an associate in 1997 and was promoted to vice president in 2000. He specialises in recapitalisations and management buyouts of technology growth companies. Before joining TA, Meeks was a financial analyst in the information services group at Robertson, Stephens & Company.

Nedungadi started as a vice president for TA in 1999 and currently serves as director of the firms London office. He focuses on recapitalisations, management buyouts and minority equity investments in growth companies. Before TA, Nedungadi worked for Trilogy Software, private equity firm Investcorp International and Credit Suisse First Boston in its mergers and acquisitions group.

TA Associates was founded in 1968. It manages more than $5 billion in capital, and has offices in Menlo Park, Pittsburgh and London. The firm usually provides growth equity capital and management buyout financing for technology, financial services, healthcare-related and consumer businesses.

Sprout hires partner for healthcare team
New York-based Sprout Group, a venture capital affiliate of Credit Suisse First Boston, has hired of Andrew Firlik as partner for healthcare technology investments.

Prior to Sprout, Firlik served as a principal at Rowayton, Connecticut-based venture capital firm Canaan Partners, where focused on healthcare investments.

Since 2000, Firlik, who has a degree in medicine, has advised and invested in early-stage companies focusing on treatment breakthroughs, mostly in drug development and medical device technologies. Before coming aboard Canaan, Firlik was a cofounder and principal of Cortex Consulting, where he served as a consultant to Menlo Park, California-based Mayfield Fund and several early-stage healthcare companies. He is also a co-founder of Northstar Neuroscience, a venturefinanced medical device company in Seattle.

Founded in 1969, Sprout Group is one of the oldest and largest venture capital firms in the US. The firm, with offices in New York and Menlo Park, Calif., currently manages approximately $2 billion in committed capital and provides equity for start-ups through buyouts for communications, software and healthcare companies.

Colorado hires alternative investment chief
The Colorado Public Employees’ Retirement Association (PERA), one of the largest US pension funds investing in global private equity funds, has appointed a new head of alternative investments to replace Kevin Kester, who left the association in December.

Denver-based Colorado PERA has hired Chris Reilly, a former investment professional at both Deutsche Bank Securities and Salomon Smith Barney in New York and a member of the Institutional Limited Partners Association.

Reilly, who left the association to become vice president of capital markets for The Broe Companies, was one of three members of the alternative investments team at Colorado PERA. Still at the pension are David Martis and Tim Moore.

PERA provides retirement and other benefits to the employees of more than 380 government agencies and public entities in the state of Colorado.

PERA is the 23rd largest public pension plan in the United States with assets of more than $28 billion, with approximately 11 percent, or $3 billion, invested in alternative investments.