News @ peHUB

Greetings for the last time in a long time, as I’m heading off for a two-week vacation. “Heading” might actually be a bit of a stretch, since my primary plan is to become better acquainted with my couch. It should be glorious.

peHUB will continue to be updated in my absence, with Erin Griffith and Connie Loizos doing most of the heavy lifting. The daily PE Week Wire email also will continue (except for tomorrow), with Erin taking over (email her any news items). We’ll also have some guest columnists for you.

Be back on July 21. Same blog time. Same blog channel…

This is the second in a series examining obstacles and pitfalls of raising a private equity fund. Please email me suggestions for future posts.

Remember that famous line from Wall Street, right before Bud Fox first meets Gordon Gekko?: “Life comes down to a few big moments, and this is one of them?” So far this year, PE fundraising hasn’t been quite so high-stakes an endeavor. Together, buyout and mezzanine firms in the

U.S. have amassed only a couple billion dollars less than they did at this point last year (which was a record). But the consensus is that it won’t keep on like that for long. LPs, you’d think, will start weeding out more and more firms. Below are some of the tips I’ve gleaned in the past few weeks on that front. Make sure your firm isn’t among those whose fundraising pitches don’t make the cut.

I’ll start with issues of style, and here’s the big one: Industry pros recommend getting in and out of investor meetings quickly. The human tendency to doze off after two hours in a stuffy boardroom is not to be dismissed. Meet that requirement first, then worry about the rest.

Other PE veterans say that it’s best to conduct the session as an interactive feature rather than a sermon, with roughly half the allotted time reserved for Q&A. The presentation’s handouts should be constructed to encourage note-taking, with appendices for the nitty-gritty financial details, which can get boring if they’re featured in a slide show.

Placement agents recommend having as much of a firm’s key personnel as possible present at the first meeting with an investor. It should start with introductions, so the LPs can attach names to faces. And once the presentation starts, its content should be divided up among everyone, or else the whole affair resembles a classroom lecture, a PE pro told me.

Next come issues of substance, and again my first tip is probably the most important: Ask questions. “I’m always astounded by the number of [GPs] that come in and ask us literally nothing about our business and what we do and what we look for. I think it’s important to show interest, because it’s a partnership at the end of the day,” said Brian Gallagher of Twin Bridge Capital at a recent industry conference in

New York. It’s hard to underestimate the warm, fuzzy feeling LPs get when their partnerships are based on more than writing checks.

Also, trying to hide investment black eyes is probably a losing proposition, pros on both sides of the meeting say. “Oftentimes firms come in and they’re not forthcoming on the track record. You’ll have a huge focus and emphasis on the realized portion without talking about the entire portfolio,” said Thomas Henley of Aldus Equity Partners. “Whenever we see people trying to hide the ball and not be forthcoming it’s a complete turnoff.” It’s easy to underestimate how informed LPs can be before the meeting, or how easy it is, in the age of Google and Lexis Nexis, to get informed afterwards.

And in the “duh” category, some GPs make the mistake of pitching a particular market segment rather than getting sector-specific. Praising the lower-middle-market is a narrative that LPs have heard a hundred times before. The 101st probably isn’t going to stick out.

My next post in this series will look at the pros and cons of hiring a placement agent today.

* Looking for detailed info on the Clear Channel debt? FT-owned news service Debtwire has some detailed info on lead arranger Citigroup’s pricing.

* Anyone know what ever came of this case? It’s the 57-page collusion lawsuit against about 15 of the biggest LBO shops from February. You may remember, it even had a hilarious chart to outline how collusion happens, and several very shaky-at-best case studies. I thought we were done with this debate anyways, so I wonder if it just got thrown out.

I’m not saying I think firms don’t collude; in certain cases they certain benefit from clubbing up. I’m also not saying I think BIMBOs (buy-in management buyout) are always done in with the non-self-serving intentions. But good luck proving it. The Neiman Marcus example (whether it’s just poorly presented or based on little to no inside information) is particularly flimsy.

* Print and read this during your weekend travels. It’s IDD’s roundtable on the state of affairs. Some of it is old hat, some of it’s interesting. Read the first few pages, where there’s an in-depth discussion on structuring earn-outs. Skip the rest.

Some were surprised, but the deal that wouldn’t die has finally left the building.
But look at Penn National Gaming’s stock.

A failed merger usually doesn’t garner a leap in share price to the tune of 10% plus. (Though considering the spread on this one, maybe.) But a fat $225 million breakup fee, plus Centerbridge and Fortress’s agreement to buy $1.25 billion of the company’s debt, is enticing to investors. What will Penn do with all that cash?

The company has already said it will delever by $610 million and look at share buybacks and development deals.

Now, given the economic environment, leisure companies are trading at depressed multiples. One investor went so far as to call their trading levels irrationally low. A gaming PE pro told me “right now is the time for stuff to happen” in the gaming space, meaning his firm is sniffing around at undervalued companies in the space.

With their peers undervalued, I say why not make an acquisition. The best and most available option looks like Ameristar Casinos (trading up). It’s known to be up for grabs, since the owner of Ameristar donated his shares, worth more than half of the company, to a research trust when he died a few years back. That trust needs to sell its shares (and thus, the controlling stake). And pricing-wise it’s not far from its 52-week low today.

Other targets? Isle of Capri Casinos (trading down), Pinnacle Entertainment (about even) and Boyd Gaming Corporation (also down). Boyd is attractive but that hinges on the completion of a big Vegas project late next year, and also, it’s family-controlled. The rest of the known targets in gaming are distressed, like the bankrupt Tropicana Entertainment and debt-laden Herbst Gaming, according to industry experts.

Penn National isn’t itself a target, because its trading above most of its peers. So I say, Penn National, why build when you can buy? Investment bankers, make your calls.

Finally, my take on the one thing bloggers, finance reporters, Missouri politicians and beer drinkers can’t get enough of this summer—Anheuser Busch.

God knows there’s been plenty of speculation.

But hear me out. I want to talk about the theme parks. Even before InBev entered the picture, there’s been rumors about the potential sale of Anheuser Busch’s theme park division (called Busch Entertainment). Its perfectly non-core, and worth a lot, considering a Lehman Brothers analyst valued it at nearly $3 billion. InBev could sell it off to pay down debt quickly, or Anheuser could shed the business itself as a way to generate cash in its defense strategy.

But my question is, who would buy it? The logical strategic suitors aren’t in the greatest financial position to date. Slate’s Daniel Gross summarized the headwinds facing a recession-era theme park like Six Flags or Cedar Fair nicely. He pointed to this stock chart.

Beyond potential strategic suitors, I can’t think of too many LBO shops willing and able to lever up a capital intensive, consumer-spending-reliant company in the leisure industry these days. You may remember Bear Stearns failed auction of Cedar Fair (Ticker: FUN) last summer. Before its own auction, Cedar Fair was one of the more acquisitive companies in the biz. Last July, the highly leveraged company was shopped to a swath of LBO shops to no avail. So the question is, were InBev or even Anheuser itself to sell the parks, who would buy them?

In fact, most of the PE-backed M&A for theme parks seems to be in Europe. Blackstone’s ownership of Merlin Entertainments, a London-based amusement park group, comes to mind. That might be the best option (again, we’re speaking hypothetically here).

Casino operator Penn Gaming announced this morning that it has terminated its proposed $6.1 billion buyout with Fortress Investments and Centerbridge Partners. We’ll have much more on this as the day progresses, but a couple quick reactions:

1. This is very surprising. Penn Gaming and its suitors have gone through regulatory hell to get this thing done, and it seems like they’re quitting with the finish line in sight.

2. Fortress and Centerbridge have agreed to pay the breakup fee, and also to buy around $1.25 billion in Penn Gaming debt. That means Penn Gaming made out better in the deal than other companies in its predicament (read: Huntsman). On the other hand, who actually pays the breakup fee? Will Fortress and Centerbridge hit up their LPs, or will they sue the banks (you know, the folks who actually threatened to renege on their agreement)?

3. This leaves BCE as the only mega-buyout that is not closed, closing, dead or dying. It will soon be in one of those categories, and this Penn Gaming news cannot be sitting well north of the border (unless you’re a disgruntled BCE bondholder).

I spent some time on the phone yesterday with Tom Hicks, who burst back onto the buyout scene this week by agreeing to take Graham Packaging public via his SPAC. The deal is valued at $3.2 billion, with Graham owner Blackstone Group agreeing to remain the company’s largest single shareholder for at least two years. Some quick hits from the conversation:

* Hicks sized the SPAC last year at $480 million, which he thought would let it do deals of between $500 million and $1 billion. Since then, however, he’s learned that the SPAC market prefers deals closer to 3x or 4x the SPAC size, which is why he began looking at larger targets. Graham is even beyond that range, but he seems confident that his investors will approve.

* He expects to raise another SPAC once Graham closes.

* Hicks is not too concerned about how macro economic conditions will affect Graham, even though much of its business is for products that would appear affected by shrinking pocketbooks (Vitamin Water, for example). He does, however, acknowledge that there will be a downturn in sales at gas stations, since folks are less likely to spend money at the mini-mart after paying more than $4 per gallon.

* I asked why Blackstone would want to commit to two more years, after having been in Graham for 10 years. He answered that Graham was a good buy and build platform, but had never really functioned properly until it got new senior management in late 2006. In Hicks’ words: “It’s just the fourth inning of a new game, and they don’t want to stop playing yet.”

* That said, Hicks acknowledged that Blackstone had to get at least some liquidity (even delayed) for Graham after so much time, and that it probably would have found another way had the SPAC not come along.

* He’s still an investor in his namesake LBO firm HM Capital Partners: “I think they have a great group of younger partners, and it’s their turn now. They’re doing niche mid-market deals, which was the hallmark of Hicks Muse and where we had our best success.”

* Krispy Kreme got an unsolicited take-private offer earlier this week, but the bidder seems to be a serial scammer. My tipoff was when I saw the bidder’s website, which brags that it is a “very sophisticated organization.”

* Another view of SOX: It’s delicious, and (mostly) good for you.

* Peter Lattman writes about the recent organizational changes at KKR, and how it means the firm might be reviving its stalled IPO plans. He’s right about the intent, but it still doesn’t make much sense. Moreover, KKR has a bigger capital-raising issue to worry about: Trying to get a new mega-buyout fund out in 2009.

* Huawei narrows the list of bidders for its mobile device unit.

* Ad group Publicis is acquiring corporate PR giant Kekst & Co.

* Ritholtz (correctly) slams Stossel.

* Michael Lewis on today’s Wall Street.

* IPO troubles spread to Asia, as two more companies scrap offerings.

* Wallstrip on newspapers:

General Atlantic, the global, growth-stage private equity firm, has been getting a lot of attention lately — not from entrepreneurs looking for funding, but from VCs looking for funding.

“I wouldn’t even say the calls have been coming over the last six months, but the last three months,” says Marc McMorris, a managing partner in General Atlantic’s Palo Alto office, who I reached by phone yesterday.

Given General Atlantic’s place in the investing ecosystem–it writes checks of between $50 million and $500 million–it’s not surprising that VCs are checking in a bit more these days. Most late-stage and crossover funds are probably looking better than ever as strategic partners, given their ability to keep alive strong companies with nowhere to go.

Still, while McMorris didn’t say so, my suspicion is the majority of venture firms that dial up General Atlantic are probably out of luck. For starters, it tilts heavily toward partnering with buyout funds when it co-invests. A few representative pairings include an investment with TPG and Newbridge Capital to invest in Chinese PC maker in Lenovo; General Atlantic’s acquisition of Edmeon, a Nashville-based company that makes payment software for the healthcare industry, with Hellman & Friedman; and the acquisition of retail software company Torex Retail, which General Atlantic did with Cerberus.

More, the majority of General Atlantic’s deals tend to be position it as the sole institutional investor, and a minority investor at that. (It likes owning around 25 percent of its portfolio companies.) I asked McMorris why, and he suggested that it’s one of General Atlantic’s biggest differentiators. While there are plenty of mid-size companies looking to be acquired, there are plenty of founder CEOs who aren’t interested in selling all of a company but who do want to squeeze out some cash — to buy out a partner or do some estate planning or a hundred other reasons. “It’s a very different dynamic than calling Goldman to do sell side,” said McMorris.

Occasionally, General Atlantic does step into a venture deal. It invested $66 million in a recapitalization of San Francisco-based analytics company ServiceSource in January 2007, for example. ServiceSource’s only backer until then was the venture firm Benchmark Capital, which invested $10 million in 2005. (The deal was meant to help ServiceSource create a bigger footprint outside the U.S., where General Atlantic has long tentacles and has for years. In addition to Palo Alto, it has offices in Mumbai, Hong Kong, London, Dusseldorf, Sao Paulo, New York, and Greenwich, Conn.)

If as a VC, you’ve got a portfolio company in the firm’s sweet spot, you’ve got cause to celebrate. Not only does General Atlantic have vast resources — it commits $2 billion a year — but its 28 partners can never tell you, “sorry, we’re in the middle of raising a fund” because their fund is evergreen. Its roughly 35 LPs are mostly families, and every year, several of them renew their commitment to General Atlantic, which keeps the fund rolling along.

I asked McMorris why it’s just now that the calls are starting to really come in from VCs and other players that General Atlantic hasn’t historically partnered with much. The writing has been on the wall for some time, I offered. “You know, it takes a few months for people to really believe their inability to get out,” he said. “Even though the market has been challenging since the end of last year, people first moderate their expectations. Then you get to June, and expectations are pretty much gone.”

In a week of otherwise somber news for the venture industry, Blueprint Ventures is thrilled to report today that portfolio company Platform Solutions Inc. (PSI) was bought by IBM.

It’s great news on multiple fronts, not the least of which is that it puts an end to litigation between Big Blue and PSI, a maker of mainframe clones. It’s also great news for Blueprint because it lends credence to its corporate spinout strategy. PSI is the second exit it has notched from the 15 corporate spinouts it has done to date, with LANDesk being the first.

The deal shows that corporate spinouts can reach exit much more quickly than traditional venture deals, says Blueprint’s Bart Schachter. His firm held PSI for about 3 ½ years, far less than the average holding period for a VC-backed company, which is about 8.6 years, he says.

While the dollar amount of the acquisition was not disclosed, Schachter describes it as “one of the top 10 VC-backed M&A deals in the IT space this year.”
 
“This was a home run [for Blueprint], but I’m not going to tell you how many runners were on the bases,” he says.

Overall, PSI raised about $52 million over four rounds, with its last round—$37.2 million in November 2007—being led by Microsoft. Blueprint’s George Hoyem led the $5.2 million Series A for PSI when it spun out of Fujitsu in November 2003, bringing in Intel Capital, InterWest and Investcorp.

IBM sued PSI in December 2006, alleging patent violations, and PSI countersued in January 2007, claiming IBM was using its dominance in the mainframe market to stifle competition. The acquisition means the two companies will not meet in court in Q3, as had been planned.