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2016-12-07-1

Term Sheet — Thursday, January 26

Jan 26, 2017

BIG, BRAZEN M&A

PE vs. Corporate: If yesterday’s last-minute buyout of AppDynamics is any indication, 2017 could be less about the return of big IPOs and more about the continuation of big, brazen M&A. That’s bad news for IPO bankers, public market investors, the open marketplace (if consolidation means less competition), and reporters like me who want more transparency about how the so-called unicorn companies are performing.

But a rise in M&A is also bad news for private equity firms, a new study from PitchBook argues. Private equity firms are being “driven out of their own market” by corporate acquirers, according to PitchBook. Strategic buyers can justify high acquisition prices as long term strategic plays, where buyout firms need to be able to see the path to a profitable exit.

I’ve heard rumblings of this issue at buyout shops – they’re priced out of auctions for the best assets, and they’re having to get more creative. The result is an increase in carve-out deals, add-on acquisitions, and more firms building their own businesses around assets like wfireless towers or servicing mortgages. PitchBook notes that add-on acquisitions made up 57% of buyout activity last year, an increase of 8% from 2010.

Nick Leopard, founder and CEO of private equity consulting firm Accordion Partners, says targets are especially hard to come by in the middle market. "Any middle market company probably fields a call a week from sponsors to see whether they’re interested in selling," he says. But he views the phenomenon as a positive. “It’s good for the industry – instead of trying to buy something cheap, firms are now coming up with creative ways to deploy capital.”

Hmmmm: Millennials are apparently driving M&A, with 74% of executives surveyed by Ernst & Young taking millennial attitudes into account in their M&A decision making.

Not-so-secret sauce: Harvard Management Corp. will no longer manage its own $36 billion endowment; it will lay off around half of its 230-person staff. Writing for Fortune, Roger Lowenstein blames the change on too many universities copying the private equity investment strategy pioneered by David Swenson at Yale:

The problem … is a familiar one in investment annals: widespread adoption has bred a return to the mean. Swensen’s secret sauce consisted of diversifying into asset classes that were relatively uncommon and in which Yale, in particular, enjoyed unique advantages. Back in the 1980s, few endowments were involved in private equity, for example, so practitioners enjoyed a scarcity value. And thanks to Yale’s network of alumni and faculty connections, it could access the best PE firms, the best venture capital, and so forth.

In recent decades, endowments and other institutions have piled into PE, hedge funds, and the like. Results at elite institutions continue to outperform, but by a considerably smaller margin than before. Non-elite schools that adopted the Swensen approach had to shoulder an added burden: the average school, by definition, will merely own the average hedge fund, the average PE firm, etc.

And the numbers show it. The average university endowment has had a poorer record—over one year, three years, five years, and 10 years—than the average public pension fund, according to the Wilshire Trust Universe Comparison Service. And through the decade ended in 2015, (the last year for which such results are available) colleges also trailed a passive stock and bond index.

Lowenstein speculates this could lead to a “fresh round of soul-searching” among other endowments. For more on this phenomenon, read his December feature, ‘Why Colleges Are Getting a ‘C’ in Investing.’

Correction: The AppDynamics deal minted a great return for its venture investors, but Term Sheet’s sources got slightly carried away with their multiple math. As noted, Greylock’s investment in the company returned more than its entire $500 million fund. But the multiple was not a 100x return, as noted. Greylock invested $23 million and expects $590 million in the sale, giving the firm a return multiple closer to 25x. Apologies for the error.

Speaking of that deal: Jonathan Vanian has more analysis on what it means for Cisco here. Two things to note: One, there is nothing stopping the big cloud companies including Amazon / AWS, Google, and Microsoft, from creating their own “AppDynamics-killer” to compete with Cisco. Two, shares of the two publicly traded companies in the same category as AppDynamics, New Relic and Splunk, traded up yesterday. Read more.

New firm alert: 79 Ventures, based in San Francisco, is fundraising with a $30 million target for its first seed fund. The firm’s thesis is to back companies that automate human labor. Founder and managing director Vishal Harpalani believes increased automation will result in extreme deflation (doctor’s visits cost a few bucks), and, no surprise, universal basic income.

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VENTURE DEALS

Verily Life Sciences, a spin-off of Alphabet (Nasdaq:GOOG) focused on life sciences research, raised $800 million in funding from Temasek.

WorkFusion, a New York City-based platform that automates enterprise business processes, raised $34 million in funding. Georgian Partners led the round, and was joined by Mohr Davidow Ventures, iNovia, Nokia Growth Partners, Greycroft, and RTP Ventures.

Raisin, a German fintech startup that allows users to compare and open bank accounts throughout Europe, raised €30 million ($32 million) in Series C funding. Thrive Capital led the round, and was joined by Ribbit Capital and Index Ventures.

Doctolib, a Paris-based online platform for making doctor and dentist appointments, raised €26 million ($27.9 million) in Series C funding. Bpifrance led the round, and was joined by Accel, and angel investors including Pierre Kosciusko-Morizet, Nicolas Brusson, and Ludwig Klitzsch.

Reflektive, a San Francisco-based platform for tracking employee performance and engagement, raised $25 million in Series B funding. Lightspeed Venture Partners led the round, and was joined by Andreessen Horowitz.

KenSci, a Seattle-based startup using machine-learning to help doctors predict when and how patients will get sick, raised $8.5 million in a Series A funding. Ignition Partners led the round, and was joined by Osage University Partners and Mindset Ventures.

Hungryroot, a New York City-based company making plant-based, healthy versions of popular comfort foods, raised $7.7 million in funding. Investors include Lightspeed Venture Partners, Lerer Hippeau Ventures, and Crosslink Capital, among others. Read more at Fortune.

RML AgTech, an Indian technology company providing technology support via mobile phone to farmers, raised $4 million from IvyCap Ventures.

Teachable, a New York City-based platform that helps tutors and teachers create and distribute online courses, raised $4 million in funding. Investors include Accomplice Ventures, Learn Capital, Naval Ravikant, and Matt Brezina.

OOHLALA, a Toronto-based mobile app designed to provide college students with information about their university, including events and course schedules, raised $4 million in Series A funding. University Ventures led the round, and was joined by Y Combinator, GoAhead Ventures, Real Ventures, LiYuan VC, Fundersclub, and several angel investors including Joe Montana.

Jiobit, a Chicago-based location tracking startup, raised $3 million in funding from Lior Ron, MATH Venture Partners, and Inflection Equity.

Sinemia, a Turkish subscription service for cinema tickets, raised $1.5 million in funding. Revo Capital led the round.

Gimmal, a Houston-based provider of information management software, raised an undisclosed amount in funding from Rubicon Technology Partners.

PRIVATE EQUITY DEALS

Next Gear Solutions, a Oxford, Miss.-based developer and provider of restoration management software for the restoration industry, acquired Luxor CRM, a Toronto-based developer of web-based customer relationship software. Next Gear Solutions is a Serent Capital portfolio company.

Vitac Corporation, a Canonsburg, Pa.-based provider of captioning, translation, subtitling, and audio description services backed by Gores Small Capitalization Partners, acquired Caption Colorado, a Greenwood Village, Colo.-based provider of captioning services. Financial terms weren’t disclosed.

Thomas H. Lee Partners agreed to acquire Art Van Furniture, a Warren, Mich.-based operator and franchisor of furniture stores. Financial terms weren’t disclosed.

Warburg Pincus invested in Nexera Holding, an Emeryville, Calif.-based consumer and wholesale mortgage lender. Terms weren’t disclosed.

OTHER DEALS

Johnson & Johnson (NYSE:JNJ) agreed to purchase Actelion (SWX:ATLN) in a $30 billion all-cash deal. At $280 per share, Johnson & Johnson’s offer represents a 23% premium to Actelion's closing price on Wednesday. Read more at Fortune.

Alphabet (Nasdaq:GOOGL) is in discussions to sell its Terra Bella satellite business to Planet Labs for around $300 million, according to TechCrunch. The company also discussed a possible sale with Monsanto’s Climate Corporation. Alphabet acquired the company in 2014 for $500 million. Read more.

AltaGas (TSX:ALA) agreed to buy WGL Holdings (NYSE:WGL) for C$8.4 billion ($6.42 billion), according to Reuters. At $88.25 per WGL Holdings share, AltaGas’ offer represents a 12% to the stock's Wednesday close. Read more.

Ant Financial Services, a mobile payments affiliate of Alibaba (NYSE:BABA), agreed to buy MoneyGram International (Nasdaq:MGI) for about $880 million, according to Reuters. Read more.

United Rentals agreed to buy NES Rentals Holdings, a Chicago-based distributor of aerial equipment, for about $965 million in an all-cash deal, according to Reuters. Read more.

IPOS

Detsky Mir, a Moscow-based children’s good retailer and operating subsidiary of Sistema Public Joint Stock Financial Corporation (MISX:AFKS), will seek to raise up to $435 million in a public offering in Moscow, according to Reuters. Read more.

Jose Cuervo, a San Antonio, Texas-based tequila producer, will seek to raise more than $700 million when it goes public on Feb. 8, according to an investor presentation. The company will offer 476.6 million shares, priced between 30 to 34 pesos per share. Read more at Fortune.

Kimbell Royalty Partners, a Fort Worth, Texas company that acquires mineral and royalty interests in oil and natural gas properties, set its IPO terms. It will seek to raise $100 million by offering 5 million shares priced between $19 to $21 a share, trading on the NYSE under the ticker symbol KRP.

EXITS

Francisco Partners agreed to sell CoverMyMeds, a Highland Hills, Ohio-based company developing software to automate the prescription filling process, to McKesson Corporation (NYSE:MCK) for $1.1 billion, with an additional $300 million in performance-related incentives.

Kik, a Canadian social messaging company, acquired Rounds, an Israeli video-chat platform that raised more than $17 million from investors including Sequoia Capital and Verizon Ventures. Financial terms weren’t disclosed, but TechCrunch cites an Israeli report valuing the deal between $60 million and $80 million. Read more.

Spire Capital Partners sold Performance Assessment Network, a Carmel, Ind.-based provider of talent management software, to PSI Services, a Burbank, Calif.-based provider of pre-employment testing and certification services. PSI Services is backed by Waud Capital Partners.

FIRMS + FUNDS

Venrock, a New York City-based venture capital and private equity firm, raised $450 million for its eight fund, Venrock 8.

PEOPLE

Megan Condon and Daniel Quintana have joined Twin Bridge Capital Partners as associates.

Andrew Rueff has joined Waud Capital Partners as an operating partner. Previously, he was a vice president of mergers and acquisitions for Nova, an Atlanta-based transaction processing company.

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