THE PRIVATE EQUITY METHOD
Good morning, Term Sheet readers.
I came across two separate articles about what happens to companies once they come under private equity ownership.
The first was about how F.A.O. Schwarz, the famed toy seller that closed three years ago, has been reincarnated with a new private equity twist. The new owner ThreeSixty, a company backed by PE firm AEA Investors, wants to capitalize on customers’ nostalgia while minimizing the costs of personnel, real estate and inventory. Although people are skeptical of the new business model given the horror story of what happened at the other private-equity owned toy retailer Toys ‘R’ Us, there is hope this new approach could revive the F.A.O. brand and boost its business.
The second story was drastically different. It was an explosive Washington Post investigation that pulls back the curtain on a private equity acquisition gone awry. It delves into the The Carlyle Group’s 2011 purchase of nursing home chain HCR ManorCare.
Under the ownership of Carlyle, which is one of the richest PE firms in the world, HCR ManorCare struggled financially until it filed for bankruptcy in March. During the five years preceding the bankruptcy, the second-largest nursing-home chain in the country exposed its ~25,000 patients to increasing health risks, according to inspection records analyzed by The Washington Post. The investigation also found that more serious violations — ones categorized as “potential for more than minimal harm,” “immediate jeopardy” and “actual harm” — increased 29% in the years before the bankruptcy filing.
The increase in health-code violations at the chain began after Carlyle and investors completed a deal that extracted $1.3 billion from the company for investors but also saddled the chain with what proved to be untenable financial obligations, according to the report.
The case is much thornier than what I’ve summarized above, but I couldn’t stop thinking about about the larger question at hand, which is whether the private equity approach is appropriate in any field. Toys? Sure. Nursing homes? Makes you pause.
Following the recession, PE firms began hunting for returns in places such as payday lenders, nursing homes, and low-income homes for rental. Ludovic Phalippou, the author of “Private Equity Laid Bare,” has described the method as “capitalism on steroids.”
“People will wonder whether this pure capitalism is appropriate in nursing homes,” Phalippou told the Post. “The health and welfare of the old people who live there depend on them.”
In other words, is the leveraged buyout model that’s so common in the PE industry fitting when dealing with businesses that cater to the nation’s poorest or most vulnerable people? Since PE’s model is geared toward generating returns for investors within a matter of years, streamlining, cost-cutting, and layoffs are part of the game. Unfortunately, cashing out while caring well is a nearly impossible balance to strike.
• Geek+, a China-based artificial intelligence and robotics company, raised $150 million in Series B funding. Investors include Warburg Pincus, Volcanics Venture and Vertex Ventures.
• QuintoAndar, a Brazil-based startup that created an innovative digital apartment rental platform, raised R$ 250 million ($64 million) in Series C funding. General Atlantic led the round, and was joined by investors including Kaszek Ventures, Ruane, Cunniff & Goldfarb, Qualcomm Ventures and QED.
• Fluidic Analytics Ltd, a U.K.-based developer of tools that analyze proteins and other biomolecular species, raised $31 million in funding. Draper Esprit led the round, and was joined by investors including Delin Ventures, BGF, IQ Capital and Amadeus Capital Partners.
• Eko, a Thailand-based provider of a mobile collaboration and communications platform for businesses, raised $20 million in Series B funding. SMDV led the round, and was joined by investors including RedBeat Ventures, AirAsia’s investment arm, Gobi Partners, and East Ventures.
• The High Note, a Los Angeles-based cannabis company, raised $15 million in funding. The investor is Gotham Green Partners.
• Securitize, a San Francisco-based issuance platform for asset-backed security tokens on the blockchain, raised $12.75 million in Series A funding. Blockchain Capital led the round, and was joined by investors including Global Brain, Xpring fund and Coinbase Ventures.
• Zizoo, a Berlin-based boat booking vacation platform, raised €6.5 million ($7.4 million) in Series A funding. Revo Capital led the round, and was joined by investors including Coparion, Check24 Ventures, PUSH Ventures, MairDumont Ventures, aws Founders Fund, Axel Springer Digital Ventures and Russmedia International.
• Yanu, an Estonia-based AI-powered robotic bartender, has secured $1 million in funding, according to a source at the firm. The investor was Robolab.
HEALTH AND LIFE SCIENCES DEALS
PRIVATE EQUITY DEALS
• Koch Equity Development, the private equity division of Koch Industries, agreed to invest $500 million in Getty Images, a Seattle-based photography subscription service.
• Everwatch, a portfolio company of Enlightenment Capital, acquired Dynamic Engineering Solutions, an Ashburn, Va.-based provider of cloud and network administration solutions for the intelligence community. Financial terms weren’t disclosed.
• Atar Capital acquired Microcel Corporation, a Canada-based distributor of tech products. Financial terms weren’t disclosed.
• Wind Point Partners agreed to buy The Kleinfelder Group Inc, a San Diego, Calif.-based provider of designs, testing, and program management services to clients. Financial terms weren’t disclosed.
• Andina Acquisition Corp. II, a Bogotá, Colombia-based SPAC formed to acquire a business in the Americas, filed for a $100 million offering. Multiple Equilibria Capital’s Julio Torres is CEO. Cowen and Craig-Hallum Capital are underwriters. It plans to list on the Nasdaq as “ANDAU.” Read more.
• Chardan Healthcare Acquisition Corp., a New York-based SPAC, for a $70 million IPO. Chardan Capital Markets’ Jonas Grossman is CEO. Chardan is underwriter in the deal. It plans to list on the NYSE as “CHACU.” Read more.
• XP Investimentos SA, a Brazilian financial services firm, is weighing an IPO on the Nasdaq. General Atlantic backs the firm. Read more.