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Term Sheet — Thursday, October 9

October 9, 2014, 1:46 PM UTC

Random Ramblings

Hedge funds are considered to be “alternative investments.” So is private equity. And venture capital. And some types of debt investments. And sometimes so is real estate, timber and certain types of commodities.

A number of public pension systems have increased their exposure to “alternatives” in recent years, at the same time that they either have curtailed (or threatened to curtail) payouts to pensioners. The official line is that the former is to prevent more of the latter, but many critics believe Wall Street is getting rich at the expense of modest retirees.

Most of this debate has flown under the radar until the electoral season elevated it in certain states. For example, Rhode Island Treasurer Gina Raimondo is a onetime venture capitalist who significantly increased her state’s exposure to alternatives. She also raised the retirement age for state workers by 5 years, moved from defined benefit plans to hybrid models and suspended annual cost-of-living increases for retiree benefits. Now Raimondo is running on the Democratic ticket for governor, after having bested a pair of primary challengers. In Illinois, a former private equity executive named Bruce Rauner is the GOP nominee for governor, and is similar reforms to the very pension system that has invested in the firm that still bears his name. It also has become an issue in New Jersey, which was late to the alternatives game but has begun to play it full force. Not because there is a relevant statewide election, but because there is union interest in undercutting pension reformer Chris Christie’s possible presidential ambitions.

The situation in each state — including in ones I haven’t mentioned — is unique. The complaint, however, generally boils down to this: Alternatives have underperformed the S&P 500 in recent years, even though many alternative funds charge higher fees than would a public equities index fund manager. In other words, state pensions are overpaying for underperformance.

Great bumper sticker. Lousy understanding of investment strategies.

The simple reality is that not all alternatives are created equal. Some, like private equity, are more tightly correlated to public equities than are others. Some are designed to chase public equities in bull markets without collapsing alongside them (that’s where the name “hedge” name from). Real estate is largely its own animal. Same goes for certain oil and gas partnerships.

Lumping all of them together because of fee strategies makes as much sense as arguing that a quarterback should be paid the same as an offensive lineman. After all, they both play football, right?

To be clear, I’m not necessarily taking sides in the active vs. passive debate (although, as you can probably tell, I generally side with the former). After all, even Warren Buffett — who often is cited as a passive management advocate for public pensions — has been co-investing alongside a large private equity firm in recent deals for Heinz and Burger King. Again, it’s more complicated than good vs. bad, smart vs. stupid.

For those who want to criticize public pensions for investing in alternatives, be specific. New Jersey, for example, reported alternative investment performance of 14.21% for the year ending June 30, 2014. That trailed the S&P 500 for the same period, which came in at 16.99%. But that alternatives number is a composite of private equity (23.7%), hedge funds (10.2%), real estate (12.74%) and real assets/commodities (6.12%). The sub-asset class most tightly correlated to public equities actually outperformed the S&P 500 (net of fees).

Would New Jersey pensioners have been better off without private equity? Clearly not for that time period. Having avoided real estate or hedge funds, however, would be a different argument. But even that case is tough to prove until New Jersey’s relatively immature alternatives program experiences a bear market. For example, both hedge funds and the S&P 500 went red last month, but the S&P 500’s loss was actually a bit worse. And macro hedge fund managers actually had positive returns. Does that make up for years of the S&P 500 outperforming hedge? Likewise, should real estate performance receive an indirect bump from recent rises in venture capital performance, just because they are both “alternatives?”

Again, that’s a judgment call that should be based on voluminous data, rather than on knee-jerk anger that alternative money managers are getting paid while retiree benefits are getting cut. If alternative managers are helping to stem the severity of those cuts, then everyone wins. If not, then the state pension needs a change in policy. But, in either case, the specific alternative sub-asset classes should be analyzed on their own merits, rather than as one homogeneous bucket. Otherwise, critics may throw out the baby with the bathwater.


 Hubspot Inc., a Boston-based provider of a marketing and sales SaaS platform, raised $125 million in its IPO. The company priced 5 million shares at $25 per share (above upwardly-revised range), for an initial market cap of approximately $759 million. It will trade on the NYSE under ticker symbol HUBS, while Morgan Stanley, J.P. Morgan and UBS served as lead underwriters. 

Hubspot reports a $17.7 million net loss on around $51 million in revenue for the first half of 2014, compared to a $16.43 million net loss on $35 million in revenue for the year-earlier period. Hubspot has raised around $100 million in VC funding, from firms like General Catalyst Partners (27.1% pre-IPO stake), Matrix Partners (17.1%), Sequoia Capital (10.3%), Scale Venture Partners (6.8%) and Charles River Ventures (5%).



 Truecaller, a Sweden-based developer of a global crowdsourced phone directory, has raised $60 million in Series C funding. Backers include Atomico, Kleiner Perkins, Sequoia Capital, Jerry Murdock and Stefan Lennhammer.

 Peel, a Mountain View, Calif.-based smart remote control app, has raised $50 million in new VC funding from Alibaba Group (NYSE: BABA). It previously raised over $30 million from Alibaba, Lightspeed Venture Partners, Redpoint Ventures and Translink Capital. Read more. 

 Digital Reasoning, a Franklin, Tenn.-based provider of cognitive computing solutions, has raised $24 million in Series C funding. by Goldman Sachs and Credit Suisse NEXT Investors co-led the round.  

 Ranovus Inc., an Ottawa–based provider of multi-terabit interconnect solutions for datacenter and communications networks, has raised US$24 million in VC funding. Backers include Azure Capital Partners, T-Venture, BDC Venture Capital, OMERS Ventures and MaRS Investment Accelerator Fund.

 Thync, a Los Gatos, Calif.-based developer of “wearable products based on advanced neuroscience,” has raised $13 million in VC funding led by Khosla Ventures.

 Pillpack, a Manchester, N.H.-based pharmacy focused on simplifying medication management, has raised $8.75 million in new VC funding. Accel Partners led the round, and was joined by return backer Atlas Venture.

 MOVE Guides, a UK-based provider of services for people relocating internationally, has raised $8.2 million in Series A funding. New Enterprise Associates led the round, and was joined by return backer Notion Capital.

 Avaamo, a Los Altos, Calif.-based messaging app for mobile workforces, has raised $6.3 million in seed funding. WI Harper Group led the round, and was joined by Rembrandt Ventures Partners, Streamlined Ventures, Eleven Two Capital and Ovo Fund., a Spain-based online platform for buying and selling event tickets, has raised €5.2 million in VC funding. Active Venture Partners led the round.

 Stellar Loyalty, a Foster City, Calif.-based provider of big data customer loyalty solutions, has raised $5 million in Series A funding led by InterWest Partners.

 ROLI, a UK-based music hardware and software company whose first product is a new type of piano keyboard, has raised $3.7 million in new Series A funding led by Horizons Ventures. This brings the round total to $12.8 million, including an earlier close. Existing shareholders include Baldteron Capital, FirstMark Capital, Index Ventures and Universal Music Group.  


 Apax Partners has agreed to acquire Exact Holding NV (Amsterdam: EXACT), a Dutch provider of software for small and mid-sized businesses, for €730 million (27% premium to trading price before July 10, when Exact disclosed acquisition talks).

 CDH Investments has agreed to acquire a 79% stake in Chinese alkaline battery maker Fujian Nanping Nanfu Battery Co. from Procter & Gamble (NYSE: PG), according to the WSJ. The deal could be valued at around $1 billion, and is expected to close later this year. Read more.

 Clearlake Capital Group has acquired Sage Automotive Interior, a Greenville, S.C.–based auto textile supplier, from The Gores Group. No financial terms were disclosed, although peHUB previously reported that Gores was seeking around $300 million. Nomura managed the process.

 Five Points Healthcare, an Atlanta-based portfolio company of Fulcrum Equity Partners, has acquired Willowbrook Health Systems, a Medicare-certified home health and hospice provider operating throughout middle Tennessee. No financial terms were disclosed.

 Navis Capital Partners has acquired a control stake in Modern Star Pty Ltd., an Australian maker of children’s learning products. Reuters reports that the deal valued Modern Star at between A$200 million and A$250 million. Read more


 Fifth Street Asset Management, a Greenwich, Conn.-based alternative asset manager, has set its IPO terms to 8 million shares being offered at between $24 and $26 per share. It plans to trade on the Nasdaq under ticker symbol FSAM, with Morgan Stanley serving as lead underwriter. The company would have an initial market cap of around $1.22 billion, were it to price in the middle of its range.

 MOL Global Inc., a Malaysian online payments company, raised $169 million in its IPO. The company priced 13.5 million shares at $12.50 per share, compared to plans to offer 19.46 million shares at between $12.50 and $14.50 per share. The company plans to trade on the Nasdaq with Citigroup serving as left lead underwriter. Its initial market cap is approximately $844 million.

 OneMain Financial, a Baltimore-based consumer lending business owned by Citigroup, has filed for a $50 million IPO. It plans to trade on the NYSE, with Citigroup serving as sole underwriter. The company reports $536 million of net income on $2.29 billion in revenue for 2013. There have been several reports that Citigroup has been soliciting buyers for OneMain Financial, with Springleaf (NYSE: LEAF) among the possible suitors.


 IAC/InterActiveCorp. (Nasdaq: IACI) is in talks to acquire Korean film and television production company DramaFever, according to Re/Code. DramaFever has raised VC funding from such firms as MK Capital, Bertelsmann, AMC Networks and NALA Investments. Read more

 New Relic, a San Francisco-based provider of application performance management solutions for the enterprise, has acquired Ducksboard, a Spanish provider of a real-time dashboard for user metrics. No financial terms were disclosed. New Relic has raised around $270 million in VC funding from BlackRock, Passport Capital, Insight Venture Partners, T. Rowe Price, Dragoneer Investment Group, Allen & Company, Benchmark Capital, Trinity Ventures and Tenaya Capital. Ducksboard  had been seeded by Kibo Ventures.


 Grupo Aleman, the Mexican owner of airline Interjet, has agreed to acquire bankrupt oil services company Oceanografia for more than $500 million. Read more

 Schlumberger Ltd. (NYSE: SLB) has hired PPHB to help explore a sale of its oilfield tools rental unit Thomas Tools, according to Reuters. A sale could be valued at around $600 million. Read more. 


 Brookfield Asset Management, a Canadian investment management firm, is seeking to raise $3 billion for its fourth private equity fund, according to Bloomberg. Read more

Keensight Capital, a Paris-based growth equity firm, has raised €250 million for its first independent fund since spinning out of Rothschild last year. Read more

New Mountain Capital has closed its fourth private equity fund with $4.13 billion in capital commitments, including $130 million in commitments from the general partner.


Michael Albrecht has joined Ridgewood Private Equity Partners as a managing director. He previously was with Allstate Investments as acting global head of infrastructure and real assets, where he succeeded Ross Posner (who left to join RPEP).

Caleb Clark has joined Palladium Equity Partners as a New York-based vice president. He previously was a VP with Windjammer Capital Investors.

Carol Gallagher has joined New Enterprise Associates as a Menlo Park-based partner, with a focus on the pharma space. She previously was a venture partner with Frazier Healthcare and served as president and CEO of Calistoga Pharmaceuticals.

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