Term Sheet — Monday, April 20

But public pension funds in both states are indirect owners of ACE Cash Express Inc., the nation's second-largest payday lender. It's not an illegal arrangement, but it sure borders on hypocritical.

Texas-based ACE was a publicly traded company until October 2006, when it was acquired for around $455 million by JLL Partners, a middle-market private equity firm that is currently in the midst of raising $1.1 billion for its seventh fund.

At the time of its original acquisition, JLL managing director Frank Rodriguez said that the deal; "presents a wonderful opportunity for us to work with the company in continuing its development as a market leader in the retail financial services industry." What Rodriguez didn't add, however, was that the buyout was partially bankrolled by public workers in states that found ACE's business to be predatory.

JLL purchased the company via an investment pool called JLL Partners Fund V LP, whose limited partners included the New Jersey State Investment Council and the New York State Teachers' Retirement System (both made $50 million commitments). Neither pension system appears to have objected to the deal, even though it would make them owners of a company that is barred from doing business in their states. Nor did they request a "carve-out," which could have allowed them to remain investors with JLL but not exposed to ACE.

This was also the case for the Montana Board of Investments, according to executive director David Ewer. In Montana, the maximum interest rate and fees for loans is capped so low (36% APR) that ACE doesn't have any locations in the state.

"The Division of Investments ... neither directs nor approves the companies in which these funds invest," says Joseph Perone, a spokesman for the New Jersey Treasury Department. "The Division is unaware of any allegations that JLL, or any of its portfolio companies, is involved in any illegal activity, either within the State of New Jersey or elsewhere."

All of that may be true. But it's also true that deep-pocketed limited partners at private equity funds do have the informal ability to affect investment decisions (including by threatening not to invest in subsequent funds). Moreover, ACE most certainly has been involved in illegal activity.

Last summer, the federal Consumer Financial Protection Bureau found that "ACE used illegal debt collection tactics—including harassment and false threats of lawsuits or criminal prosecution—to pressure overdue borrowers into taking out additional loans they could not afford." The company agreed to pay a $5 million civil penalty and $5 million in customer restitution associated with these allegations.

In its response to the CFPB settlement, ACE said that it retained an outside consultant to review a statistically significant sample of its collection calls and found that "more than 96 percent of ACE’s calls during the review period met relevant collections standards." Or, put another way, more than 3% of its calls did not meet such standards.

Even when operating properly, ACE is involved in a pretty controversial business. Supporters of payday loans argue that they help unbanked and low-income workers pay bills that are due on Wednesday when payday isn't until Friday.

Critics, however, contend that the fees payday lenders charge are usurious and can trap borrowers in a downward debt spiral. ACE's payday loans, for example, have APRs ranging from 65.35% to a whopping 1,409.36%. In California, where the UC Board of Regents is an investor in JLL Partners Fund V, a $200 payday loan from ACE comes with a $35.28 fee and a 459.9% APR.

"From a business perspective, these deals can be brilliant because they are cash-flow positive, have return customers, and the government [is] always trying to catch up on regulation," says James Zhang, a former private equity investor who is now an executive with consumer finance education website NerdWallet (which argues that there are better loan alternatives for the unbanked). "But not if you have a moral compass. Imagine teachers in low-income areas learning that they're funding a company that profits off the backs of their students or their students' parents."

In this specific case, however, there's even a question about how good an investment ACE Express will turn out to be for JLL.

The firm's fifth fund has had a decent overall performance (11.03% net IRR through 6/30/14), but it's highly unusual for a private equity firm to hold onto a portfolio company for what will soon be nine years. By now, the company usually would have been taken public or sold. Moreover, the CFBP recently proposed new payday lending rules that have been enthusiastically endorsed by President Obama. Such rules do not require Congressional approval (unless, of course, CFBP itself is unwound). So, ACE's future growth may be stunted—and that uncertainty may help explain why it's still in JLL's portfolio.

JLL Partners did not return several requests for comment. Neither did a spokesman for the New York State Teachers' Retirement System. Other states that have public pensions investments in JLL Partners Fund V include Colorado and Missouri (payday lending is legal in both states).

UPDATE: We spoke with JLL’s Frank Rodriguez shortly after publication (he had not yet seen the story). He stressed that one reason JLL was originally comfortable with ACE was that the company did not try to surreptitiously do business where it wasn’t allowed (there have been accusations that other payday lenders have still tried getting into such states via online platforms). When asked if he had any concerns that JLL funded the deal via public money from states that deem payday lending to be unethical, he said he would not presume to know why payday loans are illegal in certain areas.

Rodriguez adds that the firm did not inform LPs of the CFPB settlement because it “wasn’t material to the business,” and that the settlement did not constitute an admission of wrongdoing. As for why JLL still owns ACE, he said it was a combination of the 08/09 financial crisis and current regulatory uncertainty related to CFPB.

THE BIG DEAL

• Comcast Corp. and Time Warner Cable Inc. executives will sit down on Wednesday with U.S. Department of Justice officials, in an attempt to save a $45.2 billion merger that the DoJ is said to be leaning against approving. Read more.

VENTURE CAPITAL DEALS

• Vessel, a San Francisco-based online video platform co-founded by ex-Hulu CEO Jason Kilar, has raised $57.5 million in Series B funding. Institutional Venture Partners led the round, and was joined by return backers Benchmark, Greylock Partners and Bezos Expeditions. Read more.

• Freshdesk, a San Francisco-based provider of customer support-as-a-service, has raised $50 million in new VC funding. Tiger Global Management led the round, and was joined by fellow return backers Accel Partners and Google Capital. www.freshdesk.com

• Recorded Future, a Somerville, Mass.-based real-time cyber-threat intelligence analytics platform, has raised $12 million in Series D funding. Reed Elsevier Ventures led the round, and was joined by MassMutual Ventures and return backers Google Ventures, In-Q-Tel, Atlas Venture, IA Ventures and Balderton Capital. www.recordedfuture.com

• Assured Labor, a provider of tech-enabled labor force recruitment solutions in Latin America, has raised $6.75 million in new VC funding. Capital Indigo led the round, and was joined by fellow return backers Mexico Ventures, Thayer Ventures and Promotora Social Mexico. www.assuredlabor.com

• Pathar Inc., a Colorado Springs, Colo.-based provider of social media data solutions for companies, has raised just over $6.5 million in Series A funding. Woodside O’Brien led the round, and was joined by OCA Ventures. www.pathar.net

• Omeicos Therapeutics, a Berlin-based developer of therapeutics for cardiovascular diseases like atrial fibrillation, has raised €6.2 million in Series A funding. Vesalius Biocapital led the round, and was joined by VC Fonds Technologie Berlin, Hightech Gruenderfonds and KfW Group. www.omeicos.com

• Contego Medical, a Raleigh, N.C.-based provider of an embolic protection filter platform for angioplasty balloon and stent delivery catheters, has raised $5.6 million in Series B funding. Hatteras Venture Partners led the round, and was joined by Mountain Group Partners, Lookout Capital and Medical Mutual. www.contegomedical.com

• Flashpoint, a New York-based provider of corporate intelligence from the “deep and dark web,” has raised $5 million in Series A funding. TechOperators LLC led the round, and was joined by Bloomberg Beta, Cisco Investments, Greycroft Partners, and K2 Intelligence. www.Flashpoint-intel.com

PRIVATE EQUITY DEALS

• Advent International has agreed to acquire the consumer products unit of India’s Crompton Greaves for upwards of $350 million, according to Reuters. Read more.

• AmWINS Group, a Charlotte, N.C.-based wholesale distributor of specialty insurance products and services, has secured an undisclosed amount of private equity funding from the Public Sector Pension Investment Board. The deal means that AmWINS Group is now equally owned by PSPIB and existing backer New Mountain Capital. www.amwins.com

• Baird Capital has made a “significant investment” in Alpha Source, a Milwaukee–based provider of medical equipment solutions like maintenance and battery manufacturing. www.alphasource.com

• Baring Private Equity Asia is in advanced talks to acquire around a 40% stake in British cereal brand Weetabix Ltd. from China’s Bright Food Group Co., according to Bloomberg. The deal would value Weetabix at around $1.9 billion (including debt). Read more.

• Cie. de Saint-Gobain SA has picked second-round bidders for its Verallia glass packaging business, which is expected to be sold for around $3 billion, according to Bloomberg. Those making it through include Apollo Global Management, The Blackstone Group, CVC Capital Partners and a joint offer from Ardian and Bain Capital. Read more.

• KKR and Anchor Capital Partners have agreed to acquire a controlling 46% stake in South Korea's Ticket Monster Inc. from Groupon Inc. (Nasdaq: GRPN) for $360 million. Groupon also announced a new $300 million share repurchase program, subject to the closing of the TMON sale. www.kkr.com

• Metalmark Capital has agreed to acquire a majority stake in Kissner Milling Company Ltd., an Ontario–based provider of bulk rock salt and packaged specialty deicing product in North America, from an investor group led by TorQuest Partners. Joining Metalmark on the deal is Silvertree, a joint venture between Silverhawk Capital Partners and Demetree Salt LLC. No financial terms were disclosed. www.kissner.com

• Roark Capital Group has acquired Driven Brands Inc., a Charlotte-based automotive aftermarket franchising platform whose brands include Meineke and Maaco, from Harvest Partners. No financial terms were disclosed. www.drivenbrands.com

IPOs

• Three companies are expected to price IPOs on U.S. exchanges this week: Apigee, National Storage Affiliates Trust and Viking Therapeutics. Read more.

• Baozun Inc., a Chinese brand e-commerce solutions provider, has filed for a $200 million IPO. It plans to trade on the Nasdaq under ticker symbol BZUN, with Morgan Stanley, Credit Suisse and BofA Merrill Lynch. It reports a $9.6 million net loss on $255 million in revenue for 2014. Shareholders include Alibaba (23.5%). www.baozun.com

• Invuity, a San Francisco-based developer of medical devices to improve visualization in minimally-invasive surgeries, has filed for a $69 million IPO. It plans to trade on the Nasdaq under ticker symbol IVTY, with Piper Jaffrey, Leerink Partners and Stifel serving as lead underwriters. The company reports nearly a $21 million net loss on $13 million in revenue for 2014. The company has raised around $96 million in VC funding from Wellington Management (16.3% pre-IPO stake), HealthCare Royalty Partners (14%), InterWest Partners (12.6%), Kleiner Perkins Caufield & Byers (11.2%) and Wexford Capital (5.8%). www.invuity.com

EXITS

• IBM (NYSE: IBM) has acquired Explorys, a Cleveland–based provider of a cloud-based data analytics platform for the healthcare market. No financial terms were disclosed. Sellers include Heritage Group, Austin Ventures, Foundation Medical Partners and Santé Ventures. www.explorys.com

• Permira is in advanced talks to sell frozen foods company Iglo to Nomad Foods for around €2.6 billion, according to the FT. Read more.

• SunGard Data Systems Inc. is speaking to investment banks about launching a sale process for the entire company that could garner upwards of $10 billion, according to Reuters. The company was acquired 10 years ago for $11.4 billion by a private equity consortium that included Silver Lake, Bain Capital, The Blackstone Group, GS Capital Partners, KKR, Providence Equity Partners and TPG Capital. Since then, SunGard has spun off its disaster recovery unit and paid its investors a $720 million dividend. Read more.

• Vista Equity Partners has agreed to sell an 80% stake in San Diego-based network security company Websense Inc. to Raytheon Corp. (NYSE: RTN) for $1.9 billion (including debt), according to Reuters. Vista will retain the other 20% of Websense, combined with Raytheon’s existing cybersecurity entity. Read more.

• Xplore Technologies Corp. (Nasdaq: XPLR) has agreed to acquire substantially all the assets of Motion Computing Inc., an Austin, Texas-based provider of rugged tablets. The deal is valued at around $9 million, plus the assumption of approximately $7 million in net liabilities. Motion Computing had raised around $11 million in VC funding from firms like G-51 Capital, Institutional Venture Partners and NEA. www.xploretech.com

OTHER DEALS

• Prologis Inc. (NYSE: PLD) and the Norwegian Government Pension Fund Global have agreed to acquire real estate investment firm KTR Capital Partners for $5.9 billion. Read more.

• Telenet, a Belgian subsidiary of Liberty Global (Nasdaq: LBTY), has agreed to acquire Belgian mobile network operator Base from KPN (Amsterdam: KPN) for approximately $1.43 billion. Read more.

FIRMS & FUNDS

• The Carlyle Group has decided to shut a pair of mutual funds it launched last year. Read more.

MOVING IN, UP, ON & OUT

• David Slade has joined UBS as a London-based co-head of leveraged finance. He had spent the past four-plus years as a partner with EQT Partners, where he co-led the private equity firm’s credit business. Read more.

• TPG Capital has named Todd Sisitsky as head of North American private equity, according to Reuters. He also will continue to lead the firm’s global healthcare investing practice. Read more.

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