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Term Sheet — Thursday, August 20

August 20, 2015, 2:21 PM UTC

A false choice

While excoriating CalPERS earlier this summer for not knowing the amount of performance fees (i.e., carried interest) it had paid to its private equity fund managers, I also warned about what might happen when the pension giant finally got its books in order. Namely, that people would see a giant number, take it out of context and make all sorts of wild accusations:

The more carry a system like CalPERS pays, it’s primarily reflective of higher returns (since carry is a percentage of investment profits). For example, you wouldn’t want to brag about paying zero dollars in carry, since all that means is that you didn’t generate positive returns on your investments. Therefore, it will be important for CalPERS to put the figure in the greater context of its returns — and to see how close it is to the market standard 20%.

But today's column isn't actually about CalPERS. It's about Yale and other university endowments, which were the target of a related misdirection in yesterday's New York Times by University of San Diego professor Victor Fleischer. Before continuing, let me be clear that I often agree with Victor, particularly in his continued advocacy for changing the tax treatment of carried interest from capital gains to ordinary income (where he has been, arguably, the leading voice). But his op-ed was a dangerous bait-and-switch that effectively blamed private equity managers for ever-rising tuition costs.

Fleischer examined recent reports from Yale's $24 billion endowment, did some guesswork (namely using 2 & 20 as fee proxy) and determined that Yale paid its private equity managers $480 million in the last fiscal year -- of which around $343 million was performance fees. He then pointed out that Yale's endowment only contributed $170 million during the same period to student tuition assistance, fellowships and prizes (out of a total of $1 billion contributed by the endowment to university operations).

Did you catch the subtext there? Let me gently summarize: YALE IS PAYING MORE TO ITS PRIVATE EQUITY MANAGERS THAN TO ITS STUDENTS. OUTRAGEOUS!!!

Not surprisingly, Twitter and the NYT comments section reacted with the sort of fury usually reserved for exposés of unfriendly tech workplace culture.

But here's the big problem: Fleischer's post only delves into the "carried interest" part of the equation when pointing out the tax treatment, while giving short shrift to the reality that most of Yale's payments to PE managers are directly tied to those managers having generated billions of dollars in investment profits for the school.

Yale's private equity program currently represents 33% of its endowment, and has generated 15.4% annual returns over the past decade. Were Yale's PE portfolio to make that exact return on its current PE portfolio in its current fiscal year, the return in hard dollars would be over $1.2 billion. Sure, Yale could pay its private equity managers exactly bupkis, and then be $1.2 billion poorer for its populist pose.

If you want to argue that private equity management fees are too high with too little oversight, I'm with you. But braying about performance fees is counterproductive.

Fleischer also implies a quid pro quo between Yale investing in PE and hedge funds and managers from said funds becoming large donors to the school, although he doesn't meet his burden. Yes, Steve Schwarzman gave a huge donation to Yale. What Fleischer didn't mention is that Schwarzman also went to Yale as an undergrad. Or how about this: Blackstone spokesman Peter Rose tells me that "there is not a single dollar of Yale money in any Blackstone fund." So if Schwarzman was trying to bribe his alma mater, he did a lousy job of it...

Finally, Fleischer argues that schools like Yale spend too little of their endowment annually on students and other school operations. He points out that private foundations are required to spend 5% of assets each year and that universities should be required to spend 8%. Yale last year came in at 4.35%. If this sounds familiar, that's probably because we heard similar talk pre-crisis about how rich per capita endowments like Princeton's should eliminate tuition entirely.

I'm not going to delve into that in this space by arguing the risks of dwindling reserves (or how schools could better control costs by cutting back on large capital projects), except to say the following: Performance fees paid to private equity has no bearing on if Yale spends $1 billion or $2 billion each year on its students. It's not a zero sum game. And, over time, Yale's endowment would lose its flexibility to increase its student payouts were it to cut off private equity managers (unless it could somehow persuade them to take much lower fees).

Private equity is a straw man here. Set it on fire, and watch the campus burn.


 Valeant Pharmaceuticals (NYSE: VRX) has agreed to acquire Sprout Pharmaceuticals Inc., a Raleigh, N.C.-based drug-maker that recently received FDA approval for “female Viagra.” The deal is valued at approximately $1 billion in cash plus unspecified earnouts. Read more.

VENTURE CAPITAL DEALS, a Chinese peer-to-peer lender, has raised $207 million in new funding co-led by Standard Chartered Private Equity and China Fintech Fund. Boahi Leasing also invested in the company, which previously had raised capital from Tiger Global. Read more.

 ZocDoc, a New York-based online doctor appointment service, has raised $130 million in new VC funding at a $1.8 billion valuation. Baillie Gifford and Atomico co-led the round, and were joined by return backer Founders Fund.

 Carbon3D, a Chapel Hill, N.C.-based provider of 3D printing machinery and solutions, has raised $100 million in new VC funding at around a $1 billion valuation. Google Ventures led the round, and was joined by Reinet Investments, Yuri Milner and return backers Sequoia Capital, Silver Lake Kraftwerk and Northgate Partners. Read more.

 Grand Rounds, a Palo Alto, Calif.-based online platform that connects patients with medical specialists, has raised $55 million in Series C funding at a reported $750 million valuation. Return backers Greylock, Venrock, Harrison Metal and David Ebersman were joined by an unidentified “global mutual fund investor.”

 Orbus Therapeutics, a Palo Alto, Calif.-based developer of therapies to treat rare diseases like anaplastic astrocytoma, has raised $32.5 million in Series A funding from Longitude Capital, H.I.G. BioVentures and Adams Street Partners.

 RedMart, a Singapore-based grocery delivery service, has raised $26.7 million in new VC funding. Far East Ventures was joined by return backers Garena, SoftBank Ventures Korea, Visionaire Ventures and Eduardo Saverin. The company, which also named former Amazon exec Colin Bryar as COO, said this is a bridge financing, with plans to raise a Series C round later this year.

 Sovrn Holdings Inc., a Boulder, Colo.-based provider of programmatic advertising solutions to independent publishers, has raised $18 million in new VC funding (including the conversion of a convertible note). Foundry Group led the round, and was joined by return backers Oak Investment Partners, Archer Venture Acquisitions and John Battelle. Sovrn is essentially the company that was formerly known as Lijit, before being acquired by Federated Media (which later sold off its own legacy assets and rebranded to Sovrn).

CastAR (f.k.a. Technical Illusions), a Mountain View, Calif.-based augmented reality gaming startup, has raised more than $15 million in Series A funding from Andy Rubin’s Playground Global and returning seed backers.

 ChurchDesk, a Denmark-based provider of mobile apps for church engagement and management, has raised $2 million in VC funding led by Mangrove Capital Partners.

 SmackHigh, a Boston-based social consumer posting service for teens, has raised $1.65 million in seed funding. Flybridge Capital Partners led the round, and was joined by Boston Seed Capital and an AngelList syndicate led by Wayne Chang.

 EBS Technologies, a German developer of electrical neurostimulation therapy for visual field loss, has raised €1.1 million in VC funding from Earlybird and High-Tech Gruenderfonds.

 Zynergy, a Singapore-based provider of end-to-end solar energy solutions, has raised an undisclosed amount of funding from Kohli Ventures.


 Arbor Investments has acquired Hudson Baking Co., a Hudson, Wis.-based supplier of marshmallow crispy dessert bars, brownies, cookies and other baked goods. No financial terms were disclosed.

 Bregal Partners has sponsored a “deleveraging recapitalization” of American Seafoods, a Seattle-based harvester of wild-caught fish for human consumption in the U.S. No financial terms were disclosed. Other participating investors included Pacific Seafood Group.

 Finaccess Capital, a Mexican private equity firm, has agreed to acquire a 32% stake in Amrest (Warsaw: EAT), a Polish franchisee of such restaurants as Burger King and Starbucks, from Warburg Pincus. Amrest has a current market cap just south of $1 billion.

 H.I.G. Capital has sponsored a recapitalization of U.S. Medical Supply Inc., a Miami, Fla.,-based direct-to-consumer mail-order medical supply business focused on patients with chronic conditions. No financial terms were disclosed.

 Solera Holdings (NYSE: SLH), a Westlake, Texas-based provider of risk management software to insurers, is in talks to sell itself to private equity firms, according to Bloomberg. Possible buyers include Pamplona Capital Management and Thoma Bravo. Solera has a current market cap of nearly $3.3 billion. Read more.

 Tailwind Capital has acquired Premier Store Fixtures, a Hauppauge, N.Y.-based maker of customized merchandising displays for use in retail environments. No financial terms were disclosed. Sellers include LongueVue Capital and Ironwood Capital.

 Vanguard Dealer Services, a Fairfield, N.J.-based agent and administrator of finance and insurance to franchised auto dealers, has raised an undisclosed amount of private equity funding from Southfield Capital and company management.

 Vitruvian Partners has acquired a majority stake in Voxbone SA, a Brussels-based provider of cloud-based international VoIP services. No financial terms were disclosed.


 No IPO news this morning...


 The Weather Channel has hired Morgan Stanley and PJT Partners to explore a sale of the company, according to Bloomberg. The Blackstone Group, Bain Capital and NBCUniversal paid around $3.5 billion to purchase the company in 2008. It is unclear if a sale would be for the entire company, or only for Weather Channel’s digital business. Read more.


 Ageas has short-listed the bidders for its Hong Kong life insurance unit, picking FWD Group and Fosun International Ltd., according to Bloomberg. The deal could be valued at more than $1 billion. Read more.

 Avant, a Chicago-based online consumer loan provider, has raised $139 million in debt led by Jefferies and another $200 million in debt co-led by J.P. Morgan and Credit Suisse. These recently minted deals bring Avant’s funding total to $1.1 billion in debt financing and $334 million in equity financing. Read more.

 Coca-Cola (NYSE: KO) has acquired a minority stake in San Diego-based organic juice maker Suja, with Bloomberg reporting that Coke also has an option to buy the entire company. Read more.

 FanDuel, a New York-based real-money fantasy sports site, has acquired NumberFire, a New York-based sports analytics platform. No financial terms were disclosed. FanDuel has raised more than $360 million in VC funding from firms like KKR, Google Capital, Shamrock Capital Advisors, Time Warner Investments, Comcast Ventures and NBC Sports Ventures. NumberFire had been seeded by such firms as Box Group and RRE Ventures.

 Raise, a Chicago-based P2P online marketplace for gift cards, has acquired Tastebud Technologies, a Chicago-based developer of predictive technologies for mobile shopping. No financial terms were disclosed. Raise is backed by more than $80 million in VC funding from firms like Accel Partners, Bessemer Venture Partners, Listen Ventures, NEA and Pritzker Ventures. Tastebud had been seeded by such firms as Jumpstart Ventures, Kapor Capital and Listen Ventures.

 Spredfast Inc., an Austin, Texas-based social relationship platform for enterprise brands, has acquired Shoutlet, a New York-based provider of social data integration solutions. No financial terms were disclosed. Spredfast has raised around $64 million in VC funding from Lead Edge Capital, Austin Ventures, InterWest Partners and OpenView Partners. It also recently secured $24 million in debt financing from Silver Lake Waterman. Shoutlet had raised over $24 million in VC funding from FTV Capital, American Family Insurance, Origin Ventures and Leo Capital. Read more.

 WebPT, a Phoenix-based provider of electronic medical record solutions for rehab therapists, has acquired Therabill, a Grayslake, Ill.-based provider of practice management software for physical and occupational therapists, speech-language pathologists and behavioral health specialists. No financial terms were disclosed. WebPT backers include Battery Ventures.


 No firm or fund news this morning...


 Nathan Pund has joined Lazard Middle Market as a Charlotte-based managing director. He previously was a managing director of investment banking with D.A. Davidson & Co.

 Alex Rampell has joined Andreessen Horowitz as a general partner. He previously was co-founder and CEO of TrialPay, which was acquired earlier this year by Visa. Read more.

 AThomas Scriven has joined The University of Pennsylvania as a managing director in its office of investments. He previously spent seven years with H.I.G. Capital.

 Time Warner Inc. (NYSE: TWX) has promoted Priya Dogra to senior VP of mergers and acquisitions, leading the company’s deal activities. She joined the company in 2009 as a director of M&A, before which she was with Citigroup.

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