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Term Sheet — Friday, August 21

Friday Feedback

The sky is gray, the public markets keep sinking and most people I’ve called this week are on vacation. In other words, it’s time for some Friday Feedback.

Lots of emails yesterday in response to the Yale column, most of which agreed with my criticisms of the NYT piece (perhaps not too surprising, given Term Sheet’s reader demographics).

Peter leads us off: “Your rebuttal was very strong. I also think Victor’s methodology may be incorrect. First off, the 2% management fee is usually only for the investment period and is calculated on committed capital, not NAV. After year 5 it is typically a lower % of cost basis, not committed. I am certain that Victor does not have access to that level of data, so he is probably just calculating 2% of NAV which will inflate the fee paid in a fund with substantial unrealized gains. Also, most buyout funds and some VC funds have to repay management fees and an 8% preferred return on these fees before paying out any carry. In some sense, for strong performing funds, management fees can be thought of as loans to the GP’s that are repaid out of future carry. So again, there is no way that Victor could have access to this level of detail, so is probably again overstating the amount of carry being paid out. He probable just multiplied the % return by the beginning NAV and assumed 20% of that would be carry. As usual, things are far more complicated than that.”

Gary: “Instead of complaining about [PE] fees, the universities should be happy that the PE funds earned so much money that the 20% fees were large.  I agree with your logic, although I would like to point out that this approach highlights the importance of setting the hurdle rate high enough so that PE funds are not paid 20% for mediocre investment returns… Another interesting comparison from Yale’s endowment report:  In 2014, students paid net tuition, room, and board of $291 million, which is also less than Yale paid in PE fees.”

Frank: “We are all caught up in the arms race of ever more beautiful dorms, lavish cafeterias, $35 million student centers with lap pools and 3-story climbing walls. The better approach would be to have all the top 30 private schools enlarge their incoming freshman classes by 40-50%, something they could easily do without reducing the quality one bit in terms of academic standards. This would help slow the college application frenzy, resulting in 50% more Stanford engineering grads with the resultant impact on startups and job creation.”

Richard: “Nobody is talking about how to reduce the cost of education. So let’s try this, for universities to retain their tax free status they need to freeze student fees and expenses for 5 years. After that, costs to the student will be allowed to increase at the same rate as inflation, which for the last 5 years has been under 2%. Universities have a choice, stay within this cost mandate or give up their tax free status. There will be loopholes in this suggestion, one being cash vs cost accounting. So again to maintain their tax free status universities will have to use GAAP cost accounting just like any corporation so that they cannot financially engineer losses through their tax accounting specialist.”

I also got several emails like this one from (a different) Peter: “You mentioned that you agree with Victor Fleischer in his belief that carried interest should be treated as ordinary income rather than capital gains… As you know, carried interest is earned when private equity firms buy a company, and sell it at a gain. This gain is, by definition, capital appreciation. Capital appreciation is, to my understanding, taxed at a lower rate than ordinary income for two primary reasons: 1) because for a company to appreciate in value it likely had money invested in it that has already been taxed (at either the corporate or individual level), and 2) to encourage capital investment in businesses. Neither of these points is rendered moot because the transaction is being managed by a financial sponsor. Further, I understand that some feel that since the managers of these funds use carried interest as their primary source of income, it should be taxed at the ordinary income rate. To them I ask: ‘what about a retiree whose primary source of income is capital gains and dividend payments? Should he, too, be taxed at the ordinary income rate?’ I would love to hear your thoughts as to why carried interest should be taxed at the ordinary income rate.

Peter (and others): The last time I wrote an in-depth argument for changing carried interest tax treatment was in 2011, and you can read it by going here. And after receiving all sorts of criticism for that post, I issued various rebuttals here. All of this, of course, comes amid my continued belief that carried interest tax treatment will remain a perfect political football for both sides of the partisan aisle — Billionaires are paying less in taxes than their secretaries!” on the left, and “We won’t raise taxes!” on the right — so the arguments are largely academic.

 Roy: “Are you doing another Liquidity Event this fall in San Francisco?” Yup. And we’ve rented out a great space that we haven’t used before. Details to come in a few weeks. In the meantime, please drop me a note if your company/firm has interest in becoming a sponsor.

 Have a great weekend…


 Tesco PLC (LSE: TSCO) has received offers from three different private equity consortia for its South Korean business, which could be valued at around $6 billion, according to Reuters.

One group includes Affinity Equity Partners and KKR, while another includes Carlyle with Singapore sovereign wealth fund GIC. The final bidder is MBK Partners, which is still seeking an equity co-investor. Read more.


• GuiaBolso, a Brazilian online personal finance advisory, has raised $7 million in third-round funding. Ribbit Capital led the round, and was joined by Omidyar Network, QED Investors, Kaszek Ventures, e.Bricks, Valor Capital and individual angels like Mark Goines, Ed Baker and Peter Kellner.

• Yoogaia, a Finland-based interactive yoga studio with physical studios in Helsinki, London and Hong Kong, has raised $3 million in seed funding from Nokia Growth Partners, Inventure, Sanoma Ventures and Point Nine Capital.

• Hightower, a New York-based leasing management platform for the commercial real estate industry, has raised an undisclosed amount of strategic funding from Newmark Grubb Knight Frank Corp., Barry Sternlicht (CEO of Starwood Capital), Bill Rudin (CEO of Rudin Management Co.) and existing investor Aaron Levie (CEO of Box).

• Update: Yesterday we noted that 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. The deal included participation by an unidentified “global mutual fund investor.” Multiple sources say that the mystery party was BlackRock.


• Catterton Partners has agreed to acquire Steiner Leisure Ltd. (Nasdaq: STNR), a Bahamas-based provider of spa services and personal care products, for around $832 million. The $65 per share sale price represents nearly a 15% premium over yesterday’s closing price.

• Fenergo, an Ireland-based provider of financial client lifecycle management software solutions, has raised an undisclosed amount of equity funding from Aquiline Capital Partners and Insight Venture Partners.

• Morgenthaler Private Equity has sponsored a recapitalization of Polytek Development Corp., an Easton, Penn.-based manufacturer of liquid mold rubbers and casting plastics. No financial terms were disclosed.

• Schryver Medical Sales and Marketing LLC, a Denver-based portfolio company of Revelstoke Capital Partners, has acquired BON Labs, a provider of custom lab services to physicians with facilities in Las Vegas and Burbank, Calif. No financial terms were disclosed.

• TA Associates has agreed to acquire the voting shares of Joley Corp., the parent company of Chicago-based Keeley Asset Management Corp. No financial terms were disclosed. TA had sponsored a minority recapitalization of Keeley back in 2008.

• Zennor Petroleum Ltd., an oil and has E&P company focused on the UK North Sea, has secured up to $400 million in equity commitments led by Kerogen Capital ($100m commitment).


• No IPO news this morning…


• Angelo Gordon & Co. has sold Oak Street Holdings, a Carmel, Ind.-based commercial finance platform focused on insurance industry financing, to a subsidiary of First Financial Bancorp (Nasdaq: FFBC) for $110 million in cash. Angelo Gordon said that the deal produced a cash-on-cash return in excess of 3x and an IRR of more than 25%.

• Heaven Hill Distilleries has acquired Austin, Texas-based Deep Eddy Vodka. No financial terms were disclosed. Sellers include Liahona Ventures. Earlier this month we reported that Deep Eddy founder Clayton Christopher was co-founding a new venture capital firm.

• Navis Capital Partners is seeking a buyer for Golden Foods Siam, a Thailand-based chicken processing company, according to the WSJ. A deal could garner upwards of $300 million. Read more.

• Oracle (NYSE: ORCL) has acquired Maxymiser, a New York-based provider of A/B testing tools for marketers. No financial terms were disclosed. Maxymiser had raised over $14 million in VC funding from firms like Pentech Ventures and Investor Growth Capital. Read more.


• Enel SpA (BIT: ENEL), an Italian power utility, is seeking to sell up to half of its 66% stake in Slovakia’s Slovenske Elektrarne. This is the first part of a two-stage process, with Enel expected to sell its remaining position once the construction of two Slovenian nuclear power plants is completed. Read more.

• Intuit (Nasdaq: INTU) said that it plans to seek a buyer for desktop accounting software product Quicken, along with QuickBase and Demandforce. Read more.

• Novartis has agreed to acquire all remaining rights to Ofatumumab from GlaxoSmithKline (LSE: GSK0 in a deal that could be worth $1.34 billion ($300m up-front). Novartis previously acquired the rights to Ofatumumab for oncology indications, and the new deal is for relapsing remitting multiple sclerosis and other autoimmune disorders. Read more.

• Santos Ltd. (ASX: STO), an Australian energy exploration and development company valued at A$5.6 billion, is exploring a sale of its assets. Read more.

• Tesla Motors (Nasdaq: TSLA) raised $738 million from a stock sale that closed on Wednesday, far exceeding the electric automaker’s original estimates. Read more.


• Lerer Hippeau Ventures is raising upwards of $75 million for its fourth fund, according to a regulatory filing. GCA Savvian is serving as placement agent.

• Point Judith Capital, a Boston-based early-stage VC firm, is raising upwards of $100 million for its fourth fund, according to a regulatory filing.


• Danny Kennedy, co-founder of Sungevity, has been named managing director of clean energy investment group CalCEF.

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