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YOUR WEEKLY ROUNDUP OF

HHeeddggeeFFuunndd&&PPrriivvaatteeEEqquuiittyyMARKET NEWS

TThhee SSeeccrreett LLiiffee ooffQQuuaannttssThirty years ago, Scott Gerson startedthe executive search firm Focus Capital. He soonbegan recruiting mathematicians and physicists towork not in labs or classrooms, but on Wall Street.The idea was to take people who didn’t necessarilyhave a background in finance, but had mindsattuned to working with numbers, and train them asspecialists in quantitative analysis: Quants. Decadeslater, Gerson is still in business, and the financialcommunity is hungrier than ever for quants.

TThhee FFiinnaanncciiaall iissPPoolliittiiccaall......aanndd CCuullttuurraallIn every financial sector there arerecurring themes. In hedge funds, registration hasdominated the discussion over the past few years. Inprivate equity, China continues to overshadow theindustry as more funds target the country, which isslowly emerging from the isolation of communism.“It’s important to understand the financial policy inthe context of the overall political philosophy of thecountry. Most investors don’t think that way,” saysRobert Kuhn, a senior advisor at Citigroup.

TToopp NNeewwss1122 MD & Providence Join Bidding For Univision1122 Carlyle Closes First Mezz FundCCeennttrraall IInntteelllliiggeennccee1133 Buyer BewareDDaattaavviieeww1155 Financial Sponsor Backed Acquisitions.DDeeaallss1166 Investcorp to Exit PE Deals Totalling $1.3B1166 Smurfit-Stone Sells Division to Texas Pacific Group1166 Private Equity Firms Lining Up For Cendant AuctionFFuunnddss1177 KPP Holds First Closing on New Fund1177 Riverside Partners Closes Third Fund on $225MPPeeooppllee1177 Blackstone Names New Managing Director1177 Stomber Named Carlyle Managing Director1188 Highland Capital Names New Partner

77 Wright Arrested in Miami77 Barington Takes ‘Steak’ in Lone Star88 Duquesne Opposes Exelon Takeover of PSEG1122 One Equity Exits RR Investment1166 Perseus Exits MTN Investments in $168M Deal1188 KPCB Brings in New Partner

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5 TToopp NNeewwss33 Commissioner Glassman to Step Down33 McCaffery to Launch $6B HFTThhee SShhaaddooww SSoowwss44 The Torrents of SpringDDaattaavviieeww66 Hedge Fund Performance by StrategyIInndduussttrryy77 Senators Question HF Registration 77 JANA Demands Response From Houston Exploration88 Third Point Takes Stake in Zoltek99 Integrated Asset Management Acquires Attica1100 Funds Say Change Is In Cards For Topps1111 Three Hedge Fund Managers Arrested in ColoradoPPeeooppllee1111 Dalton Hires Tokyo Chief

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May 22, 2006 » Volume 4 » Issue 4

TThhiiss WWeeeekk’’ss FFeeaattuurreess HHeeddggee FFuunnddss Pages 3-11

This Week »

PPrriivvaattee EEqquuiittyy Pages 12-20

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ALTERNATIVE UNIVERSE | 2 | MAY 22, 2006

Abbot Capital Mgmt 17Acambis 18AGF Private Equity 17Air Liquide Ventures 19Andersen Consulting 19AOL 18Apollo Management 16, 17Argosy Gaming 10Attica Holdings 9Bain Capital Partners 12Bank of America 18Barclays 16Bare Escentuals 16bareMinerals 16Barington Capital 7Berkshire Partners 16Blackstone Group 12, 17Bloomberg 9BNP Paribas 16BuildNet 13Burns & Associates 18Carlyle Group 12, 16, 17Cascade Investments 12Caterpillar 12CDC Enterprises 17Cerberus 17CheapTickets.com 16CIA 19Citicorp 18Citigroup 11, 14, 16Colorado Springs PD 11ComEd 8Compaq Computer 18Crescendo Partners 10Dalton Investments 11Del Frisco’s Steak House 7Deutsche Bank PB 17Doering 18Duquesne Capital Mgmt 8EMC Corp 19Ernst & Young 19Evercore Partners 16Exelon 8, 9Exxon 18Exxel 5Falfurrias Capital Partners 18FBI 7Fed. Energy Reg Comm 9

FSA 10Focus Capital 5, 17, 18GAIM Advisors 9Goldman Sachs 12Google 18Harvard 3Hershey 10Highland Cap Partners 18, 19Houston Exploration Co. 4HSBC 17i.d. 16IDI Asset Management 19Industri Kapital 16Initiate Systems 19In-Q-Tel 19Integrated Asset Mgmt, 9, 10Int. Mgmt Assoc. 7Investcorp 16JANA Partners 4, 7JH Partners 16JP Morgan Chase & Co 12Kerr-McGee 7Key Principal Partners 17KeyCorp 17Kidron Corporate Advisors 10KKR 12, 16KPCB 18Kraft 10Lone Star 7, 8Madison Dearborn 12Makena Capital Mgmt 3MTN 16Mass. Inst. of Tech. 17Massey Energy 8Mayflower Venture Capital 13MD Beauty 16Microsoft 3Millburn Ridgefield Corp 6Minimax 16MN Services 17Nabi Biopharmaceuticals 8Natural Gas Partners 18Nextreme Thermal Sol 19Nikko Citigroup 11Nikko Cordial 11Nikko Securities 11NVCA 13Omicron Master Trust 8

One Equity Partners 12Oranje-Nassau Groep 16Orbitz.com 16PECO 8Pembridge Capital Mgmt 10Persues 16PharmaVent Partners 17PMC 18Portus 4Progress Rail Services 12Providence Equity Partners 12PSE&G 8PSEG 8, 9QUANTster 5RCN 11Red Lion Hotels 8Riverside Partners 17S&P 4Sal. Oppenheim 9, 10SeaMobile 16Sewell & Associates 18Smurfit-Stone. 16Soros 9Stahl Holdings 16Stanford Management Co 3StorageNetworks 19Stowe Capital 18, 19Sullivan’s Steakhouse 7SV Investments 18Televisa 12Texas Land & Cattle Co 7Texas Pacific Group 12, 16Third Point 8Thomas E. Lee Partners 12Topps 10Truffle Ventures 19UBS Investment Bank 18Univision 12US Chamber of Commerce 14US Congress 19US Army 18Vision Fund 11Wendel Investissement 16Wharton 4Wrigley’s 10XL Capital Partners 11Yale 4Zoltek 8

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Check in daily to www.hedgefund.net for the latest news about the hedge fundindustry.The site offers stories about new funds,personnel changes and indus-try moves.The site’s data on hedge funds is second to none.

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IInnddeexx »» Companies In This Issue

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Marc [email protected]

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Christopher Glynn, [email protected]

Dana Czapnik, [email protected]

James Armstrong, [email protected]

Natalia Radziejewska, [email protected]

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Michele GregoryDDEESSIIGGNN

Buckenmeyer Mediawww.buckenmeyer.com

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Donald Cacciapaglia

MMAANNAAGGEERR,, GGLLOOBBAALL AADDVVEERRTTIISSIINNGG SSAALLEESS

Tony McLean

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Amy Geant

Alternative Universe is a publication of ChannelCapital Group Inc., 420 Lexington Ave., Ste. 2510

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CCoommmmiissssiioonneerr GGllaassssmmaann ttoo SStteeppDDoowwnnBY JAMES ARMSTRONG | Securities and Exchange Commis-sioner Cynthia Glassman announced on Monday shewill leave the agency after she completes her currentterm next month.

“It has been an honor and a privilege to serve you and ourcountry as a Commissioner of the Securities and ExchangeCommission for over four years,” Glassman wrote in a res-ignation letter to President Bush. She said she would work toensure a smooth transition to a successor, but it would soonbe time for her to move on.

Glassman clashed openly with the majority of the SEC onthe hedge fund adviser rule which passed 3-2. Since then, shehas not shied away from publicly condemning the decision,saying it lacked rigorous analysis.

“I was never quite clear as to what the real objec-tives of the rule were, so it’s very hard to tell whetheror not we are accomplishing them,” Glassman saidearlier this year at a conference in London. Such bitingattacks on registration became typical of her publicremarks, despite the fact the vast majority of decisionsthe SEC made during her tenure were unanimous, asGlassman herself pointed out.

Glassman joined the SEC in 2002, under the tumul-tuous chairmanship of Harvey Pitt, who resigned aftera controversy with the accounting oversight board.Pitt’s successor, William Donaldson, backed the hedgefund registration rule over the objections of Glassmanand fellow commissioner Paul Atkins.

When Donaldson stepped down in 2005, PresidentBush appointed Glassman acting chair of the agencyuntil Christopher Cox became the new permanenthead later that year. Cox has expressed his desire notto go back on the registration rule.

In a statement, Chairman Cox called Glassman astalwart proponent of investor protection, investoreducation and clear disclosure. He said her perspective

as an economist had been an invaluable asset in ensur-ing the agency’s decisions were based on a throughexamination of the issues.

While Glassman’s term officially ends June 5, com-missioners frequently remain at the SEC for severalmonths after their terms expire if a replacement hasnot yet been confirmed.

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BY DANA CZAPNIK | The former president and chief executiveofficer of Stanford Management Co, Michael McCaffery,has launched a new hedge fund, which will likely cap at $6billion, according to reports.

McCaffery left the $14.3 billion university endow-ment at the end of 2005 to start his own firm, Make-na Capital Management. The firm is located in MenloPark, Calif. McCaffery brought Michael Ross, Stan-ford's former chief investment officer, and DavidBurke, Stanford’s former managing director of privateequity, with him when he launched the new firm.

According to reports, Paul Allen, a co-founder ofMicrosoft, has contributed a large portion of capital to thefund. One article reported that he has invested $2 billion inthe fund.

As of March 30, when the firm filed with the Secu-rities and Exchange Commission, Makena had raised$15.9 million, according to reports citing its asset-backed issuer distribution report. That amount islargely seeded directly from McCaffery, Ross andBurke, all three of whom are beneficial owners, aswell as a Seattle-based investment firm called CougarInvestment Holdings.

McCaffery’s story is similar to the story of formerHarvard Management Co. chief executive officer JackMeyer. Meyer left Harvard in 2005 to raise a $6 billionhedge fund. The two managers both helped bring inrecord annual returns to their respective endowmentsduring a period of economic

HedgeFunds Alternative Universe

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downturn in the United States.Although no one has admitted pub-licly why both Meyer and McCaf-fery left their respective posts,most speculate it had to do withdisagreements regarding compen-sation.

PPoorrttuuss DDiiaammoonnddssRReemmaaiinn EElllluussiivvee BY JAMES ARMSTRONG | Investigators arestill trying to track down the $8.8million worth of missing diamondspurchased with investor funds fromthe defunct Canadian hedge fundfirm Portus.

Portus co-founder Boaz Manortook in about CAN$800 million($720 million) from 26,000investors across Canada. Accordingto reports, Manor ultimately mis-appropriated approximately $95.4million, including $8.8 millionfrom a U.S. dollar denominatedoffshore account used to purchasethe diamonds.

Of the approximately $17.6 mil-lion still missing, the $8.8 millionin diamonds is the most curiousaspect of the situation. It includes a22-carat diamond and several othersmaller gems sent to Manor’s sister-in-law in Hong Kong, Yu Jieying.Yitzhak Toib, a private banker,picked up the diamonds from Yu’soffice, but he claims to havereturned them to her.

Manor fled to Israel after the col-lapse of his fund, where he remains,making scant appearances in courtand mainly speaking through hislawyer. Neither he nor Yu nor Toibclaim to have the diamonds.

In remarks made earlier thismonth to a conference of econo-mists in Quebec, David Longworth,deputy governor of the Bank ofCanada, said scandals at Portus, aswell as at hedge fund firm Nor-shield and mutual fund group Nor-bourg, had forced regulators tolook at ways to strengthen theapplication of securities laws inCanada.

Along with record rainfalls inNew England, baseball sized hail-storms in Texas, and the droughtin the Southwest, we have a presi-dent, excuse me, a DECIDER,who will be remembered as deny-ing the existence of global warm-ing and the onset of a civil war inIraq. No wonder the French hateus. (Mind you, a population filledwith 30-year-olds living large ongovernment welfare in their par-ents’ home is no way to gothrough life either.)

Just when we thought that alto-gether too much chaos hasencroached upon our miserable,graceless, self involved lives, we nowhave a roller coaster commoditiesmarket which could impinge on allof our hard earned hedge fundreturns, and which could possiblythrow us back to the Stone Age(1982-1994).

Wait a minute! Is a commodityroller coaster that bad? And theStone Age is that a disaster? TheShadow's song book says that thisis the beginning of volatility inmany, if not all the markets. Withthe VIX at 15.71, it is time for atleast a 2 year move toward 20 orhigher. After 650 trading days oflow vol on the S&P and assortedother markets, a few sparks fromthe anvil might be healthy - andprofitable - for those who knowhow to dance with the markets.

I know there is a whole crop ofsnot-nosed, overly manicured,metro sexual MBAs who havenever encountered real volatilityand are actually managing portfo-lios with impunity. This will end.Two thousand and six is the yearthat the chaff will blow away. Justwhen we think we are heading for

a record year in returns, thingswill quickly change for those whohave never experienced at leasttwo economic cycles. We will seemore liquidations along with moregreat funds and it will be you, Mr.Investor, who has to make somehard choices. Staring blankly intothe headlights is not one of them.

We are on the verge of a majorshakeout in our industry. It willhappen because we are so compla-cent, because we think we cantime our investments, and becausewe are afraid to think outside thebox. It will happen becausevolatility will be king once more,and there are very few subjects tothat king who can walk a tightrope without a net.

Too many portfolio managersat major insurance companies, atlarge funds-of-funds and at someendowments and foundations arecontent to come in each morningand play defense. You have to putpoints on the board and thatmeans you have to look outside ofyour back yard to find creative,new, hard driving managers thatmight not have Yale or Whartonon their resumes. Those that knowhow to get their hands dirty in thisnew environment of volatility willbe the ones who will eat well. Andthose that miss the tide that iscoming will be like so many flop-ping fish left on a dry shore.

It was Paul Valery, (he’sFrench), who said: “That whichhas always been accepted byeveryone, everywhere, is certain tobe false.”

The views expressed in this columndo not necessarily reflect the views ofChannel Capital Group Inc.

HHeeddggeeFFuunnddss»»News

The Torrents of SpringObservations On the Commodity Plagues

TThhee SShhaaddooww SSoowwssCommentary From Our Man On the Inside

CONTINUED FROM PREVIOUS PAGE


HHeeddggeeFFuunnddss»»Feature

BY JAMES ARMSTRONG | Thirty years ago,Scott Gerson started the executivesearch firm Focus Capital. He soonbegan recruiting mathematiciansand physicists to work not in labs orclassrooms, but on Wall Street. Theidea was to take people who didn'tnecessarily have a background infinance, but had minds attuned toworking with numbers, and trainthem as specialists in quantitativeanalysis: Quants.

Decades later, Gerson is still inbusiness, and the financial communi-ty is hungrier than ever for quants.Hedge funds in particular are chasingthese refugees from academia, luredby the prospect of phi beta kappaswho can capture alpha.

More recently, however, fundshave tended toward a more practicalapproach. While theoretical knowl-edge is fine, funds also need pragmat-ic people who can apply their knowl-edge to the real world.

“I would say that over the pastyear or two, the hedge fund industryhas become less of a think tank andmore practical in terms of the peoplethat we look for,” says Gerson.“Many years ago, I was bringingphysicists to Wall Street. Nowadays,I'm more apt to hire mechanical engi-neers, civil engineers, people thatactually build things.”

Individuals with computer back-grounds are also in demand. Thosewho develop proprietary computermodels and those who provide math-ematical know-how are two sides ofthe same quantitative coin. Fundslook for candidates who can do both,or at least have a working knowledgeof both areas.

Gerson says funds now look forquants who aren't stuck in one par-ticular type of work. After a fewyears, quants might even move into

other jobs as business analysts,product developers, or even sales-people. Because they already under-stand the quantitative side, they cansometimes more easily relate theesoteric aspects of the business toother people. In that way, a quantjob can be a stepping stone to other- sometimes bigger - things.

“I have people that I've hired thatstarted out at entry level, and theynow run funds,” says Gerson.

While there is currently a highdemand for quants, Gerson saysdemand has also created a strongsupply. People in academia getword funds are looking for them,so more of themwant to explore thepossibility of work-ing for funds.Sometimes theyhave friends of col-leagues who havemade the switch.Other times theymight have stum-bled over funds byaccident.

For some Ph.D.sjaded by the dailygrind of academia, hedge fundsseem exciting and dynamic. Poten-tial quants might be fascinated bythe ability to use their skill setsand work with other brilliant peo-ple, but in a new and different set-ting. Other times, they just wantthe money.

“Do you know how hard it is tomake money as a professor?” Ger-son asks.

Sometimes, people might try outthe financial world for a while, andlater go back to academia. For

those who stay, however, theawards can be great.

Jim Varriale, publisher and ownerof QUANTster, a quantitative financejob market daily, says $100,000 ayear is a base starting point for quantsalaries. After a couple years of expe-rience, quants make $200,000 andup. Varriale says as recently as amonth ago he has seen quant jobspaying $1 million to $5 million.

Gerson, however, says there isreally no going rate. He says fundsmight hire someone at a reasonablebut not tremendous compensation,such as $80,000, but in two yearsthe quant might have a pretty goodsix-figure salary.

“I have a little club I call the mil-lion dollar earner club,” Gerson says.

“When I get somebody ajob, any time in their career,if they make a million dol-lars, they've got to call meand take me out to dinner.”

While Gerson didn’t sayhow many free dinners he'sgotten over the years, hesays he still gets calls fromexcited former clients pass-ing the seven-figure markfor the first time.

If a quant is going tosucceed, however, Gerson

says that person must be brilliantwith numbers, and have the rightattitude. The quants who thrive athedge funds have drive, he says,and would probably be successfulno matter what they did.

Varriale agrees that brains aloneare not always enough. Quants alsoneed communication skills andhave to be able to relate to otherpeople without undue languagebarriers or a demeanor that makesothers uncomfortable.

“At least six ofExxel’s late ‘90spurchases havegone bankrupt,including musicretailer Musi-mundo and Fargo,a bakery. Exxelinvested a total of$315 million inthese twocompanies.”

The Secret Life of QuantsAcademics are rushing to WallStreet, and hedge funds haveno shortage of jobs for them


HHeeddggeeFFuunnddss»»Dataview


Hedge Fund Performance, by StrategyLast 12 Months Through April 2006, by Percent Return

This chart displays the last 12 months of the aggregate performance of hedge funds through April 2006, according to HedgeFund.net-PerTrac Uni-verses, a feature of PerTrac Online. The data below presents select strategies. HedgeFund.net-PerTrac Universes charts the aggregate performanceof a total of 33 different hedge fund strategies.

HedgeFund.net-PerTrac Universes are available through PerTrac Online, an advanced tool forhedge fund analytics available exclusively to registered users of HedgeFund.net. The Univers-es provide a three-dimensional view of HedgeFund.net's hedge fund performance indices.Detailed percentile rankings are calculated each day for each of 33 investment strategies. Theresults are presented in easy-to-use tables and graphs. Alternative Universe provides month-ly, yearly, and sector-focused views of PerTrac Online aggregate data on a rotating basis.

PerTrac Online is a revolutionary new Web-based tool for hedge fund analysis and portfoliomonitoring. PerTrac Online harnesses the performance data of more than 6,000 hedge funds,allowing you to compare managers against their peers or a range of benchmarks. Visitwww.HedgeFund.net today to learn more about PerTrac Online, or contact us at 1-212-381-8064 or [email protected].

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All Funds 1.95% 1.83% 0.36% 3.10% 1.86% 1.80% -1.32% 1.80% 0.93% 1.83% 1.51% 0.77%

Convert. Arbitrage 0.49% 0.98% 1.20% 2.45% 0.77% -0.03% -0.23% 1.24% 0.54% 1.44% 0.99% -1.29%

CTAs 4.17% 2.18% -1.69% 2.57% 0.60% 3.77% -1.02% 1.30% 1.56% 0.16% 2.36% 2.28%

Distressed 1.65% 2.01% 0.75% 2.28% 1.49% 0.96% -0.45% 0.82% 1.68% 2.16% 1.44% 0.44%

Emerging Markets 4.40% 1.42% 2.51% 5.50% 3.41% 2.84% -2.35% 5.04% 2.57% 3.36% 1.72% 0.64%

Event Driven 1.91% 2.17% 0.63% 3.42% 1.73% 1.25% -2.08% 0.97% 0.86% 2.10% 1.61% 0.85%

Fixed Income 0.71% 0.11% 0.46% 1.22% 1.19% 0.47% 0.05% 1.03% 0.69% 1.03% 0.84% 0.58%

Fixed Income Arb. 1.26% 0.67% 0.44% 1.09% 0.67% 0.24% 0.29% 1.04% 0.09% 0.64% 0.45% 0.09%

Fund of Funds 1.84% 1.66% 0.45% 2.92% 1.86% 1.47% -1.55% 1.58% 0.83% 1.70% 1.26% 0.02%

Long/Short Hedged 1.77% 2.59% 0.19% 4.18% 2.70% 2.40% -2.00% 2.39% 0.85% 2.59% 1.90% 1.41%

Macro 2.56% 0.77% -0.08% 2.91% 1.40% 1.88% -0.41% 2.47% 0.36% 1.32% 0.80% 0.63%

Mark. Neutral Equity 0.96% 1.01% 0.43% 1.45% 0.65% 0.48% -0.31% 1.04% 0.76% 1.03% 0.98% 0.57%

Risk Arbitrage 1.34% 1.19% 0.95% 2.68% 1.30% 1.28% -0.97% 0.30% 0.40% 1.46% 0.91% 1.11%

Short Bias 0.08% -1.90% 0.48% -2.78% -0.04% -2.91% 1.99% 1.67% 1.56% -1.74% -0.15% -3.38%

Technology Sector 0.48% 3.20% 0.85% 4.28% 3.29% 2.33% -0.70% 2.00% -0.93% 3.69% 1.02% 4.19%

Value 1.93% 2.37% 0.38% 4.46% 1.52% 2.00% -1.98% 1.23% 0.65% 2.81% 1.61% 2.36%

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“Because you’re in a front officeenvironment, communication skillsare pretty key,” says Varriale.

A quant’s job has been called partscience and part art. Varriale says thatin addition to having the basic mathe-matical skills, a good quant is intellec-tually curious and able to work in afast-paced environment. Every fundhas its own environment, so a quantsuited to one position will not neces-sarily fit in someplace else.

Despite the strong demand forquants, hedge funds are still rigorousin selecting candidates that fit the pro-files they need. Varriale says it's notuncommon for funds to interview 50people to 100 people or more to findthe right quant for a job. After all, afund's quant staff directly impacts thebottom line of a fund, so funds wantquality people.

The major firms recruit topgraduates as entry-level quants.Candidates who have been in aca-demia for a while can certainly stilljoin funds, but with so many want-ing into the industry, they mightfind it difficult to differentiatethemselves from other candidates.Varriale suggests signing up fordistance learning programs to get acertificate in quantitative finance,or simply reading some of the prin-ciple texts on the subject.

“It’s great to go to a hiring manag-er and say ‘I want to be a quant,’” hesays, “but you’ve got to show someevidence that you’ve taken it seriouslybeyond just desire.”

Barry Goodman, executive vicepresident of Millburn RidgefieldCorp., says when his company islooking for quants, they try to findpeople they can integrate into the

team framework they already have.For Millburn Ridgefield, thatmeans finding a way to blend mar-ket experience with quantitativeskill sets. Goodman says sometimeswhen firms become overly commit-ted to the quantitative process, theylose sight of what they are doing.

All the same, he says funds areincreasingly hiring people withquantitative backgrounds, and notjust to do analysis. A basic under-standing of the math involved in astrategy is always helpful, whetherin providing structured notes orworking in marketing or serving insome other capacity.

“In this day and age, this kind ofbackground is very good to have,”says Goodman.

As the industry continues to grow,the demand for quants will likely con-tinue for all sorts of positions.


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BY DANA CZAPNIK | Republican senatorMike Crapo of Idaho questioned theSecurities and Exchange Commis-sion’s authority to require hedgefunds to register at a Senate Bankingsubcommittee hearing on Tuesday.

Crapo raised the issue at thehearing, which focused on dis-cussing the hedge fund industry,and expressed the hope that thecourts would overturn the registra-tion rule, which took effect thispast February 1st.

Other Republican senators cameforth to oppose the registration ruleat the hearing. John Sununu of NewHampshire criticized the SEC’s role inenforcing registration. He asked theother members of the banking sub-committee whether they feel that theSEC has the jurisdiction to regulatehedge funds in this way.

Fellow Republican Senator, JimBunning of Kentucky doubted whetherthe registration law would last due tothe fact that it is in the process of beingchallenged in the courts.

JJAANNAA DDeemmaannddssRReessppoonnssee FFrroommHHoouussttoonn EExxpplloorraattiioonnBY JAMES ARMSTRONG | New York and SanFrancisco-based hedge fund JANAPartners is asking the board of Hous-ton Exploration Co. to respond tothe fund’s suggestion of a $650 mil-lion share repurchase.

In an open letter to the company’sboard, JANA managing partnerBarry Rosenstein accused the boardof “playing possum” - remainingmotionless when confronted with ashareholder proposal. He called theinaction “an inexcusable abdicationof fiduciary duties.”

Last month, JANA publicly calledon the board to use the proceeds of arecent sale of assets in the Gulf ofMexico to institute a Dutch tendershare repurchase. The company hadplanned on using the money foracquisitions and debt repayments.

At Houston Exploration’s recentannual meeting, 30% of shareholderswithheld their votes for the compa-ny’s board, a sign of considerable dis-content, according to Rosenstein.Despite that fact, Houston has stillnot offered a quantitative analysis tocounter JANA’s proposal.

“We are starting to questionwhether anyone at the company haseven done the math on what courseof action is best for shareholders,”Rosenstein wrote in the letter.

JANA included an updatedanalysis with the letter, comparinga share repurchase with a possibleacquisition. It said the analysisfavored funding a share repurchasewith the $520 million in cash leftover from the recent asset sale andanother $130 million in debt, thesame amount of debt the companyrecently repaid.

Rosenstein wrote that failing torespond to the letter would indi-cate a clear breach of the fiduciaryduties of the board. If thatoccurred, he said JANA would nothesitate to hold each board mem-ber individually liable.

JANA also recommended Hous-ton implementing a comprehensivehedging strategy, placing a collar on asignificant portion of 2007 and 2008natural gas volumes. The fund suc-cessfully advocated similar strategieswith exploration company Kerr-McGee last year, but only afterresolving a lawsuit by Kerr-McGeecharging JANA conspired to manipu-late the company’s stock.

Rosenstein concluded his letterurging the board to explore possiblestrategic alternatives, including sell-ing the company.

JANA currently owns about 9%of Houston Exploration. The fundhas about $4 billion in assets undermanagement.

WWrriigghhtt AArrrreesstteedd iinnMMiiaammii BY JAMES ARMSTRONG | Kirk Wright, thehedge fund manager accused of bilk-ing an impressive list of clients that

included former professional footballplayers Steve Atwater and TerrellDavis, was arrested Wednesday at aMiami hotel.

Wright had been missing for near-ly three months. His lawyer, JacobFrenkel, claims Wright went into hid-ing after being threatened by a dis-gruntled investor.

The Atlanta-area businessmanran International ManagementAssociates, which once had asmuch as $185 million from about500 investors. In addition to takingmoney from famous sports figures,Wright also got California million-aire Roger O’Neal and bus compa-ny executive Charles Busskohl toinvest in his funds.

The Securities and Exchange Com-mission, however, claims Wright sup-plied false quarterly reports misrepre-senting the amount of assets in sevendifferent hedge funds. He claimedreturns as high as 20% while themoney was largely dissipated, regula-tors claim. Many of the investorshave filed law suits, and Wright facescriminal fraud charges.

Agents from the Federal Bureauof Investigation arrested Wrightlate Wednesday afternoon with theaid of Miami Beach police, accord-ing to reports.

Courts have already frozenWright’s assets, and a receiver hasrecovered a few million dollars so far,much of it from luxury items Wrightallegedly bought with investor funds,including cars and multiple residences.

BBaarriinnggttoonn TTaakkeess ‘‘SStteeaakk’’iinn LLoonnee SSttaarrBY JAMES ARMSTRONG | Activist hedgefund firm Barington Capital hasbought up 7.47% of Lone Star Steak-house & Saloon, Inc.

According to a filing with theSecurities and Exchange Commis-sion, Barington now owns 1.6 mil-lion shares of the Wichita, Kan.-based restaurant chain. Barington hasbeen building up its position over thepast three months.


HHeeddggeeFFuunnddss»»Industry


In addition to running 224 LoneStar restaurants, the company alsoowns 40 other steakhouses under thenames Texas Land & Cattle Co., DelFrisco’s Double Eagle Steak Houseand Sullivan’s Steakhouse.

Barington has a history of invest-ing in distressed and undervaluedcompanies. Last month, Baringtonhead James Mitarotonda wrote apublic letter to the president and chiefexecutive officer of Red Lion Hotels,arguing against a public offering of5.5 million shares to raise much need-ed cash. Barington controls about6.9% of Red Lion.

Though it is not in such financialtrouble as Red Lion, Lone Star hasfelt the effect of heavy competition inthe industry lately. The companyclosed 30 under-performing restau-rants in March.

Despite low growth prospects,Lone Star is debt-free and current-ly has plenty of cash on hand. Thecompany’s revenues increased2.9% during first quarter, and it

currently has a total of 16 newrestaurants under construction.

Lone Star opened its first restau-rant in Winston-Salem, N.C., in1989. The chain has no locations inTexas, the Lone Star State.

TThhiirrdd PPooiinntt TTaakkeess SSttaakkeeiinn ZZoolltteekkBY JAMES ARMSTRONG | Activist hedge fundThird Point has taken a 7% stake incarbon fiber manufacturer Zoltek.

According to a recent filing withthe Securities and Exchange Commis-sion, Third point now owns 1.5 mil-lion shares of Zoltek, valued at about$43 million. It is currently the com-pany’s third-largest shareholder afterfounder Zsolt Rumy and OmicronMaster Trust.

Daniel Loeb, who runs ThirdPoint, has been known for taking aheavy-handed approach with someof his investments. He recentlyaccused Massey Energy of spend-ing too much on executive pay andpressured Nabi Biopharmaceuti-

cals to hire a strategic adviser toconsider a sale of the company.

On Monday, Zoltek announcedit has completed a private place-ment of $20 million. The companyhas now received a total of $50million of convertible financing tohelp it expand its productioncapacity.

DDuuqquueessnnee OOppppoosseessEExxeelloonn TTaakkeeoovveerr ooffPPSSEEGGBY JAMES ARMSTRONG | Duquesne CapitalManagement is asking power com-pany Exelon to reconsider its pend-ing takeover of fellow utility PSEG.

Chicago-based Exelon ownsComEd, PECO and Exelon Energy.Exelon provides electricity, muchof it generated from nuclear powerplants, to about 5.2 million cus-tomers in Illinois and Pennsylva-nia, and provides natural gas to asmaller number of customersbased in the Midwest.





An acquisition of Newark, N.J.-based Publish Service EnterpriseGroup, better known as PSEG,would add 1.7 million natural gascustomers and 2.1 million electric-ity customers through its sub-sidiary, the Public Service Electric& Gas Co. (PSE&G).

Duquesne, however, thinks the$16.2 billion price tag being consid-ered is too high.

“It is an unjustified and enor-mous windfall to Public Serviceshareholders entirely at the cost ofExelon shareholders,” Duquesnemanaging director ZacharySchreiber told Bloomberg. “TheExelon board is required to exer-cise due care, and against thebackdrop of a sea change in theenergy environment during the lastyear, they need to re-examine thewisdom and terms of a deal.”

Schreiber believes Exelon’s low-cost nuclear plants make the com-pany more valuable on its own

than merged with PSEG consider-ing current high energy prices.Those prices have made what wasa marginally bad deal “obscene,”he said, as federal regulators couldtry to force Exelon to sell some ofits nuclear plants to avoid anti-trust concerns.

It is still unclear, however,whether Duquesne, which ownsless than 1% of Exelon, will beable to get the company to dowhat it wants. The Federal EnergyRegulatory Commission approvedthe merger last year, and Exelonshareholders have already voted infavor the deal.

Former Soros trader StanleyDruckenmiller runs Duquesne,which currently has about $9.5billion in assets under manage-ment. Druckenmiller is also wellknown for his philanthropic activ-ities, including donating tens ofmillions of dollars to a New Yorkcharter school program known asthe Harlem Children’s Zone.

IInntteeggrraatteedd AAsssseettMMaannaaggeemmeenntt AAccqquuiirreessAAttttiiccaa;; SSaall.. OOppppeennhheeiimmAAccqquuiirreess 2277%% SSttaakkee iinnIInntteeggrraatteeddBY DANA CZAPNIK | The London-basedfund-of-funds manager Attica Hold-ings has been acquired by IntegratedAsset Management.

Integrated Asset Management isan alternative investment grouplisted on the London StockExchange AIM. The firm has pur-chased a 50.1% majority stake inAttica from Sal. Oppenheim Inter-national Institute Luxembourg foran undisclosed amount. Throughthe deal, Integrated Asset Manage-ment also has the option to buy theremaining 49.9% stake in the fund-of-funds for a combination of cashand shares up to €13.45 million.

Attica has $400 million undermanagement. The addition of Atti-ca to Integrated’s portfolio makes





the firm’s total assets under man-agement valued at more than $1.1billion.

In addition to the deal withAttica, Sal. Oppenheim wasinvolved in another deal. The firmacquired a 27% stake in IntegratedAsset Management, becoming thefirm’s largest single shareholder.Two members of Sal. Oppenheim’steam will be nominated to Inte-grated’s Board of Directors.

GAIM Advisors, Integrated’sfund-of-funds division alreadyunder management, and Attica,will now become the preferredfund-of-funds providers to Sal.Oppenheim.

The deal is still subject to share-holder approval and it is contin-gent upon the approval of theFinancial Services Authority.

Kidron Corporate Advisors wasthe financial adviser to IntegratedAsset Management.

FFuunnddss SSaayy CChhaannggee IIss iinntthhee CCaarrddss ffoorr TTooppppss

BY JAMES ARMSTRONG | Dissident share-holders filed a preliminary proxysolicitation on Wednesday to swapboard members at trading cardcompany Topps.

Pembridge Capital Managementand Crescendo Partners have criti-cized the company’s deterioratingoperating performance and stag-nant stock price. Over the last fis-cal year, Topps lost $2.3 milliondue to increased expenses anddeclining sales.

The funds also claim manage-ment compensation at Topps isexcessive, with chairman and chiefexecutive officer Arthur Shorinreceiving an average salary of about$980,000 a year. Chief executivesat multi-billion dollar companieslike Kraft, Hershey and Wrigley’smake comparable amounts, thefunds say. They point out Shorin

also received a $500,000 bonus forthe last fiscal year, despite the com-pany’s poor performance.

Because Topps’ board is staggered,the funds’ nominees will constitute aminority if elected and will have towork with current board members.The funds are also attempting todeclassify the board so all membersare elected annually.

Calling themselves the Topps FullValue Committee, the dissidents havenominated Pembridge president andportfolio manager Timothy Brog,Crescendo managing director ArnaudAjdler and Argosy Gaming executiveJohn Jones. They have also proposedamending Topps’ certificate of incor-poration to allow stockholders to callspecial meetings.

If elected, the nominees have com-mitted to explore strategic alterna-tives, including the sale of all or partof the company, the significant repur-chase of common stock, a large spe-


HHeeddggeeFFuunnddss»» Industry



cial dividend, a reallocation of capi-tal, a reduction of cost structure,including executive compensationand bonus packages, and improvedcorporate governance practices.

“We are convinced that theTopps board has lost touch with itstrue constituency, the company’sstockholders, and has lost sight ofits true purpose, the creation ofstockholder value,” the proxysolicitation states. It said a sub-stantial vote in favor of the funds’proposals would send an unmis-takably clear message to the boardto address important issues.

The company’s management hasthreatened to rule the funds’ propos-als out of order, in which case, theissue could end up in court.

Management claims the nomi-nation of Jones may not be proper,because his nomination letter neg-lected to mention he was executivevice president and general counselof RCN, a telecommunicationscompany that filed for bankruptcymore than a year and a half afterJones left the firm. The funds feelinformation wasn’t material to theevaluation of Jones’ ability orintegrity.

TThhrreeee HHFF MMaannaaggeerrssAArrrreesstteedd iinn CCoolloorraaddoo BY DANA CZAPNIK | Three Colorado hedgefund managers indicted for stealing$7.5 million from investors werecarted off to jail on Tuesday care ofthe Colorado Springs Police Depart-

ment. All three were released afterposting $20,000 bonds.

Hamilton Bird, David Newtonand Douglas Scott were indicted by agrand jury on Friday for allegedlystealing $7.5 million from investorsthrough a faulty hedge fund calledthe Vision Fund. The arrests wereannounced Tuesday morning byAttorney General John Suthers andSecurities Commissioner Fred Joseph.

Bird, director of XL CapitalPartners, launched the Vision Fundin 2002, offering limited partner-ships to investors through privateplacement memorandums. ThePPMs stated that XL Capital wasentitled to a performance fee of20% of the net profits during eachfiscal year.

The firm raised $24 millionfrom 450 investors for the VisionFund, some of it coming fromchurches and religious organiza-tions in Colorado Springs.Investors heard of the hedge fundthrough word of mouth and werelured in by promises of highreturns. The minimum investmentfor the fund was $10,000.

The indictment alleges that $7.5 mil-lion of the $24 million raised was usedfor personal expenses: a $4.1 millioncompany jet, a new home for Newton,repairs for Bird’s home as well as othermiscellaneous personal spending.

Bird has been charged withthree counts securities fraud andfive counts theft, which all carryindividual sentences of 4-12 years.The indictment also claims thatBird can be sentenced as a habitu-

al criminal and therefore eligibleto be sentenced to a term that isthree time the maximum sentenceof 12 years.

Newton was charged with twocounts of securities fraud and fourcounts of theft and Scott was chargedwith one count securities fraud andone count theft.

DDaallttoonn HHiirreess TTookkyyooCChhiieeff BY JAMES ARMSTRONG | Los Angeles-based hedge fund Dalton Invest-ments has named Junichiro Sanoto head up its Tokyo operations.

The company announced Sanowill serve as president and chiefexecutive officer of Dalton’sJapanese affiliate, Dalton Invest-ments KK. Sano is a long-timefriend and associate of Dalton co-founder James Rosenwald.

Sano joins Dalton from NikkoCitigroup, a joint venture betweenNikko Cordial and Citigroup.While there, he served as a manag-ing director responsible for alldomestic equity distributions.Prior to joining Nikko Citigroup,he spent 28 years at Nikko Securi-ties, rising to become chief operat-ing officer for global institutionalsales.

Rosenwald founded DaltonInvestments with Steven Persky in1998. The firm currently has about$1.3 billion in assets under man-agement, but recently closed itsdistressed fund and will be return-ing $300 million to investors.


HHeeddggeeFFuunnddss»»Industry & People



MMaaddiissoonn DDeeaarrbboorrnn && PPrroovviiddeennccee JJooiinnBBiiddddiinngg ffoorr UUnniivviissiioonn,, GGSS DDrrooppss OOuuttBY NATALIA RADZIEJEWSKA | On the same day the bidding war forLos Angeles-based Spanish language television station Uni-vision gained two more potential players, Goldman SachsCapital Partners dropped out of the buying competition.Univision’s high price -– $12 billion – may have deterredGoldman, but sources familiar with the matter cite multipleconflicts of interest to be behind Goldman bowing out.

Univision is a client of Goldman and the New Yorkbased investment bank underwrote the television station’spublic stock offerings. Goldman would also be competingagainst some of its biggest clients who are among Univi-sion’s other private equity bidders.

Goldman’s departure from the group comes in thewake of negative comments by the bank’s chief executiveofficer, Hank Paulson, who advised the bank to approachfuture deals where it would bid against clients with cau-tion. While other investment banks have recently spunoff or de-emphasized their private equity divisions, Gold-man has raised the ire of many private equity managers byrecently closing an $8.5 billion buyout fund.

With Goldman out, the firms still bidding for Univisionare Madison Dearborn and Providence Equity Partners,who joined the fray on Tuesday, as well as Texas PacificGroup and Thomas E. Lee Partners. Competing withthese private equity firms is a group made up of Mexicanmedia company Televisa, Bain Capital Partners, Black-stone, Carlyle Group and Kohlberg Kravis Roberts & Co.Currently, Televisa owns 11.4% of Univision.

Televisa must bid for American-based media propertiesas part of a partnership because U.S. law prohibits foreignbusinesses from owning more than 25% of a U.S.-basedmedia company. Cascade Investments, the investmentgroup owned by Bill Gates, is also considering a bid,according to a recent SEC filing.

Univision confirmed it was for sale in February 2006.Bidding is expected to start in June, with a deal expectedto be reached by the end of the summer.

OOnnee EEqquuiittyy EExxiittss RRRR IInnvveessttmmeenntt

BY MARC RAYBIN | One Equity Partners, the private equity armof JP Morgan Chase & Co., has sold portfolio companyProgress Rail Services to strategic buyer Caterpillar in adeal valued at $1 billion.

Progress serves the aftermarket rail business and isbased in Albertville, Ala. The company provides remanu-factured locomotive and railcar products and services tothe North American railroad industry, including repair,welding and maintenance.

Progress operates more than 90 facilities in 29 states.The company also has operations in Canada and Mexico,employing approximately 3,700 people. Sales for the com-pany reached $1.2 billion last year.

One Equity Partners acquired Progress from ProgressEnergy for $405 million in February 2005.

Caterpillar’s plans for Progress include expansion out-side of North America.

Terms of the deal call for Caterpillar to pay One Equi-ty Partners $800 million. Approximately 53% will be incash and 47% will be in Caterpillar stock. Caterpillar willassume $200 million of long-term debt. The deal is expect-ed to close at the end of the second quarter.

One Equity Partners manages approximately $5 billionin capital. The firm has locations throughout NorthAmerica, including New York and Chicago. It also hasoffices in Frankfurt.

CCaarrllyyllee CClloosseess FFiirrsstt MMeezzzz FFuunndd

BY MARC RAYBIN | The Carlyle Group announced it has enteredthe world of mezzanine investing, having closed its firstfund to invest in that space on $436 million.

Carlyle Mezzanine Partners, as the new fund is called,will be led by managing directors Leo Helmers, RufusRivers and James Shevlet. The fund will have seven invest-ment professionals based in New York and Los Angeles.

The mezzanine team was formed back in 2004 and hasmade eight investments to date, comprising nearly 30% ofthe new fund. Investments include a janitorial and land-scaping services company, a manufacturer of munitions andanti-riot products and an operator of family-style restau-rants. The fund invests in debt and equity securities of third-party leveraged buyouts, recaps and growth financings.CMP invests primarily in senior subordinated notes, pre-ferred stock and minority equity securities.

Shelvelt said the outlook for mezzanine investing is verygood and the time is right for Carlyle to get into the market.

“The credit cycle is at a point where there are a lot ofdeals being over-levered,” said Shevlet. “I think the debtmarkets will re-trench a bit.”

Shevlet demurred to predict exactly when that wouldoccur, but he estimated it would happen in the next 12months to 18 months.

Being part of Carlyle has its advantages for the new fund.Managers have an array of resources at their disposal, espe-cially when it comes to deal due diligence and deal sourcing.Furthermore, CMP managers have the ability to invest up to25% of the new fund in Carlyle-controlled funds.

CMP was oversubscribed by nearly 10%, as its targetwas for $400 million. Limited partners include corporatepension plans and college endowments.

Private Equity Alternative Universe


Stories about crime and fraud do notgrace pages of the private equity sec-tion of this publication as often asthe pages of the hedge fund section,so when a criminal case involvingprivate equity comes up, it catchesour attention.

On Tuesday, May 16th, BrentWood and Diane Pace, two man-agers of Mayflower Venture Capi-tal Fund III, were found guilty ofeight criminal counts in a Raleigh,N.C. federal court. The pair wasfound guilty of a number ofcharges, including conspiracy, wireand mail fraud and conspiracy tocommit money laundering in theuse of approximately $15 millioncollected by the fund from around145 investors between February2000 and November 2000.

Fund III was specifically estab-lished to invest in a planned initialpublic offering of BuildNet, aDurham-based company. Thefunds were fraudulently diverted toother unauthorized investmentswithout the knowledge and/or con-sent of the investors. Between May2000 and November 2000, themanagers of the fund also sent falseupdates to investors assuring themFund III money was exclusivelyreserved for BuildNet, according tothe government. The plan unrav-eled when the BuildNet IPO nevermaterialized and the fund wasunable to return money toinvestors because the illegal invest-ments never panned out.

“That was an immediate redflag that something was amiss,”says Assistant U.S. Attorney Gas-ton Williams, who prosecuted thecase on behalf of the government.

Wood, who is an attorney, andPace both face federal prison sen-tences of between eight years and 11years, according to guidelines.

“It won’t be for hardened crimi-nals, but it won't be all that cushyeither,” says Williams of the possiblefacilities Wood and Pace will sooncall home. “They’ll probably be in anintermediate [security] level prison.”

The pair will know their fates inSeptember, when sentences arehanded down by the court.

A few other things shouldhave caught the attention ofinvestors.

“From the looks of it,Mayflower was not a ven-ture capital firm as we defineit here at the NVCA,” wroteMark Heesen, president ofthe National Venture CapitalAssociation, in an email.“Venture capital firms musthave accredited investorsand it doesn’t seem as if thiswas the case here - justbecause the word ‘venture’ isin the name of the firm,doesn't mean it is a true ven-ture capital [firm].”

Other curiosities include the stat-ed strategy of investing in a singlecompany. Heesen points out venturecapital funds are designed to investmoney in multiple companies.

Furthermore, venture capital is along-term investment, so it wasunusual for the money to be puttoward a short-term transaction ofan IPO.

“Technically, this wasn't ventureinvesting as described toinvestors,writes Heesen.

According to Dan Boyce, theattorney for Pace, she relied on theadvice of Wood, who said andemailed to her that the fund couldmake investments in multiple portfo-lio companies as had the firm's pre-

vious fund, which did allow for thosetypes of transactions. Boyce says hisclient also passed three polygraphlie-detector tests.

Wood’s attorney did not returna message seeking comment on theoutcome of the trial.

Boyce will file a motion shortlyfor the judge to set aside the verdictfor his client. Boyce said the judge

expressed concern thegovernment had notproven the conspira-cy had begun in Feb-ruary 2000, as theindictment charged.

“Two alternatejurors we inter-viewed said ‘notguilty,’ so we wereanticipating a notguilty verdict,” saysBoyce. “We werevery surprised.”

Although there isalways potential forfraud in any assetclass, venture capitalhas seemingly been

able to stay out of the spotlight.Heesen suggests potential limitedpartners should be careful of“tourists” posing as venture capi-talists who are really angelinvestors or just plain amateurs.Inspecting the track records of thefirm and its partners is always agood start - although Boyce saysPace does not have a criminalbackground.

The odds are this case, which isrelatively small compared with thefund raising of the last few years, willnot deliver a major blow to theindustry. Still, any kind of financialmalfeasance perpetrated by a venturecapital firm is sure to bring the kindof negative publicity investors typi-cally could do without.

PPrriivvaattee EEqquuiittyy »»Central IntelligenceMARKET COMMENTARY BY MARC RAYBIN

Buyer BewareA recent court case should serve

as a warning to potential VCinvestors

“Venture capitalfirms must haveaccreditedinvestors and itdoesn’t seemas if this wasthe case here -just becausethe word ‘ven-ture’ is in thename of thefirm, doesn’tmean it is atrue venturecapital [firm],”writes Heesen


BY DANA CZAPNIK | In every financial sectorthere are recurring themes. In hedgefunds, registration has dominated thediscussion over the past few years. Inprivate equity, China continues to over-shadow the industry as more funds tar-get the country, which is slowly emerg-ing from the isolation of communism.

“It’s important to understand thefinancial policy in the context of theoverall political philosophy of thecountry. Most investors don’t thinkthat way,” says Robert Kuhn, a sen-ior advisor in the investment bankingdepartment at Citigroup, who workswith Chinese companies on mergersand acquisitions as well as withmultinational corporations on theirChina strategies.

Kuhn thinks foreign investorsclamoring to get their piece of theChinese pie are entering the nationpoorly informed about its complexi-ties before negotiating deals.

Kuhn says that China is in aunique phase in its history right now.The country is being led by a presi-dent interested in making China aplayer in the global economy and itspoliticians are making a move toadopt a more capitalistic structure.But some of the traditions of commu-nism persist, which makes it difficultfor Western investors to understandsome Chinese businesses’ methodolo-gies. Kuhn thinks investors have to bebetter educated about China’s historyand political and financial landscapebefore even thinking about acquiringa Chinese company.

In an attempt to reach out toAmerican investors and better educateAmerican businessmen, Xi Jinping,president of the Zhejiang province,arranged a nearly week-long confer-ence partly sponsored by the UnitedStates Chamber of Commerce in NewYork last week. Jinping spoke to U.S.

investors, financial players and mem-bers of the financial press about thegrowth of industry in Zhejiang andabout building an investment bridgeto their province.

According to Kuhn, this was animportant event. Zhejiang is rapidlybecoming one of the most financiallyinfluential parts of China.

“Zhejiang is an important provincebecause it is the biggest experiment inprivate business,” Kuhn says. “It’s thefourth largest GDP province in China,but it's GDP per capita is thehighest in China, the Zhejiangpopulation also has the high-est disposable income.”

Jinping is also a pioneeringpolitician. He is experiment-ing with allowing more trans-parency in government andmaking the investmentprocess easier for foreigners.

“Seventy percent of theprovince is [comprised of] foreignbusiness,” Kuhn says. “They do $18billion in trade with the U.S. alone.So Zhejiang, a province Americanshave probably never heard of, is abigger trading partner with the U.S.than most countries.”

The reasons Zhejiang is so revolu-tionary and U.S. investors should payattention to the progress it’s making isbecause it’s operating in a way that isso different from the traditional com-munist and socialist financial structure.

“In the 1950’s,” Kuhn says, “thegovernment placed a lot of their bigfactories in the mountains in theNortheast. Those big factories andbusinesses in the mountains eventual-ly became dinosaurs.”

The businesses emerging in Zhejiangare the antithesis of those antiquated,

overpowering, industrial structures.The businesses being built in Zhejiangare nimble, entrepreneurial and farmore relevant in today's economy.

During communism's heyday inChina, the country was consideredone of the most balanced and equalcountries economically. The scaleshave tipped dramatically since then.According to Kuhn, the urban to ruralincome disposability ratio is 3.3 to 1.

China is considered one of thelowest-cost producers in the world.Poor people in China work hard forlong hours without much pay. Nowthat urbanites are making more

money and becomingmore educated than theirrural counterparts, HuJintao, China’s presi-dent, is trying to forgeinitiatives to level outthe economic disparityagain. Except this time,China is abandoningold-fashioned commu-nist methods and

embracing capitalism.“The party has transformed itself

from a socialist revolutionary partyinto a ruling party that maintains sta-bility. They’re not just a party for theworkers, they’re also a party for themost educated people in society,”Kuhn says. “In order to re-balancethings, you have to raise wages. But ifyou raise people’s salaries, China’s nolonger the low-cost producer. At thesame time, China needs to maintainthat growth because it has the ruralpopulations that are filled with theunemployed and migrant workersbecause of state-owned factories thatare closing regularly and putting peo-ple out on the streets.”

Kuhn says China is looking to theJapanese model in terms of transform-

The Financial is Political…and CulturalBefore investing in China,

private equity professionalsshould do their research

PPrriivvaattee EEqquuiittyy»»Feature


Kuhn thinksinvestors haveto be bettereducatedabout China’shistory andpolitical andfinanciallandscape


PPrriivvaattee EEqquuiittyy»»Dataview

Financial Sponsor Backed AcquisitionsLast 12 Months Through April 2006

This chart displays the number and value of global financial sponsor backed acquisitions for the last 12 months through April 2006, according to CapitalIQ. The data is presented as buyout-only, venture capital-only and total deals. Values are in $mil. Learn more about Capital IQ at www.capitaliq.com. Thedata is up to date as of May 19, 2006.

Capital IQ, a division of Standard & Poor’s, provides high-impact information and workflow solutions to over 1,200 leading financial institutions, advisory firms, and corporations. Its solutions arebased on the Capital IQ Platform, a unique combination of global private and public capital market data and technology that enables end-users to draw deep market insights, generate betterideas, leverage relationships, and simplify workflow. The Capital IQ Platform provides much of the information and tools that financial professionals need to be highly productive. For more infor-mation, please visit Capital IQ’s web site at www.capitaliq.com.

AAbboouutt CCaappiittaall IIQQ

NNoo.. ooff BBuuyyoouutt DDeeaallss VVaalluuee ooff BBuuyyoouutt DDeeaallss NNoo.. ooff VVeennttuurree DDeeaallss VVaalluuee ooff VVeennttuurree DDeeaallss TToottaall NNoo.. ooff DDeeaallss TToottaall VVaalluuee ooff DDeeaallss

Apr 2006 179 $33,757.40 340 $7,055.01 519 $40,812.41

Mar 2006 258 $43,109.34 362 $6,346.44 620 $49,455.78

Feb 2006 241 $24,421.94 333 $6,199.41 574 $30,621.35

Jan 2006 251 $46,067.01 368 $8,477.15 619 $54,544.16

Dec 2005 246 $38,393.69 271 $6,222.86 517 $44,616.55

Nov 2005 229 $25,871.14 274 $3,053.26 503 $28,924.39

Oct 2005 223 $32,338.78 280 $4,750.87 503 $37,089.65

Sept 2005 299 $44,468.49 318 $3,786.34 617 $48,254.83

Aug 2005 176 $30,805.67 269 $3,181.60 445 $33,987.27

Jul 2005 215 $31,812.05 250 $4,090.13 465 $35,902.17

Jun 2005 218 $32,341.17 294 $5,508.61 512 $37,849.79

May 2005 194 $31,220.95 248 $3,437.11 442 $34,658.06

1122--MMoonntthh TToottaall 22772299 $$441144,,660077..6633 33660077 $$6622,,110088..7799 66333366 $$447766,,771166..4411

ing their nation.“Japan used to be the low-cost

producers. Japan used to competeon price; now it’s competing oninnovation,” Kuhn says. “Chinasees itself following the same route,except with China, the populationis ten times the population ofJapan. Whereas Japan was bub-bleish, because their domestic mar-ket is so small, China is not becauseit has this enormous depth of mar-ket and it can grow for decades.”

Also, in order to compete in a glob-al market China also wants to have anumber of Chinese companies in everyindustry that can compete on a multi-national stage. Kuhn says, ultimately,this is the country’s long-term objective.

“That’s the economic back-ground investors need to knowbefore they begin to invest in thecountry,” Kuhn advises.

China genuinely wants to makechanges, but they’re still nervous aboutforeign investors, which may be why

private equity firms have been met withsuch skepticism and difficulty when try-ing to do deals in China. Kuhn believesthat the Chinese government is warm-ing to private equity and is beginning tolet good deals go through.

But private equity firms facetwo major challenges in China,Kuhn believes. One is that exitingfrom a company is still extremelytricky - the government onlyallows an exit through an initialpublic offering or through a sale toa third party within China.

“You can’t move money out ofChina, the RMB is not convertible,”Kuhn says. “It’s always easier to putyour money in than it is to get yourmoney out, that’s always the case inany private equity deal, but it’s partic-ularly difficult in China.”

The second major obstacle privateequity firms face is that there is a lotof money chasing very few qualitydeals, Kuhn says.

“There will be a category of dealsthat will be well picked over, which

are the larger deals that are amenableto private equity investors,” Kuhnwarns. “That doesn’t mean that therearen’t any deals - there are quite afew, I’m sure - but investors mighthave to look smaller.”

China is, no doubt, one of themost exciting countries forinvestors in every asset class inevery financial market all over theworld because of the depth of themarket, the potential for growthand the many untapped resourceswithin the country’s borders. But,according to Kuhn, it is also acountry that remains a mystery tomany investors. Before investorsbegin to pour their money intocompanies there, it would benefitthem to truly understand the cultur-al and financial nuances of China.Private equity investors as well.

“Everybody has a China strategy,everyone has to have a China strategy,because everyone is going to be effect-ed by China, directly or indirectly,whether you're aware of it or not.”



JJHH AAnndd BBeerrkksshhiirreeSSiittttiinngg PPrreettttyy oonnAAnnootthheerr RReeccaapp ooff MMDDBBeeaauuttyyBY MARC RAYBIN | According to a report,cosmetics company MD Beauty ispaying out another dividend to its pri-vate equity backers JH Partners andBerkshire Partners to the tune of $300million. The portfolio companyreturned $300 million in two dividendpayouts to JH and Berkshire last year.

BNP Paribas is said to be leadingthe debt financing for the most recentrecapitalization. Berkshire invested$60 million in MD Beauty in 2004 ina recapitalization valued at $234 mil-lion. The firm saw a 2.5 times returnon its investment through this recapi-talization. JH Partners has been aninvestor in MD Beauty since 1990.

The dividend recapitalizationshave already returned more to thefirms than what they invested,according to the report.

MD beauty is headquartered in SanFrancisco and markets cosmetics andskin care products. The company’sbrands include Bare Escentuals, i.d.and bareMinerals and the company’sproducts are sold through home shop-ping networks, infomercials, retailerssuch as Ulta and Sephora, and 19 BareEscentuals stores nationwide.

Berkshire Partners has $3.5 billionin capital under management in sixfunds. The firm is based in Boston.

JH Partners was founded in 1986and is based in San Francisco. Thefirm focuses on the consumer sector.JH is currently making investmentsfrom a $200 million fund.

SSmmuurrffiitt--SSttoonnee SSeellllssCCoonnssuummeerr PPaacckkaaggiinnggDDiivviissiioonn ttoo TTeexxaassPPaacciiffiicc GGrroouuppBY NATALIA RADZIEJEWSKA | Smurfit-StoneContainer Corp. announced the saleof its consumer packaging assets toTexas Pacific Group for approxi-mately $1.04 billion in cash. Thebusinesses to be sold include fourcoated recycled boxboard mills, 39

consumer packaging converting oper-ations and a consumer packagingcovering plant. Collectively, thesebusinesses employ 6,000 people.

As a result of the sale, Smurfit-Stone’s chief operating officerresigned to become Texas PacificGroup’s Chief Executive Officer forits new consumer packaging business.

IInnvveessttccoorrpp ttoo EExxiitt PPEEDDeeaallss TToottaalllliinngg $$11..33BB BY MARC RAYBIN | Investment groupInvestcorp announced it had reachedagreements on two deals exiting pri-vate equity investments.

In one of those transactions, theCarlyle Group announced it has part-nered with French private equity firmWendel Investissement’s subsidiaryOranje-Nassau Groep to acquire StahlHoldings from Investcorp in a dealvalued at €520 million ($667 million).

Investcorp reportedly acquiredStahl for €375 million in 2001.

Stahl is a surface effects specialistcompany based in the Netherlands.The company provides productsand services in both leather chemi-cals and non-leather coatings. Stahloperates nine manufacturing plantsworldwide in addition to 26 labora-tories. Customers can be found in66 different countries. The companyemploys 1,400 people.

Carlyle, ONG and Stahl manage-ment invested approximately €160million in equity toward the deal,with Carlyle and ONG contributingequal amounts.

Carlyle and ONG plan to expandStahl both organically and throughadd-on acquisitions.

Separately, Investcorp has agreedto sell German fire protection servic-es provider Minimax to Nordic pri-vate equity firm Industri Kapital, fora similar, but unspecified, price,according to a report.

Minimax was founded in 1902and currently has nearly 40 locationsaround the world. The company pro-vides a number of fire protectionservices and products, includingsprinklers, gas systems and special

hazard solutions. Minimax employsmore than 3,200 people. The compa-ny generated €443 million in rev-enues in 2005, up €24 million fromthe year prior.

Investcorp acquired Minimaxfrom Barclays Private Equity for anundisclosed sum.

Investcorp has offices in Bahrain,London and New York, with privateequity being one of its specialties. Thefirm was founded in 1982 and cur-rently manages approximately $9.5billion in capital throughout a varietyof alternative assets.

PPEE FFiirrmmss LLiinniinngg UUpp FFoorrCCeennddaanntt AAuuccttiioonn BY MARC RAYBIN | According to reports,Bain Capital, Texas Pacific Groupand Apollo Management have sub-mitted bids to acquire CendantCorp.’s travel business, includingWeb sites Orbitz.com andCheapTickets.com, in an auction thatcould see the operations be sold foras much as $4.5 billion.

Kohlberg Kravis Roberts & Co.was rumored to be interested in Cen-dant’s travel business as well. Howev-er, it was not clear as to whether ornot the firm submitted a formal bid.

According to reports, some of thefirms will likely join forces as the bid-ding process heats up.

Investment banks Citigroup, J.P.Morgan and Evercore Partners arenamed as running the auction.

PPeerrsseeuuss EExxiittss MMTTNNIInnvveessttmmeennttss iinn $$116688MMDDeeaall BY MARC RAYBIN | Perseus has sold Mar-itime Telecommunications Networkto strategic buyer SeaMobile. Finan-cial terms of the deal were not dis-closed, however, an unnamed sourceput the transaction value at $168 mil-lion in cash.

MTN is a maritime communica-tions provider to the cruise lineand offshore oil and gas industries.The company supplies voice, data,

PPrriivvaattee EEqquuiittyy »»Deals



Internet and compressed videoservices to its clients. UnderPerseus’ ownership, MTN expand-ed its core markets into the gov-ernment and energy sectors.

Perseus acquired MTN in April2005 and earned a return ofapproximately 2.25 times its ini-tial cash investment, according tothe source.

Perseus is based in Washington,D.C. and New York. The firm wasfounded in 1995 and has $1.3 billionin capital under management in sixfunds. The firm has recently launchedits seventh fund, according toPerseus’ Web site.

KKPPPP HHoollddss FFiirrsstt CClloossiinnggoonn NNeeww FFuunndd BY MARC RAYBIN | Cleveland-based pri-vate equity firm Key Principal Part-ners announced the first closing of itsKPP Investors III fund on $435 mil-lion. Managers expect to close thefund in the third quarter on a cap of$500 million.

The new fund will be used tomake non-controlling mezzanineand control equity investments inlower middle market companies.The firm focuses on what it calls“sponsorless” investments where-by non-control transactions arecompleted. The firm believes thisoffers high, risk-adjusted, rates ofreturning because KPP can utilizeless leverage than other buyoutfunds in order to close the deal.Taking a non-controlling stake in acompany, the firm believes, alsoallows KPP to invest in companiesthat are not looking to be sold.

A message left for a representa-tive from KPP seeking comment onthe new fund was not immediatelyreturned.

Key Principal Partners focuseson the middle market throughoutNorth America. The firm hasapproximately $2 billion in capitalunder management. KPP is anaffiliate of KeyCorp, a $90 billionfinancial services firm.

RRiivveerrssiiddee PPaarrttnneerrssCClloosseess TThhiirrdd FFuunndd oonn$$222255MM BY MARC RAYBIN | Riverside Partners hasclosed its third private equity fund on$225 million. The firm initially tar-geted $175 million, but it was over-subscribed by $50 million.

The new fund, named RiversideFund III, will focus on healthcare andtechnology companies in the middlemarket primarily in North America.The fund has already made threeinvestments totaling $40 million. Thoseinvestments were in a company thatmanufactures flat panel displays used inhealthcare, an industrial automationand network connectivity devices com-pany and an X-ray company.

Limited partners in Fund IIIinclude the Massachusetts Institute ofTechnology, Abbot Capital Manage-ment and MN Services.

Riverside Partners was foundedin 1989, focusing on the health-care and technology sectors. Thefirm’s portfolio companies typical-ly have revenues between $10 mil-lion and $100 million.

BBllaacckkssttoonnee NNaammeess NNeewwMMaannaaggiinngg DDiirreeccttoorrBY MARC RAYBIN | The Blackstone Groupannounced has hired John Studzinskias a senior managing director. He willstart in the fall, when he will overseethe firm’s advisory business in theUnited States and in Europe.

Studzinski is currently the co-head of HSBC’s investment bank-ing and markets division. He willremain an advisor to HSBC evenafter he starts working for Black-stone, according to a person withknowledge about the hiring.Before working for HSBC,Studzinski had been at MorganStanley for 22 years rising tobecome head of investment bank-ing and deputy chairman.

Reports have Studzinski opening acorporate advisory office in Londonfor Blackstone and hiring bankers inNew York and Europe.

SSttoommbbeerr NNaammeedd CCaarrllyylleeMMaannaaggiinngg DDiirreeccttoorr BY MARC RAYBIN | Private equity giant,The Carlyle Group, announced ithas hired John Stomber as manag-ing director.

Stomber started working in thefirm’s leveraged finance group onMay 1. The division has $5.4 bil-lion in capital under managementin 12 high-yield, mezzanine anddistressed funds in the UnitedStates and Europe.

Before joining Carlyle, Stomberwas a managing director at alterna-tive investment firm Cerberus wherehe focused on structured financetransactions and deals with bankingand securities firms. Prior to workingfor Cerberus in 2004, Stomber was asenior vice president at Merrill Lynch& Co. He also worked for DeutscheBank from 1991 until 1999, where hewas responsible for funding and riskmanagement for capital markets andbanking activities.

LLaauuggeell JJooiinnss AAGGFFPPrriivvaattee EEqquuiittyyBY NATALIA RADZIEJEWSKA | Thierry Laugelhas joined AGF Private Equity as apartner within the company’s venturecapital team. Laugel will specialize inlife sciences investment.

Prior to joining AGF, Laugel wasan investment manager in charge ofhealthcare with CDC Enterprisesand managing director of Phar-maVent Partners.

AGH Private Equity, a subsidiaryof Paris-based AGF Insurance, man-ages an investment portfolio of €1.5billion ($1.9 billion) for institutionaland private investors. The portfolioconsists of funds-of-funds and ven-ture capital investment activities.

NNeeww MMaannaaggiinngg PPaarrttnneerraatt AAppoollllooBY NATALIA RADZIEJEWSKA | James Zelterhas joined Apollo Management asmanaging partner for capital mar-

PPrriivvaattee EEqquuiittyy »»Deals, Funds & People




kets, the company announcedtoday. Currently the firm’s capitalmarket activities include ApolloInvestment Management and thefirm’s other investment funds.Zelter will also serve on variousApollo investment committees.

Zelter comes to Apollo with 20years of investment experience.At Citicorp, Zelter spent 12 yearsserving on the firm’s global fixedincome management committee.Most recently, he had beenresponsible for a portfolio of $5billion in capital.

KKPPCCBB BBrriinnggss iinn NNeewwPPaarrttnneerr BY MARC RAYBIN | Kleiner PerkinsCaufield & Byers announcedthe firm has hired ThomasMonath as a partner. He willbegin working for the firm onJune 26th.

Monath, who is also a med-ical doctor, will work withKPCB’s $200 million PandemicPreparedness and BiodefenseFund. He will work to invest incompanies developing vaccines,antiviral drugs and disease surveil-lance techniques. The fund willwork with a variety of institutionsand businesses, including universi-ties, biotech companies and gov-ernment agencies, to fight world-wide pandemics in the next threeyears. According to a KPCB state-ment announcing the fund, morethan 15 million people die eachyear due to infectious diseases andmore than one-third of world’spopulation lacks access to essentialdrugs.

Monath began his medicalcareer as chief scientific officerwith Acambis in 1992. For thenext 10 years, Monath oversawthe development of vaccines withinthe company’s pipeline of prod-ucts. Prior to joining Acambis,Monath was a colonel in the U.S.Army where he was chief of thevirology division of that branch of

the armed forces’ MedicalResearch Institute of InfectiousDiseases. He was also a director atthe Centers for Disease Control fornearly 20 years.

Kleiner Perkins Caufield & Byerswas founded in 1972 and has mademore than 450 venture investments,including AOL, Google and CompaqComputer.

EEiibbeenn JJooiinnss SSVVIInnvveessttmmeennttssBY NATALIA RADZIEJEWSKA | GustavoEiben, formerly an associate direc-tor of the private equity funds

group at UBSInvestmentBank, has joinedSV Investmentsas Director ofInvestor Rela-tions and Busi-ness Develop-ment.

At SV, Eibencoordinates andexecutes thefirm’s investorrelations and

fund raising efforts. This includescommunicating with existing andprospective SV limited partnersabout the firm’s investment activitiesand strategies. Eiben’s responsibili-ties also include coordinating newdeal sourcing for SV Investments.

New York-based SV Invest-ments specializes in providing pri-vate equity financing for businessservices companies in the U.S. mid-dle market.

EEnneerrggyy VVeetteerraann JJooiinnssNNaattuurraall GGaass PPaarrttnneerrssBY NATALIA RADZIEJEWSKA | Oil and gasprivate equity firm Natural GasPartners has hired Mark Doeringas a venture partner. Doering is along-time veteran of the oil indus-try, having worked 26 years forthe Exxon Co., Netherland,Sewell & Associates, Doering,Burns & Associates, and PMC

Reserve Acquisition Co. in vari-ous capacities.

Based in Connecticut, NewMexico and Texas, Natural GasPartners has managed a portfolioof $3 billion since its inception in1988. The firm invests in naturalgas gathering and processing com-panies, oilfield companies andother energy related businesses.

TTwwoo FFoorrmmeerr BB ooff AAEExxeeccss FFoorrmm PPrriivvaatteeEEqquuiittyy FFiirrmmBY NATALIA RADZIEJEWSKA | Hugh McColland Mark Oken, former execu-tives at Bank of America, haveformed Falfurrias Capital Part-ners. The firm will invest inlower-middle-market companies.

Oken retired as B of A’s chieffinancial officer earlier this year,while McColl served as chief exec-utive officer before his retirementin 2001. Oken and McColl arehalfway to raising a fund expectedto reach between $85 million and$100 million, according to reports.Falfurrias has raised some of itsfunds from institutional investors,but is concentrating on individualinvestors, such as past businessassociates of Oken and McColl.

Oken and McColl plan to investin companies with up to $100 mil-lion in annual revenue. They willconsider all industries but willlikely do some investing in finan-cial services companies. Falfurriasis expected to make investmentsaveraging $10 million, accordingto reports.

HHiigghhllaanndd CCaappiittaallNNaammeess NNeeww PPaarrttnneerr BY MARC RAYBIN | Highland Capital Part-ners announced the firm has hiredPeter Bell as venture partner. Bell willfocus on identifying and leadingtechnology investments for the firm.

Prior to joining Highland Capi-tal, Bell was the founder and man-aging director of Stowe Capital, a

PPrriivvaattee EEqquuiittyy »»People


Prior to joiningAcambis,Monath was acolonel in theArmy where hewas chief of thevirology divisionof the MedicalResearchInstitute ofInfectiousDiseases.



firm that specialized in providingcapital and management expertiseto emerging growth companies.Bell focuses on information securi-ty, e-commerce, data center infra-structure, enterprise software andcommunications industries.

Before starting Stowe Capital,Bell was the co-founder and chair-man of StorageNetworks. TheWaltham, Mass.-based companyprovided information storage soft-ware and services. He served aschief executive officer from itsfounding in 1988 through to 2002.He led the company to an initialpublic offering in 2000.

Bell began his career at EMCCorp. in 1986, where he worked ina variety of capacities, includingmarketing, sales and operations.

Highland Capital Partners wasfounded in 1988 and currently hasa portoflio that includes more than$2.6 billion in capital under man-agement. The firm invests in avariety of sectors, including theinformation technology, communi-cations and healthcare industries.

BBiivveennss JJooiinnss TTrruufffflleeVVeennttuurreess aass IInnvveessttmmeennttMMaannaaggeerr BY NATALIA RADZIEJEWSKA | Mark Bivenshas joined Paris-based Truffle Ven-tures as an investment manager.With general partner BernardRoques, Bivens will work on invest-ments in the IT sector.

Prior to joining Truffle, Bivensworked for Air Liquide Ventures spe-cializing in software investments.This was followed by a short stint atParis-based mezzanine fund IDI AssetManagement.

Truffle Venture invests in the IT,life science and energy sectors. Thefirm has €250 million ($320 million)under management.

IInn--QQ--TTeell PPrroommootteessJJoohhnnssoonn ttoo PPaarrttnneerrBY DANA CZAPNIK | In-Q-Tel, the venturecapital firm run by the U.S. Cen-tral Intelligence Agency, has pro-moted Will Johnson to partner.

Johnson joined the firm in 2005as principal after having worked at

JP Morgan Partners. At JP Mor-gan, Johnson focused on softwareinvestments. Prior to working at JPMorgan, Johnson worked as atechnology consultant for Ander-sen Consulting and for the firmErnst & Young.

As a principal for In-Q-Tel,Johnson has helped source andresearch deals. He led the firm’sinvestment in Nextreme ThermalSolutions, an embedded thermo-electric component company.Johnson also led In-Q-Tel’s dealwith Initiate Systems, a companythat focuses on customer data inte-gration software.

In-Q-Tel recently lost its presi-dent. Amit Yoran resigned in Aprilafter only four months with thefirm.

In-Q-Tel was established in1999 to invest anywhere between$1 million to $3 million in compa-nies that develop innovative infor-mation technologies that serve thenational security interests of theUnited States. All of the firm’sfunding is from money appropriat-ed by Congress.

PPrriivvaattee EEqquuiittyy »»People

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