Dec 21, 2017

Axios Pro Rata

By Dan Primack
Dan Primack
Top of the Morning

Private equity executives are largely pleased with the tax bill, but there are growing grumbles about how the change to interest deductibility isn't grandfathered in for existing loans.

  • This could be a particularly acute problem for highly-leveraged companies that are either unprofitable or barely profitable. In those cases, private equity sponsors may have to choose between pumping in new cash and crossing their fingers.
  • Going forward, expect leverage levels to decrease. Per one buyout big: "We use leverage as a tax shield, which is about to become much less relevant."
  • There is likely to be a decline in dividend recaps, at least in the short-term.
  • To be clear, private equity firms are still cheering these changes (at least from a portfolio perspective).
  • The longer-term hold period to qualify for carried interest is unlikely to prevent firms from selling before three years, in the rare cases when applicable. Just expect the funds to essentially defer the carry.
  • Go deeper: What you'll see under the new tax code.

• Feeling better: Oscar, the VC-backed healthcare insurer co-founded by Joshua Kushner, tells Axios that it is expecting to generate nearly $1 billion in premium revenue for 2018. That's up from "more than $300 million" in 2017 premium revenue. It also says that its insurance underwriting business has become profitable for the first time, although the overall company remains in the red.

  • Why it matters: Oscar continues to grow, despite having originally launched to provide health insurance to individuals under an Affordable Care Act that the Trump Administration has been slowly dismantling.
  • More numbers: The company expects around 250,000 members in the individual markets, including in New York and California where enrollment remains open. That's around 2.5x larger than last year's figure, and doesn't include Oscar's recent expansion into employer plans.

• Bonus season: A number of companies yesterday announced bonuses and other employee goodies, ostensibly tied to the tax bill being signed into law. AT&T and Comcast, for example, said that they'd give $1,000 bonuses to most of their workers.

  • Bottom line: This is both a commendable development and well-coordinated PR, neither of which negates the other. For many employees, it will help pay the bills. For companies like AT&T and Comcast, the extra money represents well less than 2% of 2016 profits, meaning that they could have easily afforded to stuff employee stockings under existing tax law.
  • Fifth-Third Bank said the tax cut would cause it to raise wages for all of its minimum-wage employees to $15 per hour. The bank said there are around 3,000 such employees, but had no comment on why a corporation with $1.5 billion in 2016 profit chooses to pay around 16% of its people so little. For context, $15 per hour works out to an annual income of $31,200, based on 52, 40-hour work weeks.

• Size matters: Sequoia Capital is speaking with investors about raising $5 billion for its third global growth fund, although it has not yet set an official target or begun formal marketing. Recode first broke the news, and attributed the big number to what it calls "the SoftBank effect," although it's actually quite similar to the percentage jump between Sequoia's first and second global growth funds ($750m to $2b).

  • Bottom line: This is primarily about Sequoia recognizing similar trends to SoftBank (i.e., staying private longer, etc.), particularly within its own portfolio, rather than needing extra money to compete. After all, even $5 billion can't compete on a capital basis with $100 billion.

• Hello, old friend: First Round Capital has just posted its annual holiday video, which you can find here.

  • The productions had been getting pretty elaborate in recent years, but this year First Round opted to go back to its roots and donate the budgeted $25k or so to "nonprofits working to improve diversity and inclusion in the tech ecosystem."

Penske Media has agreed to invest more than $50 million for a majority stake in Wenner Media, the publisher of Rolling Stone magazine.

  • Why it's the BFD: Besides nostalgia? Okay, because Rolling Stone is somehow still a leading online source of music reporting and reviews, despite its historic antipathy toward the intertubes.
  • Bottom line: "BandLabs Technologies, the Singapore-based company that bought 49% of Rolling Stone last year, had a right of first refusal for any offer for the rest of the magazine, according to people familiar with the sale process. By structuring the transaction as an investment, this prevents BandLabs from buying the whole magazine." — Peter Kafka, Recode
Venture Capital Deals

• Didi Chuxing has raised $4 billion in new equity funding, with a source saying that participants included Mubadala and existing backer SoftBank. The post-money valuation is around $56 billion, and it means that the Chinese ride-hail giant has now raised more than either Uber or Lyft.

🚑 Tessa Therapeutics, a Singapore-based developer of virus-specific T cell immunotherapies for cancer, has raised $80 million in new funding. Temasek led, and was joined by EDBI, Karst Peak Capital, Heliconia and Heritas.

🚑 FLX Bio, a South San Francisco-based developer of cancer immunotherapies, has raised $60 million in Series C funding. GV was joined by return backers The Column Group, Kleiner Perkins, Topspin Partners and Celgene Corp.

🚑 Aura Biosciences, a Cambridge, Mass.-based biotech aimed at preventing blindness in cancer patients, has raised $30 million in Series C funding. Lundbeckfonden Ventures and Arix Bioscience co-led, and were joined by return backers Advent Life Sciences, Chiesi Ventures, Ysios Capital, Alexandria Venture Investments, Columbus Venture Partners and LI-COR Biosciences.

• Ripcord, a Hayward, Calif.-based robotic digitization startup focused on enabling paperless workplaces, has raised $25 million in Series B funding. GV led, and was joined by Telstra Ventures and return backers Icon Ventures, Kleiner Perkins, Lux Capital, and Silicon Valley Bank.

🚑 Nuritas, a Dublin, Ireland-based data mining biotech startup, has raised $20 million in Series A funding led by Cultivian Sandbox Ventures.

• Happy Returns, a Santa Monica, Calif.-based provider of online retail logistics, has raised $8 million in Series B funding. USVP led, and was joined by return backers Upfront Ventures and Brian Spaly.

🚲Mobike, a China-based dockless bike-sharing company, has raised an undisclosed amount of strategic funding from Japanese messaging app maker Line (Tokyo: 3938). Mobike previously raised around $1 billion.

• PrecisionLender, a Charlotte-based pricing and profitability platform for commercial banks, has raised an undisclosed amount of growth equity funding from Insight Venture Partners and return backer Georgian Partners.

Private Equity Deals

• Apollo Global Management has agreed to acquire a $50 billion portfolio of retirement income annuities from Voya Financial (NYSE: VOYA), in partnership with Crestview Partners and Reverence Capital Partners.

• Audax Private Equity has acquired Liquid Environmental Solutions, an Irving, Texas-based provider of non-hazardous liquid waste management and disposal services, from ABS Capital Partners.

🚑 Dr. Max, a Central and Eastern European pharmacy group owned by Penta Investments, has agreed to acquire Romanian pharmacy chain A&D Pharma Group.

• Equistone Partners has acquired a majority stake in Dugas Co., a Paris-based distributor of high-end spirits.

• Gryphon Investors has acquired a majority stake in Potter Electric Signal, a St. Louis-based provider of products to the fire safety industry, from Two Rivers Associates and Parkway Capital.

• Penta Investments and China's CEFC Group have made a joint bid for Time Warner's (NYSE: TWX) Central European Media Enterprises unit, which could be worth around $2 billion, per Reuters.

⛽ Rock Hill Capital Group has invested in Ace Gathering, a Katy, Texas-based provider of crude oil marketing, gathering, and reclamation services.

Public Offerings

• Spotify has been given indications from the SEC that it will be approved for a direct listing on the New York Stock Exchange, according to the WSJ.

Liquidity Events

⛽ Conduit Capital Partners has agreed to sell its interest in Electricidad del Golfo, a 35-MW hydroelectric power plant in Veracruz, Mexico, to Canada's ATCO (TSX: ATO) for $90 million in cash (including assumption of debt).

• Daimler has agreed to acquire a majority stake in Chauffeur Prive, a French ride-share company that had raised €5 million from XAnge Private Equity, Siparex Group and CM-CIC Capital Prive.

• Littlejohn & Co. and Strategic Value Partners have sold GSE Holding, a Houston-based maker of geosynthetic containment solutions for environmental protection and confinement applications, to Canada's Solmax.

More M&A

🚑 JSR Life Sciences (Tokyo: 4185) has agreed to acquire Taiwan-listed cancer drug discovery company Crown Bioscience International for $400 million.

⛽ Mineral Resources (ASX: MIN) has agreed to acquire Australian gas producer AWE Ltd. (ASX: AWE) for around A$526 million.

🍕 Nomad Foods (NYSE: NOM) is in talks to acquire British pizza parlor chain Goodfella's for around £200 million.

• Ryanair (ISE: RYA), the Irish budget airline, said that it has decided not to bid for the assets of bankrupt Australian carrier Niki.


• Ares Management has closed its first junior direct lending fund with $3.4 billion.

• Brick & Mortar Ventures of San Francisco is raising up to $100 million for its latest fund, per an SEC filing.

🚑 Flagship Pioneering has closed its sixth healthcare-focused VC fund with $618 million in capital commitments.

• Fly Ventures, a Berlin-based seed firm, has closed its debut fund with $41 million.

🚑 Hadean Ventures, an Oslo-based biotech VC firm, has closed its debut fund with €100 million.

• Industry Ventures is raising up to $250 million for its fifth fund-of-funds, per an SEC filing.

It's Personnel

• Lily Tapia has joined Miami-based private equity firm Trivest Partners as a director. She previously was chief development officer at the Laser Spine Institute and, before that, was a wealth manager at Merrill Lynch.

Final Numbers

President Trump likes to talk about the stock market's strong performance since took office, including how the S&P 500 keeps hitting record highs. But, in terms of percentage growth, the index's performance under Trump actually lags its performance through the first 11 months of President Obama and the first President Bush.

  • Obama also oversaw stronger percentage performance for the Dow Jones Industrial Average and NASDAQ over his first 11 months in office than has Trump, although the two inherited much different sorts of economies (Obama's was weaker, Trump's was stronger).
Dan Primack