BusinessTN

VENTURE CAPITAL/PRIVATE EQUITY

It's no secret that the economy took a turn for the worse in 2008. And with banks still hesitant to lend money, there's been a fundamental shift in the private equity world.

"Because debt isn't available, that furthest end of the funding continuum has gone away," says Sid Chambless, executive director of the Nashville Capital Network, the five-year-old nonprofit organization that helps young companies raise investment capital through its network of angel investors and its $5.2 million sidecar fund. "This means the private equity firms are having to support their companies longer, which results in the venture firms having to support their companies longer, as well."

As a result, VCs are making fewer earlier-stage investments, a trend that is increasing the number of companies seeking capital from angel investors. And because money isn't readily available, angels, as well as early-stage venture firms that are still active, have some pricing power when negotiating with companies. In addition, many investors point out that as talented people continue to lose jobs in this troubled economy, there are more "accidental entrepreneurs" out there coming up with new ideas and launching startups. That, too, spells opportunity for angels and early-stage firms.

Unfortunately, though, industry insiders once again express concern that there are not enough people doing early-stage venture investing in Tennessee--a fact that is even more problematic in this environment in which early-stage opportunities are plentiful. On the private equity side, however, there is a bit of good news, as one of last year's capital markets-related highlights is indeed likely to bode well for Nashville and the state. By all accounts, Cressey & Co.'s Nashville office, partner Bill Frist included, is hard at work. Ralph Davis, also a partner at Cressey, says the firm, whose style is to exclusively buy/build traditional private equity in partnership with management in the health care services and facilities sectors, has closed on a significant portion of the $500 million Cressey & Co. Fund IV and is ready to invest capital.

"We have a physical presence in Nashville because we believe that being an active, visible and physical part of this health care community will help us achieve our goal of investing in the best middle market health care businesses," Davis says. "And Bill and I hope that it will be a value-add to what Nashville offers to health care entrepreneurs who are looking for a place to apply their career."

Finally, when it comes to fundraising in 2008/2009, all is not lost. Council Ventures was the big winner, closing on an $80 million fund in 2008. (Council also hired Grant Jackson, a former partner at North Carolina-based Aurora Funds, who has vast experience in health care services and health care IT.) And a few firms are in the process of raising money or have plans to raise money in 2009. Others, such as the Southern Appalachian Fund and Richland Ventures, are winding down and don't appear to be raising further capital.

Here's a look at some of the late 2008/early 2009 Tennessee firm highlights:

Claritas Capital

Claritas hired R. Burton Harvey, formerly of Morgan Keegan, and Harbert Mulherin, founder of Live Oak Capital in Dallas, to raise a mezzanine fund. At press time, Claritas managing partner Don McLemore Jr. said the firm hadnÕt officially started raising money, though they had informally talked to interested investors. "If you look to history, when the banks pull back, that's when you need to have a mezzanine fund, and when they lend too easily, you need to pull back," McLemore says. The firm, which has funded 27 venture capital investments since 2002, recently invested in two Nashville companies--Dobie Media, which provides mobile messaging and marketing for events, and FiledBy, which, led by former Ingram International CEO Peter Clifton, provides digital marketing services for published authors.

Clayton Associates

After making four new investments in the first half of 2008, Clayton Associates spent the latter part of the year, as well as early 2009, making follow-on investments in successful portfolio companies. Matt King, managing partner at Clayton Associates, says the Nashville firm, like many in the private equity business, is "maintaining reserves to do follow-on investments for companies that are doing well but won't get alternative financing from equity right now." Last year's new investments include edo Interactive and StudioNow in Nashville, Continuum in Jackson, Miss., and Southern Land Co.'s McEwen real estate project in Cool Springs. Still in the midst of their fourth fund, FCA Venture Partners IV, Clayton Associates will likely be looking to raise money in 18 to 24 months.

Gen Cap America

Though he reads nothing but "doom and gloom" in Buyouts magazine, Private Equity Analyst and Venture Capital Journal, Don Napier, Gen Cap's executive vice president, says Gen Cap's portfolio is doing just fine. In fact, he says tough economic times typically mean good times for the management-led buyout firm. Whether it's in the form of a larger company that wants to sell a division or a 70-year-old business owner who wants to sell before "the end of the world gets here," Napier says opportunities abound. "Our market historically doesn't get hammered like some other things," he says. Napier reports that Gen Cap's Southvest V fund, now in its fourth year, is about 75% invested. The group closed four new investments in 2008.

Meritus Ventures

In February, Meritus Ventures invested in its first Arkansas company--a fire protection sprinkler company called Arkansas Automatic Sprinklers. Meritus' Grady Vanderhoofven says the $36.4 million venture capital fund, formed to make equity investments in expansion stage companies in central and southern Appalachia, is looking to complete one or two more deals in 2009. But, he says, "if a company is not a revenue-generating company right now, we won't look at it." Meanwhile, Vanderhoofven, who also administers the Southern Appalachian Fund, says that fund, which was geared toward early-stage companies, is fully invested and not seeking new investment opportunities.

MB Venture Partners

Though Gary Stevenson, co-founder of Memphis-based MB Venture Partners, confirmed that his firm is in the process of raising its third fund, he declined to comment further. His company spent much of 2008 focused on seven existing portfolio companies that needed to raise money, all of which succeeded (four at higher valuations and three at flat valuations). They also added three new companies to the portfolio: CaloSyn Pharma, Zyga Technology and Visioneering Technologies. "Our pace of adding new companies started to slow in 2008, and it will slow even more in 2009," Stevenson says. "We're going to be selective, but we are looking for attractive opportunities."

Nashville Capital Network

Nashville Capital Network reported seven investments worth more than $4 million in 2008. Sid Chambless, NCN's executive director, says NCN's angel investors contributed $3 million. Of the seven, five benefited from the NCN Angel Fund I, a $5.2 million sidecar fund focused on early-stage companies in the Midstate area. NCN has invested a little over $1 million from the fund in those five companies--Pathfinder Therapeutics, The Restaurant List Co., BreatheAmerica, edo Interactive and Continuum. In 2009, individual NCN angels, as well as the NCN Angel Fund, invested in Silvercare Solutions, which provides on-site medical services aimed at continence care. "One of the reasons we raised our sidecar fund was that it would encourage angels to be more active in the group and refer more opportunities," Chambless says. "That thesis has been proven true. Our angels are active at looking at referring opportunities to the network for investment consideration."

River Associates

Mark Jones, a partner at River Associates, says his firm closed two platform company acquisitions "just as the credit window was shutting tight in the deal world." The Chattanooga-based private equity firm brought Atlanta-based specialty apparel supplier Boxercraft into the fold in late September and acquired Cash Management Solutions, a St. Louis-based provider of accounts receivable management services, in early October. "The lower middle market that we're in had not been all that affected by the credit crunch, but the fall of Lehman Brothers in September really changed a lot of things so that credit became much tighter and more expensive. We were fortunate to get both of those transactions completed and very happy that lenders stood by what they said they were going to do." In January, the firm also completed an add-on acquisition to an existing portfolio company, New Jersey-based Coining. Jones says River plans to begin raising its sixth fund in mid- to late-2009, adding that, though it sounds counterintuitive, "history will tell you that some of the higher returning funds were raised in times of economic uncertainty."

SSM Partners

Memphis-based SSM Partners invested in Austin-based All Web Leads, a Web marketing firm that generates leads for insurance and financial professionals. That was their second 2008 investment, (The first was RemitDATA in Memphis.) The private equity firm also sold two businesses, Franklin's Passport Health Communications and Dental One in Dallas. Though SSM's Wilson Orr says the firm doesn't have any investments to report so far in 2009, they are actively looking. "We're trying to find young companies needing growth equity capital that are at or close to being profitable," he says. "Our capital should allow them to accelerate a growth plan that they've already demonstrated."

Solidus

In 2008, Solidus, which invests in the company that publishes BusinessTN, closed three new deals--Restaurant Rewards (formerly known as the Restaurant List Co.), onFocus Healthcare and Tricycle Inc. The early-stage investment firm also provided additional financial support to the Documentary Channel, change:healthcare and MedFusion. Solidus plans to close at least two new deals in 2009 while simultaneously working to get existing portfolio companies cash-flow positive. And like many in the investment community, Solidus' Townes Duncan remains positive. He conjures up a specific image to describe what lies ahead. "Did you ever watch films in junior high science class that showed blades of grass poking up through the ground of a burned out forest?" he asks. That, he says, rather than "some never-ending descent into the economic nether regions," is what's in store.

Tenth Street Capital

In 2008, Tenth Street Capital made eight loans to private companies around the country, including European Soaps in Washington, Calling All Ships in Florida, Thomas Pipe in Arizona and Pioneer Supply in Oklahoma. The average loan, typically granted as acquisition capital, was $3 million. "As a subordinated lender, this is a decent market for us because banks aren't lending as much as they used to, which creates more of a need for our debt," says Casey Hammontree, principal at Tenth Street Capital. The firm's second fund is about 75% invested. In 2009, they plan to be selective in making new investments and work closely with existing investments to help them weather the storm.

INVESTMENT BANKING

With the IPO market on the ropes since the summer of 2008, investment banking firms have been trying to do as much private transaction work as possible.

"So, that would be M&As and private placements," says Jeff Nahley, former Avondale Partners senior partner and head of investment banking who recently signed on with Baltimore-based Signal Hill Capital Group to open a Nashville office. "Deals are still getting done, but they are harder to do, and valuations have come down."

What's more, some industries are faring better than others. Segments of the health care industry, for example, are proving reasonably resilient. And, says Burk Lindsey, a managing director in the health care investment banking group at Raymond James, there's also work to be done for those in the consulting and restructuring advisory businesses.

"Any kind of non-cyclical industrial sector is good, but anything that is more cyclical and consumer-oriented--whether it's real estate, restaurants or manufacturing--is under a lot of pressure, so you're not seeing a significant amount of corporate finance or M&A activity in those sectors.Ó"

Though Tennessee firms, most of which remain focused on the middle market, had a reasonable number of deals to report in late 2008/early 2009, they also endured quite a bit of talent migration. Tom Decosimo left Four Bridges Capital Advisors, which broke ties with the Decosimo CPA firm in mid-2008. Decosimo, who still works with his family's accounting firm, is launching the firm's own broker/dealer, Decosimo Corporate Finance.

Meanwhile, in March, Four Bridges announced the addition of high-profile partner Charlie Brock. (Brock's family founded the Brock Candy Co.) Brock, who helped start mall advertising company Foxmark Media, will focus on general investment banking, strategic advisory and principal investing activities for the firm.

Duncan Dashiff, formerly the managing director and co-head of the health care corporate and investment banking group at SunTrust Robinson Humphrey, departed to lead the new Nashville office of investment banking group Shattuck Hammond Partners, a division of Morgan Keegan. A slew of others from SunTrust Robinson Humphrey, including David Meagher, Chris Rogers, Chris Dorn, Patrick Walsh and Jack Jeong, soon followed. Since launching the Nashville office in September, Dashiff and company closed a sell-side transaction for CashRetriever Systems, which was purchased by Revenue Cycle Solutions. Dashiff says Shattuck's Nashville office, which
focuses on health care services and medical devices, also has a dozen transactions in process.

In October, Trey Crabb left Avondale Partners, where he served as a managing director and co-head of the firm, to head up a new Nashville office for health care advisory firm Stroudwater Associates. Several months later, Nahley made his move to Signal Hill, which works with small- and mid-cap companies. Nahley, who completed about 50 transactions and assignments exceeding $5 billion in value while with Avondale, says he plans to have a Nashville office of Signal Hill up and running by the end of the year.

The investment banking community also said goodbye to 75-year-old Joe Rodgers of Rodgers Capital Group, who passed away in February. Rodgers Capital's Mark Gill says the firm has not been offering corporate financing services for about 18 months.

And we have it on good authority that SunTrust Robinson Humphrey relocated what was left of its investment banking practice (after Dashiff and others left) to Atlanta. The firm, however, did not return calls seeking confirmation.

On the opposite end of the spectrum, at least two Tennessee firms made headlines for company-wide expansion announcements--Wunderlich Securities and Duncan Williams, the latter which launched a 10-year expansion plan that includes an equity capital markets group that started doing business in May.

Avondale Partners

Following Nahley's departure, Mike Ryan, who joined Avondale last year from JP Morgan in New York as head of the firm's equity new issue group, and Karsten Lampka, who joined Avondale in 2003 and was co-head of mergers and acquisitions and private placements, were tapped to co-head the investment banking group. The firm also announced plans to increase its focus on the health care industry, naming Brian Williams, previously of Credit Suisse, as a health care services senior analyst. "We're also realigning some of our folks on the investment banking side to spend more time working in the health care space, as opposed to trying to bank some of the other industries we cover with our research product," says senior managing partner Pat Shepherd. "We have a practice in the manufactured housing and RV industry, and it doesn't make sense, given the current environment, to devote a lot of investment banking resources to a space like that."

Brentwood Capital Advisors

With seven completed transactions, 2008 matched Brentwood Capital Advisors' best year in business, says senior partner Tom Wylly. The firm served as financial advisor in one of the largest 2008 Nashville area transactions--the $232 million private equity growth investment in Franklin-based Passport Health Communications, which closed in July. Other transactions include representing Nashville-based Can-Do Tape in its sale to River Capital and advising Hendersonville-based Smith Travel Research in the acquisition of HotelBenchmark, a division of Deloitte, and The Bench. And though Wylly says 2009 probably won't be a record year, with five active engagements at press time, they're on track for another good one. "We have continued to be busy because of our focus on health care--we focus on health car services and health care information technology," he says. "And unlike some others, we have a laser-like focus on working with private companies, and we're benefiting from that."

Four Bridges Capital Advisors

When Four Bridges Capital Advisors managing directors Andy Stockett and Dewey Hammond attended the recent Association for Corporate Growth meeting in Atlanta, they were pleased to receive at their booth a steady number of private equity firm representatives. "They were looking to talk to us to see what kind of deals we were working on or what kind of deals we saw down the road," Stockett says. "That is just anecdotal evidence that the money is out there. It is true that they are very selective in terms of what kind of companies they are looking for, but if you have a good quality company with management and visible growth prospects, there's still a market out there for those." As for 2008 highlights, the Chattanooga firm advised Missouri Dry Dock and Repair, Missouri Barge Line and Cape Girardeau Fleeting in a sale to American Electric Power. At press time, the firm was working with two other companies on sell-side advisories and three companies--an alternative energy company, a construction company and a consumer goods company--on the acquisition advisory side. They were also working on an equity raise for a medical device company expected to hit the market in March.

Morgan Joseph

Gordon Pollock says New York-based Morgan Joseph, which has 14 of its 80 investment bankers in Nashville, has been working on public and private debt restructuring, including retirement of debt and exchange offers. They've also been spending a lot of time on strategic buy-side opportunities. Pollock, who co-heads the Nashville office and runs the business services group, says the firm, which put together a restructuring group in the fall of last year, closed 10 transactions nationwide in the fourth quarter of 2008. "They were pretty evenly mixed between buyer representation and seller representation, which would be a much different mix than a year ago and certainly 18 months ago," he says. For example, the firm advised Memphis-based Thomas & Betts in the $45 million sale of its PVC pipe extrusion assets to Mitsubishi operations.

Raymond James

In May 2008, the Nashville-based health care investment banking group acted as financial advisor to Brentwood-based Ambulatory Services of America on a $75 million equity raise funded by New York-based private equity firm, Lindsay Goldberg. The group also advised Brentwood-based Renal Advantage on the November purchase of competitor National Renal Alliance. At press time, the group was working on three transactions, but Raymond James' Lindsey says the type of transactions are a bit different. "You're going to see more divestitures by big companies that are going to be selling off divisions to try to raise capital," he says. "More of the activity is going to be private M&A activity; you're not going to see a lot of public equity work. And you are certainly going to continue to see a lot of restructuring and reorganization work."

Wunderlich Securities

Jim Harwood, head of investment banking at Wunderlich, says the latter half of 2008 and early 2009 have been frustratingly quiet. "Nothing is going to happen until this market finds a bottom for valuations to get reset," he says. But in addition to helping a group of local investors buy the Racquet Club of Memphis, the firm completed a private investment of a public equity for an Oregon bank in January. On the expansion front, Wunderlich has been busy. The firm recently announced an agreement to acquire a brokerage and investment banking firm based in Richmond, Va., which will bring more than 130 investment service professionals into the fold. They also launched an equity capital markets group and opened a new retail brokerage office in Birmingham, Mich.