Term Sheet — Thursday, July 26

NO DEAL: Well, here we go. American chipmaker Qualcomm terminated its $44 billion deal to buy NXP Semiconductor after China failed to grant it regulatory approval. NXP will collect a $2 billion break-up fee from Qualcomm, while Qualcomm said it would buy back up to $30 billion of its stock.

Eight jurisdictions, including the United States, had already given the thumbs up on the Qualcomm’s purchase of the Dutch chipmaker — except China. In a time of escalating trade tensions between the U.S. and China, the country dragged its feet on the process for more than 20 months. Read more.

BUBBLE TALK: On Tuesday, I wrote about an article titled, “Everything About Private Equity Reeks of Bubble. Party On,” which lays out concerns about record fundraising levels, rising buyout valuations, and increasing competition for deals. I posed the following questions to Term Sheet readers: Does this perspective support what you’re seeing in the market? If so, is this concerning? And of course, the age-old question: where in the cycle are we?

Here is a selection of thoughtful responses we received:

It feels bubbly:

Gustavo: Fully agree with the comments in your article. Very high multiples (many based on “revenue” and not EBITDA), projections based on “pro-forma” numbers including “future acquisitions”, etc… There is clear trend in the market to transact at very high multiples. But I also think that not all businesses are getting what they want. I have seen some businesses not being sold and holding the sale process for more than a year.

Brian: Here's my take: When we’re lazy and just go where the market takes us — widely-auctioned, banker-led processes in parts of our ‘business services’ universe that are the flavor du jour with well capitalized strategic buyers or financial buyers sitting on dry powder that they need to put to work – we’re seeing decent (and less-than-decent) assets trade for astronomical multiples (double digit TTM EV/EBITDA). When we do our job and build relationships with owners of businesses in the extremely “nichy” B2B segments that we know best, we are rewarded with the opportunity to buy and partner with fundamentally-sound companies that play in growing “niches” at fair prices. For us, the price we pay is a function of time invested in doing the work, “sticking to our knitting,” and going extremely deep.

Owen: I’ve yet to hear a single compelling argument from a PE manager in terms of ‘18 being a good vintage year. The lazy point to be made is that it’s cheaper than public equities, but maybe not after 2 & 20 on committed?

Yet they are all still raising capital, the next vintage bigger than the last, as early as possible (~75% of prior fund committed, not even funded). They are clamoring to lock in fees on committed before the music stops.

One thing to keep an eye on is funding early investments with credit facilities. Firms are abusing this to juice IRRs, which can lead to frustrated LPs at the lack of capital calls. They understand how critical it is to be top quartile with consultants once they are in market for their next vintage. The first handful of buyouts MUST perform well, which is convenient during periods of multiple expansion, but remember that leverage cuts both ways.

Tim: I believe the bubble is being created by conflicting interests between the GPs and the LPs.  The LPs are in an asset allocation exercise hoping for attractive returns and GPs are solely focused on their own returns (with many of the GPs not being heavily invested in their own funds). The GPs obviously have an incentive to deploy capital as quickly as possible within their 5 year investment period, which leads to very competitive sale/acquisition processes.  Unfortunately, this has created an environment where GPs can no longer dictate their entry points and everyone is paying too much for all companies (thus driving down IRRs).

With IRR profiles descending rapidly into the low-to-mid teens (versus a preferred return typically of ~8%), the value of the carried interest is evaporating quickly. To make up for the greatly diminished wealth creation opportunity of the carried interest, GPs are raising larger funds to increase their management fee, which is cash in their pockets with little risk. Clearly, the larger fund size benefits the GP much more than it helps the LP... and I think it is hard to see this cycle continue indefinitely...

Entrepreneurs are cutting great deals though:

Philip: The talk of too much dry powder and high valuations obscures a bigger fact about the private capital marketplace: it’s more efficient than it’s ever been. In some respects, that’s bad for firms buying certain companies right now, but it’s also great for sellers, entrepreneurs, business owners and innovators. PE will be subject to cycles just like any financial market, due to leverage. However it shouldn’t obfuscate the many benefits that a highly efficient private capital market provides.

Chris: I’m raising money for a boutique real estate acquisitions and development business (cell towers). I’ve been at it for about 6 weeks, and I expect to see 2 or more term sheets for 9 figures within 2 weeks. The last time I was raising money in 2012 for the same business, it took 2 years. From my point of view, there is an ocean of available investment capital, and it is enabling operators to cut great deals for themselves — so the bubble may affect exit returns in 5-7 years.

Zach: I get approached weekly by (typically) young, somewhat recent college graduates (often Ivy league) who do the leg work for connecting PE firms with businesses. They run point on selling the firm. If we do decide to get into deeper conversation, they will bring in the more senior leadership at firm to discuss in more depth. But for me, I saw how out-of-touch some of these associates are when one offered me deal to buy our company at a dinner table in Vegas. The multiple he was proposing didn’t seem reasonable (too high, but I wasn’t complaining) and he was certainly not the sole decision maker (I knew the higher-ups on East Coast would have to agree to it). But his earnestness to close a deal was what struck me. He knew we were in multiple conversations, so he was willing to potentially overpay to get a deal. Seems like this environment may be teaching some lessons that these (potential) future leaders will need to unlearn before they take the reins.

Keep an eye on the Fed:

Peter: While the average debt multiple is slightly lower than the 2007 peak, the percent of deals done at 6x or higher is pretty much right in line. We're late in the cycle, but because of regulatory guidance around debt-to-ebitda multiples, it's showing up more as "measured excess" than the outright excess of 2007. Still, with the Fed raising rates and unwinding its much-less-risky bond portfolio, we're getting closer and closer to midnight — where the music stops for high yield asset classes.

Frank: As long as lots of people are worrying, warning and talking about a bubble, we are not in one yet! 1) We are in the 9th year of the recovery (2nd longest ever). However, the first 7 years were in the extremely slow growth (+1.75%) Obama Stagnation Economy, so my guess is we are in the 7th inning. 2) The 2008 Financial Crisis was caused by over-leverage in the housing market, not the LBO business, which was just collateral damage. 3) Watch what the Fed does, 3-4 more interest hikes, are going to create real trouble in the emerging markets (Turkey, Argentina , Italy) and I believe that is where the next “crisis” will occur — not in domestic buyout markets. 4) Second level of concern is the slow, but steady rollback in the various capital and regulatory controls on the Big Banks. It is these institutions and their reckless disregard for truly safe capital ratios that will exacerbate the next crisis.

THE LATEST FROM FORTUNE...

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• Mattel Cuts 22% of Corporate Jobs as Sales Plunge Post Toys 'R' Us Bankruptcy (by Phil Wahba)

VENTURE DEALS

• The RealReal, a San Francisco-based provider of authenticated luxury consignment solutions, raised $115 million in Series G funding. PWP Growth Equity led the round, and was joined by investors including Sandbridge Capital and Great Hill Partners.

• ClassPass, a New York-based fitness network membership, raised $85 million in Series D funding. Temasek led the round, and was joined by investors including L Catterton.

• ODX, a blockchain-based data marketplace, raised $60 million in funding. Investors include Pantera Capital, BlockTower Capital, DNA Fund, Kenetic Capital, Wavemaker Genesis and Strong Ventures.

• Equidate, a San Francisco-based stock market for private tech companies, raised $50 million in Series B funding. Investors include Financial Technology Partners, Panorama Point Partners and Operative Capital.

• FinAccel, a financial tech company, raised $30 million in Series B funding. Square Peg Capital led the round, and was joined by investors including MDI Ventures, Atami Capital, Jungle Ventures, Openspace Ventures, GMO Venture Partners, Alpha JWC Ventures and 500 Startups.

• Tally, a San Francisco-based automated debt management company, raised $25 million in Series B funding. Kleiner Perkins led the round, and was joined by investors including Shasta Ventures, Cowboy Ventures, and Sway Ventures.

• Scandit, a Switzerland-based developer of barcode scanning software solutions, raised $30 million in Series B funding. GV and NGP Capital co-led the round.

• Patientco, an Atlanta-based patient billing and payments technology company, raised $28 million in Series B funding. Accel-KKR led the round, and was joined by investors including BlueCross BlueShield Venture Partners/Sandbox Advantage Fund.

• RFPIO, a Beaverton, Ore.-based provider of RFP response software, raised $25 million in funding. The investor was K1 Investment Management.

• LeoLabs, Inc., a Menlo Park, Calif.-based commercial provider of low Earth orbit mapping and Space Situational Awareness services, raised $13 million in Series A funding. Investors include WERU Investment, Airbus Ventures, Space Angels and Horizons Ventures.

• OpenInvest, a digital investment advisor for socially responsible investing, raised $10.4 million in Series A funding. QED Investors led the round, and was joined by investors including Andreessen Horowitz, SYSTEMIQ, Wireframe Ventures, Yard Ventures and Abstract Ventures.

• snap40, a U.K.-based AI-enabled healthcare company, raised $8 million in seed funding. ADV led the round, and was joined by investors including MMC Ventures.

• HealthCrowd, a San Mateo, Calif.-based healthcare communications platform-as-a-service, raised $7.2 million in funding. TVC Capital led the round, and was joined by investors including Startup Capital Ventures and Healthy Ventures.

• ColdQuanta Inc, a Boulder, Colo.-based lab equipment supplier, raised $6.75 million in seed funding. Maverick Ventures led the round, and was joined by investors including Global Frontier Investments.

• Outlier, an Oakland, Calif.-based provider of automated business analysis, raised $6.2 million in Series A funding. Ridge Ventures led the round, and was joined by investors including 11.2 Capital, First Round Capital, Homebrew, Susa Ventures and SV Angel.

• Evo, a London-based surgical and high-precision engineering company that provides bespoke full jaw dental implant solutions, raised £4 million ($5.2 million) in funding from BGF.

• By Miles, a U.K.-based provider of real time pay-as-you-go car insurance by the mile, raised 1 million pounds ($1.3 million) in funding. JamJar Investments led the round.

• Sokowatch, a B2B e-commerce company raised $2 million in seed funding. 4DX Ventures led the round, and was joined by investors including Village Global, Lynett Capital, Golden Palm Investments, and Outlierz Ventures.

PRIVATE EQUITY DEALS

• Claritas Capital invested $4.3 million in TwelveStone Health Partners, a Murfreesboro, Tenn.-based provider of chronic care medication services.

• Outward Hound, a portfolio company of J.W. Childs Associates LP, acquired Wholesome Pride, a Chesterfield, Mo.-based maker of pet treats. Financial terms weren't disclosed.

• DME Express, which is backed by WayPoint Capital Partners, acquired Advanced Therapeutics, a Maryland-based provider of medical equipment to hospice providers. Financial terms weren't disclosed.

• Blackstone and Carlyle Group made a joint takeover approach for Arconic (NYSE: ARNC), according to The Wall Street Journal. Apollo Global Management, KKR, and Onex Corp have also expressed interest. Read more.

IPOs

• Pinduoduo, the Shanghai-based e-commerce firm, had reportedly raised $1.63 billion in an offering of shares priced at $19. Previously the firm planed to offer 85.6 million shares priced between $16 to $19. It posted revenue of $278.1 million in 2017. Tencent (18.5% pre-offering) and Sequoia (7.4%) back the firm. Credit Suisse, Goldman Sachs, and CICC are underwriters. It plans to list on the Nasdaq as “PDD.” Read more.

• Focus Financial Partners, a New York-based wealth management firm, raised $535 million in an offering of 16.2 million shares priced at $33, below its $35 to $39 range. The firm posted revenue of $662.9 million in 2017. Goldman Sachs, BofA Merrill Lynch, and KKR are underwriters in the deal. The firm plans to list on the Nasdaq as “FOCS.” Read more.

• Ascletis Pharma, a Chinese biotech, raised $400 million in an Hong Kong IPO, Reuters reports citing sources. Read more.

• Berry Petroleum Corp., a Bakersfield, Calif.-based onshore oil firm, raised $183 million in an offering of 13 million shares priced at $14, a downsized IPO  below its $15 to $17 range. The firm posted revenue of $319.7 million in 2017. Goldman Sachs, Wells Fargo, and BMO Capital are underwriters. The firm plans to list on the NASDAQ as “BRY.” Read more.

• Liquidia Technologies, a Morrisville, N.C.-based maker of pulmonary arterial hypertension therapies, raised $50 million in an IPO of 4.55 million shares priced at $11, the midpoint of its range. The firm posted revenue of $7.3 million in 2017. Jefferies and Cowen are bookrunners. It plans to list on the Nasdaq as “LQDA.” Read more.

• Cango, an Shanghai-based online car marketplace, now says it plans to raise $44 million in an offering of 4 million ADSs priced between $10 to $12. That’s dow from $138 million in an offering of 12.5 million ADSs priced between $10 to $12. The firm posted $167.8 million in revenue in 2017. Warburg Pincus (18.2% pre-offering), Didi Chuxing (14.8%), and Tencent back the firm (10.7%). Morgan Stanley, BofA Merrill Lynch, and Goldman Sachs are bookrunners. It plans to list on the NYSE as “CANG.” Read more.

EXITS

• Grubhub agreed to acquire LevelUp, a Boston-based online and mobile food ordering company, for $390 million cash. LevelUp had raised approximately $108 million in total funding from investors including Highland Capital, GV, Balderton Capital, Deutsche Telecom Strategic Investments, Continental Advisors, Transmedia Capital and U.S. Boston Capital.

• Novelis Inc agreed to buy Aleris Corp, an Atlanta-based provider of aluminum rolled products, in a deal valued at $2.6 billion, including debt.

PEOPLE

• Eric Roth joined MidOcean Partners as a managing director. Previously, he was at Lazard.

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Polina Marinova produces Term Sheet, and Lucinda Shen compiles the IPO news. Send deal announcements to Polina here and IPO news to Lucinda here.