Firms in Cambridge’s U.S. Private Equity Index called $7.4 billion in capital during the second quarter of 2009, up $1.1 billion from the first quarter of the year. However, distributions held relatively steady during the second quarter at $2.5 billion, said Cambridge, an independent research and investment firm. Newer funds, namely ones of vintage years 2004 to 2008, accounted for more than 90% of the capital called.

Cambridge’s private equity index is based on returns data compiled for institutional quality funds that represent nearly two-thirds of the capital raised for private equity funds between 1986 and 2009.

New investments have required more equity than those made in recent years due largely to tight credit markets, according to a press release issued by Cambridge. Higher equity contributions, combined with a shortage of near-term exits, has led capital calls to outpace distributions, Cambridge said.

Firms in Cambridge’s U.S. Venture Capital Index called about $2.7 billion in capital during the second quarter and returned about $950 million, roughly in line with the previous quarter’s results.

The firm’s findings raise the question of whether signs of life in the deal market will put increased pressure on limited partners that are overallocated to the asset class. Secondary firms have pointed to the slow pace of capital calls as one reason that institutional investors haven’t felt greater pressure to swallow the discounts sought by typical secondary buyers.

However, the large amounts of capital raised by secondary firms could mitigate that pressure. During the first nine months of 2009 alone, firms raised roughly $14 billion for secondary funds, according to Private Equity Analyst.

Overall performance by firms in Cambridge’s private equity index increased during the second quarter by 4.3%, the best return that the index has produced since the end of 2007, according to the release. Write-ups in industries hardest hit by the recession, namely retail, financial services and energy, drove much of the gain, according to the release.

The three largest industries by size in the index, consumer, energy, and health care, together represented more than half of the benchmark’s value. Each of the three sectors rose between 3.4% and 4.4%, with health care performing best, the release stated.

That said, private equity index returns still lag behind major public market indices, including the S&P 500, the Dow Jones Industrial Average and the Russell 2000 Composite Index. All three posted double-digit increases during the second quarter.

The private equity index also remains down for the trailing 12 months ending June 30 with a negative 20.6% return, according to the Cambridge data.

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If Kraft Foods Inc. is successful in its hostile bid for Cadbury PLC – or if another buyer emerges – the combined company might well put some assets on the block. If it did, it wouldn’t find itself wanting for private equity interest.

Private equity firms are well acquainted with Cadbury’s stable of products, which includes Trident gum and Dairy Milk chocolate. Even before Kraft first floated an offer for Cadbury in September, private equity firms had looked at Cadbury. An official at a large, New York-based buyout firm said the firm’s principals have known executives at both Kraft and Cadbury for years, and have looked at Cadbury’s books.

Cadbury as a whole is valued at GBP9.8 billion by Kraft’s bid, which is too rich for the private equity industry to pull off at the moment, given the still limping debt markets. But PE firms would be interested in any slivers of the businesses that might come up for sale, the executive said.

Buyout firms like the food sector, thanks to its steady cash flow and recession-proof demand for its products. Many firms already own companies that assets of Kraft or Cadbury could be folded into.

Blackstone Group, for instance, controls Pinnacle Foods Group, which makes things like Duncan Hines cake mixes, Hungry Man frozen dinners, and Vlasic pickles, comparable to assets in Kraft’s portfolio. Blackstone itself is already familiar with Cadbury, having bought beverage company Orangina SAS from Cadbury in 2006 in partnership with Lion Capital.

A few of the other firms currently active in this sector include Warburg Pincus, which took a stake earlier this year in U.K.-based Premier Foods plc, which provides such products as Hovis bread, Mr Kipling cakes and Bisto gravy; European buyout firm Permira, which owns frozen food company Birds Eye iglo Group; and CVC Capital Partners Ltd., which owns Leaf, the former sugar confectionery unit of Dutch food group CSM.

Corporate carve-outs are attractive for PE firms at the moment - witness AB InBev’s acquisition of Anheuser-Busch last year, which has generated at least four spin-out deals for the buyout industry to date. Firms like these sorts of deals for several reasons. For one, the PE industry has plenty of experience in this type of deal, which often entails things like installing new management and new back-office systems. For another, the sellers don’t mind retaining some stake in the upside of such deals, whether by offering seller financing or keeping a small stake in the assets being sold. That helps get deals done in a climate where buyers and sellers remain some distance apart on price.

If a Kraft-Cadbury combination does happen, Terry Bivens, food analyst with JPMorgan Chase & Co.’s investment banking division, said neither Kraft nor Cadbury would be in a hurry to unload assets, but that Kraft could certainly chop off some slow-growing brands.

One thing that could hit the block is coffee maker Maxwell House. “If it’s not a growth business, it’s certainly a stable business” that throws off steady cash flow, Bivens said.

Another brand that could be sold is packaged meats provider Oscar Mayer, as well as some European brands that might overlap with those of Cadbury, Bivens said.

Maxwell House could fetch as much as 10 times earnings before interest, taxes, deprecation and amortization, implying an enterprise value of up to $3.5 billion, according to Bivens. Oscar Mayer could receive seven to eight times Ebitda, representing a price tag of up to $1.5 billion.

Such valuations would put both brands within reach of private equity firms, though strategic buyers such as Sara Lee Corp. and HJ Heinz Co. might well offer some serious competition.

Shale and other types of unconventional gas production account for about 40% of overall U.S. gas production, up from around 10% in 1990, thanks to advancements in horizontal drilling and rock-cracking, as chronicled in a recent Wall Street Journal report. At least three shale-related private equity transactions were announced last week.

EnCap Investments LP, Flatrock Energy Advisors LLC and TPH Partners have launched a new company, Meritage Midstream Services, focused on the Eagle Ford Shale in south Texas. Meritage will provide oil and gas producers with services like gathering and treating gas, oil, condensates and water. It also will provide carbon dioxide sequestration.

The three investors have committed equity of less than $150 million to the platform, according to TPH Managing Director George McCormick III. “There’s plenty of infrastructure in south Texas generally speaking, but there is definitely a need for additional capacity in this shale,” he said.

Meanwhile, Valerus Compression Services also has its eye on shale. The natural gas equipment and services company, which announced a $500 million equity and debt investment from TPG Capital, said “we firmly believe that Valerus is poised to benefit from the continued development of America’s natural gas resources and the growth in gas production from the country’s prolific shale plays.”

Valerus has about $500 million in revenue, said a person familiar with the matter. A portion of the investment will go toward paying off the majority of the company’s existing debt and the rest has been set aside for future capital needs.

Even the popular shales still have room. Lime Rock Partners is delving into the Marcellus Shale with PDC Mountaineer LLC, a platform launched with Petroleum Development Corp. The venture will focus on underdeveloped sections of the shale like West Virginia and southwest Pennsylvania, according to Lime Rock Managing Director Will Franklin.

The new venture is worth roughly $158.5 million; Lime Rock put $45 million at closing and expects its equity investment will eventually reach at least $102 million.

Earlier in the fall, Global Infrastructure Partners said it would pay Chesapeake Corp. $588 million in a deal that formed Chesapeake Midstream Partners LLC. Chesapeake contributed its Barnett Shale midstream assets to the joint venture.

And one new buyout-backed company is employing a multi-shale strategy. Delphi Midstream Partners, launched by American Securities LLC, announced its first deal in October. It bought the Texas-based Mansfield gathering and compression system, which operates on the Barnett Shale, from Carrizo Oil & Gas Inc. Carrizo received net proceeds of $34.7 million, including a $1.2 million working capital adjustment. The deal gives Delphi the right to invest up to $100 million to support Carrizo’s Marcellus Shale development.

With this degree of activity, it may be difficult for other sedimentary rocks to catch up to shale in time for year-end award season.

-With Rimin Dutt and Josh Beckerman

In this morning’s media roundup:

News: Northrop Grumman Corp. is selling its TASC consulting unit to General Atlantic LLC and Kohlberg Kravis Roberts & Co. to comply with a new federal law tightening conflict-of-interest rules for defense contractors. The price tag is $1.65 billion, with a senior lending consortium of four banks and KKR itself having arranged some mezzanine financing from Highbridge Mezzanine Partners LP. Here’s the WSJ’s take.

The Dollar General Corp. initial public offering is scheduled for this week. It has been much anticipated by both public investors and, undoubtedly, Kohlberg Kravis Roberts & Co. LPs, who should see some healthy distributions from a dividend the firm took and the shares of DG it is selling. Mark your calendars for Friday. The Wall Street Journal story is here.

As anyone who watches “Project Runway” knows, in fashion, one day you’re in, the next you’re out. The same seems to be true of hotly litigated VoIP telephony deals. Index Ventures - once thought to be the best chance of resolving the dispute between Skype and its co-founders - is now out of the private equity consortium buying Skype from eBay Inc., while Skype co-founders Niklas Zennstrom and Janus Friis are in. The Wall Street Journal story is here. Meanwhile, over at New York Times Bits, there are some lessons to be learned from this deal, including that “litigation can create valuable leverage in deals.”

Both Blackstone Group and Fortress Investment Group reported financial results Friday. We listened to the Blackstone conference call, but missed this gem from the Fortress one: “We had the Great Intervention, with government supporting housing, owning banks, auto manufacturers; and intermediating between the U.S. consumer and the Chinese factory worker,” Fortress CEO Daniel Mudd said. Next, “we may have the Great Taxation and the Great Litigation.” The Wall Street Journal story summarizing both groups’ earnings is here.

Analysis: Warren Buffett is well-known for despising leverage, and has criticized private equity firms, whom he calls “disciples of debt,” again and again for their over-use of it, including in his most recent annual letter to shareholders. Why, then, is he using some $8 billion of it in his purchase of Burlington Northern Santa Fe? The Wall Street Journal story is here.

Just for fun: Apparently robot hamsters that cost $10 apiece and have names like Pipsqueak and Num Nums are the hottest toy this Christmas. The Financial Times has the details.

Party like it’s 2007: The $5.2 billion deal for IMS Health Inc., by TPG Capital and the Canada Pension Plan Investment Board, is a cheerful sign for the market (not as ebullient as the Hall & Oates montage in “(500) Days Of Summer” but at least 23% happier than the trailing five Coen Brothers movies). Perhaps the cheeriest part is that just one bank, Goldman Sachs, will provide debt financing, and plans to hold onto a “significant” amount of the debt itself. That’s a big change from the dozen-member lender consortiums seen on most other big deals this year. IMS Health is also bigger than any deal struck in 2008. It’s the biggest LBO announced since November 2007, in fact, when U.K. utility Kelda Group struck a deal worth over $10 billion with Citigroup, GIC Special Investments, HSBC Bank and Infracapital Partners.

Speaking of 2007: A Moody’s Investors Service study of 186 PE-backed companies found that their default rates overall were similar to other companies, but mega-deals like those done in that year fared worse. By Moody’s terminology, four of the top 10 largest deals have defaulted – Chrysler plus three debt swaps (Clear Channel, Freescale, Harrah’s) that the ratings agency considers defaults. The Private Equity Council had a different view. The council slammed Moody’s for ignoring the favorable effects of debt buybacks and said a Moody’s claim that private equity firms haven’t injected more capital into their companies is untrue.

Arrested for cruelty to telephones: Is it a character weakness that we might not read the article entitled “Hedge Fund Hero Saves Kitten From Tree” but we’d certainly click on a “SEC Accuses A Bunch Of Financial Types Of Misdeeds” story? The latest private equity-related insider trading allegations involve a Ropes & Gray attorney who the SEC accuses of passing along tips on PE deals for Axcan, Avaya and 3Com. Authorities allege the info wound up in the hands of trader Zvi Goffer - now eternally known as “Octopussy” - who not only allegedly engaged in improper trades, but also “destroyed the disposable cell phone by removing the SIM card, biting it, and breaking the phone in half, throwing away half of the phone and instructing his tippee to dispose of the other half.”

The unbearable lightness of being a BDC: Two major business development companies reported relatively happy news. American Capital Ltd. reached an agreement in principle to restructure its $2.4 billion of unsecured debt, and reported appreciation in its portfolio for the first time in nine quarters. American Capital posted a $77 million profit for the third quarter. Meanwhile Allied Capital Corp. posted a narrower loss than it did in the 2008 quarter, and Allied’s buyer-to-be Ares Capital Corp. swung to a profit. Ares talked about post-merger plans; the combined entity will focus more on debt and less on equity. While the deal helps Ares get bigger and better, and perhaps saved Allied from oblivion, analysts don’t expect American Capital to go the merger route.

To everything there is a season: On the exit scene, the IPO filing of the week goes to Blackstone Group’s Graham Packaging Co. It doesn’t make soup, potato chips or motor oil, but it makes the containers that hold these things. A rare entrant in the Decade Club (Blackstone invested in 1998), the company has tried to go public before. The IPO markets have been a little iffy lately, with several private equity-backed offerings being withdrawn or trading poorly, but Blackstone President Tony James defended the industry’s track record on the firm’s quarterly conference call. “As long as private equity is offering quality companies with quality management…those deals will be fine. I actually think more than fine, because private equity are good owners.” He also addressed the perception that PE firms taking something public is a sell signal, a sign that the smart guys are getting out. “I don’t think there’s any signaling, because I don’t think PE guys are in particular good readers of where the market is going,” he said. “The idea that we have a lot of insight into what public markets are doing is odd to us.” We don’t doubt the sincerity of the argument, but we must point out that the timing of Blackstone’s own IPO at the very top of the market - generating big profits for some of its top managers - isn’t great supporting evidence.

Not a clunker: Other exit strategies are heating up. TA Associates Inc. agreed to sell acute-care provider Triumph HealthCare Inc. to RehabCare Group Inc. for $570 million. Two dividend recaps – the last in 2006 – already returned nearly five times TA’s 2004 investment. And telecom company Nuvox Inc., with an army of PE owners, struck a $643 million agreement to be sold to Windstream Corp. Nuvox backer M/C Venture Partners, with a 25% stake, expects a three times cash-on-cash return. But the exit of the week award has to go to One Equity Partners, for exiting an auto parts company via a path other than bankruptcy. Exhaust systems company EMCON Technologies LLC will be sold to France’s Faurecia SA in a stock deal worth about EUR295 million ($438 million). This, more than anything, we take as a sign that things are really looking up.

Have a great weekend.

-With Jennifer Rossa

Blackstone reports its earnings a lot of different ways. Its GAAP loss attributable to Blackstone was $176 million, narrower than a loss of $340 million in the year-ago quarter. Total segment revenue rose to $603.8 million from negative revenue of $229.2 million a year ago, as the value of its portfolio appreciated.

In its private equity segment, the fair value of the portfolio appreciated by 5% in the third quarter. Limited partner capital deployed in the third quarter was only $109.1 million, down from $1.5 billion in the year-ago quarter and $338.3 million in the second quarter. But Blackstone said transaction activity is picking up, with $600 million of capital committed to new deals subsequent to the end of the quarter.

“It has been just over a year since the onset of the global financial crisis,” Blackstone Chairman Stephen Schwarzman said in a statement. “Equity and debt markets have continued to heal, many companies have reduced expenses and inventory levels, the cost of borrowing has declined and the availability of credit is slowly increasing. We believe the worst is behind us though a recovery could be gradual and uneven.”

Blackstone always has some interesting thoughts on where the economy stands, so we’re curious to hear more details on its outlook.

9:31: We’re just kicking off. On the call are Tony James, Laurence Tosi, and Joan Solotar, along with Peter Rose.

9:33: Tony James is giving an overview of the results. “We earned performance fees in every segment of our business last quarter.”

9:34: “Blackstone continues to be rock solid in a financial security sense.” It completed its first ever bond deal during the quarter.

9:35: The picture overall is one of increasing activity both in deal and exit activity. In private equity, two-thirds of companies have growing Ebitda. Four companies were sold to strategics in the quarter and another three companies are in IPO proceedings, which should generate $2.8 billion in proceeds. That’s a 40% premium over carrying value under FAS 157. “Our pipeline of new deals is growing substantially,” James says.

9:36: Leverage ratios available are now four to five times Ebitda, close to historic levels.

9:37: “Real estate seems to have bottomed out,” James says. After two years of doing no deals here, Blackstone is putting capital to work again in this segment. It has five new investments in the U.S. and Europe, and James says the firm’s new real estate debt business is also thriving.

9:40: Revenue was up about 24% for the quarter in the advisory business as restructuring business remains strong.

9:41: We are hopeful that improvement in the funding environment will lead to a revival in its fund placement business, James says. “We have $27 billion of dry powder today which puts us in extraordinary position to capitalize.”

9:42: “LPs are now urging us to put our money to work,” he says. He believes it has some interesting consolidation opportunities as some of its competitors are weak.

9:43: The Q&A is starting.

9:44: How are existing companies being restructured? James says the firm has restructured something like $12 billion of debt this year in a couple of ways. It bought back debt when it was cheap, and now that credit markets have recovered, it’s refinancing existing debt securities or bank debt by pushing out maturities. “We’ve played that both ways,” James says. The firm has a couple of companies, like Hilton, that it’s still working on, and it is optimistic that it can put its companies on an attractive footing. “We don’t have any guns to our heads. We don’t have any material defaults in our most recent private equity fund or real estate fund.”

9:46: On fund-raising: “In general, the fund-raising world is definitely loosening up.” The firm believes it will get to the fund size it wants “but I’m not counting those eggs before they hatch.” The firm isn’t collecting management fees on the new fund yet.

9:48: On consolidation in the industry: “There’s a couple of different kinds of things we’d consider doing,” James says. One is consolidations. It’s one of the biggest CLO managers in the world, so it covers all the loans in all the segments. There are a lot of CLO managers out there that don’t have the ability to grow and have shrinking revenue. They’re stuck in a losing business and Blackstone could roll the assets - but not the people or overhead - into its platform. There are examples like that in various of its credit businesses.

9:50: Then there’s adjacent products: filling out a geographic niche, getting a little more depth in an industry segment, or get presence in a new asset class. But “It needs to be something that we’re very very comfortable with and that connects well to the firm.”

9:51: Any difficulties in exiting club deals anticipated? And how long will IPO window be open? On club deals, “If all the investors got in together, they have a tendency to want to get out together.” There are some deals, though, where sponsors came in later with a different valuation, and there may be different views on exits there. Blackstone itself has one or two deals that look like that, but so far all the sponsors are seeing eye to eye there. “Most private equity firms are eager for exits to send money back to LPs.” As far as the IPO window, “We believe it will be open at least through the early part of next year” because it’s fairly optimistic about the near-term economy. Longer term, however, there are issues like the deficit and the banking system to deal with.

9:54: As deals get bigger, how are deals being structured? “It’s been a remarkable recovery, actually,” partly driven by the fact that the volume of transactions isn’t very high, Jones says. But he doesn’t think there’s a lot of credit available. Interest rates are generally higher, the banks are taking much less refinance risk, there are covenants, there are not PIK toggles. “Doing really big deals is not possible today, and doing deals that are really small, the banks don’t want to work on it.” James sees opportunities for GSO to come in here and work on smaller transactions as a result. “There are pockets of opportunity in the credit markets and pockets that are still shut down.”

10:03: On expanding SEC investigations of insider trading, “I don’t see any impact at all on private equity,” James says. “Any time you have large transactions that’s where your insider trading is going to be.” We’re coming off a cycle where private equity accounted for a big share of M&A, so PE deals are going to surface more just routinely, James says. “We think it’s terrible, and it hurts us and it hurts the economy. But I don’t think it has any impact on private equity per se.”

10:05: On bank investing, “The opportunity to do some of the medium sized stuff is certainly more competitive,” James says. He says there are a lot of community banks that are in trouble. “We’re pretty optimistic that there will be a lot of opportunities there, but how do you set up to make an efficient business off of a lot of little tiny banks?”

10:08: On IPOs again, “As long as private equity is offering quality companies with quality management…that those deals will be fine. I actually think more than fine, because private equity are good owners.” He thinks PE IPOs will continue to outperform, even though every deal will not succeed. “We always feel like we’re getting abused on the IPO process rather than taking advantage of the situation,” he adds of the IPO process. He also addresses the perception that PE firms taking something public is a sell signal. “I don’t think there’s any signaling, because I don’t think PE guys are in particular good readers of where the market is going.” PE firms are about value creation. “The idea that we have a lot of insight into what public markets are doing is odd to us.”

10:13: Recoveries of lending don’t mean a new bubble. James says the leverage now is at four to five times trough levels, not peak levels, and that’s a key difference.

That’s it, as Blackstone has another call coming up in 45 minutes or so. We won’t be live blogging that one, but we will listen to it, and we will bring you the highlights later here, so check back.

Here, as promised, are highlights from Blackstone’s investor call:

On the economic outlook: Chairman Stephen Schwarzman said, “A key difference between the second quarter and the third quarter is that there is tangible evidence of an economic recovery…The growth trajectory in the U.S. will last into early 2010.” Emerging markets like Asia and Latin America have fared better than the U.S. “We are highly optimistic about the future,” Schwarzman said.

On new deals: Blackstone has about $12.6 billion of dry powder for private equity deals, and some $12 billion for real estate deals. President Tony James said Blackstone’s private equity group is starting to look at riskier businesses - ones operating in more cyclical industries, for example - but very cautiously.

On IPOs: The firm plans to take eight more companies public in the next 18 months. James said Blackstone is under no pressure from its limited partners to generate cash, but that the historic run on the stock market over the last six months has created a great window for initial public offerings. “We dialed a little more towards [exiting through] IPOs,” said James.

On the fund-raising environment: Schwarzman said the weakest link in the limited partner community is endowments, which are “out of the market right now.” The most aggressive cohort is sovereign wealth funds, with pension funds and insurance companies in the middle. In general, Blackstone has detected a “real change in attitude” since the fund-raising market froze in the wake of Lehman Brother Holdings’ collapse last year, said Schwarzman. The firm has seen “genuine engagement” from potential investors for its new offerings. Nearly every business segment of Blackstone is raising new funds, Schwarzman said.

-With Shasha Dai

In this morning’s media roundup:

News: Insider trading cases with private equity links are suddenly a dime a dozen, due to the Galleon scandal. Here’s the latest, from our colleagues at the Wall Street Journal, who make much of the James Bond element. The PE connection mostly relates to Arthur Cutillo, a lawyer at Ropes & Gray, who allegedly passed on information to Zvi Goffer, the “Octopussy” of this particular ring. According to the SEC and the Justice Department, Cutillo, together with a lawyer friend of his, Jason Goldfarb, conveyed information related to Avaya’s acquisition by Silver Lake and TPG Capital; Alliance Data Systems’ planned purchase by the Blackstone Group; Axcan Pharma’s purchase by TPG LP; and a failed bid by Bain Capital Partners LLC for 3Com Corp. Also mentioned in the same case is Kronos Inc. - bought by Hellman & Friedman LLC. It is unclear where the individual who conveyed the Kronos information to Goffer worked; the individual is referred to in the Justice Department complaint as CC-1. The involvement of lawyers in this ring is particularly unusual, as Bloomberg points out, quoting a legal professor who says, “That’s the ultimate betrayal of trust.”

Fortress Investment Group reported third quarter results a bit earlier. Its loss widened to $58.6 million, or 41 cents a share, from $57.4 million, or 61 cents a share, as Dow Jones Newswires tells us. We’re still waiting on Blackstone Group’s earnings.

Rob Feckner, president of California Public Employees’ Retirement Systems board, has urged his colleagues not to meet with “go-betweens who help pitch private equity investments,” at least while the Calpers investigation of these intermediaries is proceeding. The LA Times story is here.

Point/Counterpoint: Moody’s issued a report yesterday on private equity and defaults. The Private Equity Council had some issues with it. Its comments are summarized over at New York Times Dealbook.

Analysis: Ray Soifer of Soifer Consulting releases his “Harvard M.B.A. Indicator” survey. He finds that 11% of the business school’s graduating class took jobs at private equity firms, down from 17% last year. Read more at Dealbook.

Reuters

My prescription: a dose of Goldman Sachs.

The $5.2 billion buyout agreement for medical data provider IMS Health Inc., by TPG Capital and Canada Pension Plan Investment Board, wears the crown for largest buyout in 2009 so far. If it keeps it, this would be the second year in a row for the health care sector to land the top spot.

The deal tops last year’s $4.1 billion buyout of ConvaTec, the wound care and ostomy products division of Bristol Myers Squibb Co., by Avista Capital Partners and Nordic Capital.

The circumstances in each deal are somewhat unique. ConvaTec ultimately succeeded through a quirk of timing. The deal, which included a debt financing package from a consortium of nine banks, closed just a few weeks before the collapse of Lehman Brothers Holdings Inc.

“We were worried right up until we closed the deal,” ConvaTec Chief Executive David Johnson told us at the time. “We got a little lucky with the timing. Another eight weeks, and we wouldn’t have gotten that.”

Showing how much the debt markets have come back since then, IMS’s debt financing is being underwritten wholly by Goldman Sachs & Co., whose loan and mezzanine affiliates will hold on to a substantial amount of the debt and sell some to additional parties, people familiar with the matter said.

IMS operates in a sector that has only a handful of players, and IMS might well have been “the only one you could buy in the space,” according to Tom O’Connor, a managing director with Berkery Noyes & Co. He added that there was likely not much strategic interest in the asset, explaining why private equity was able to put together a winning bid. IMS’ main competitor SDI likely had little appetite for another acquisition after its purchase of Verispan last year, for instance.

Health care is certainly a sector where PE eyes have been peeled for some time, given its reputation as safe during a downturn. At the September Private Equity Analyst Conference, during a discussion of which sectors were the most attractive, health care came up several times.

“We like very specific niches within the health-care space which we think are defensive in terms of reimbursement risk from the government and also defensive in terms of just the ‘compelling-ness’ of what the service or product is in terms of medical necessity,” Michael Flaherman, managing director of New Mountain Capital LLC, said at that conference.

But beyond the #1 spots in each year, health care wasn’t prominent among the biggest deals. Apax’s Trizetto Group buyout was the only other health care transaction in last year’s U.S. top 10, and none of the other entries on the 2009 list are in the category, according to Dealogic.

Six of the top 10 U.S. buyouts this year have been in the financial sector. After IMS, the second biggest deal announced this year was Blackstone Group’s agreement for Busch Entertainment Corp., worth $2.3 billion plus earn-outs.

Even so, IMS may be a harbinger for many smaller transactions in the health care data and IT space, where companies are looking to sell for multiples of as high as eight to ten times Ebitda, said O’Connor.

“The only part of the economy that is growing is health care,” said O’Connor.

Here are the basics. Both business development companies, which are merging, reported earnings this morning. Allied Capital reported a loss of $140.7 million, or 79 cents a share, for the third quarter, narrower than its year-earlier loss of $318.3 million, or $1.78 a share. The most recent quarter includes a $117.5 million loss on the extinguishment of debt related to Allied Capital’s recently completed debt restructuring.

Meanwhile, Ares Capital Corp. reported third quarter net income of $63.3 million, or 62 cents a share, versus a loss of $41.4 million, or 43 cents a share, a year ago. President Michael Arougheti said in the release that this is the highest quarterly level of earnings for the BDC in over four years.

Ares Capital said when it announced it would buy Allied Capital that it wants to be a consolidator in this area. But there wasn’t a lot of detail on why this deal makes sense for it. We’re hoping for more during this call, which starts at 11 a.m.

10:55: While we wait, Allied Capital has posted presentations related to the call on its Web site. You can find its earnings-related presentation here, and its merger-related presentation here. If there is a similar presentation on Ares Capital’s earnings, we can’t find it, but here’s their 10-Q.

11:00: On slide 9 of the merger presentation, we get a few details that seem new. The slide says the combination will reduce Allied Capital’s ongoing need to sell assets to de-leverage, and hopefully reduce its borrowing costs and allow it to extend the maturities of its debt.

11:02: The combined company will have the ability to commit and hold up to $200 million in a single deal (Slide 10).

11:02: The call is starting, but we’ll just note as we leave the slides for now that slide 15 says ALD’s bank facility is expected to be retired.

11:05: Arougheti is speaking. I’ve got a terrible Web connection - it sounds like he’s speaking through a monster - so I’m going to try and get on the phone to listen there.

11:08: Ahhhh, that’s better. They’re talking about non-accruing loans, and saying they’re very proud of their performance. The call is now going over to Richard Davis, ARCC CFO, who is just going over the earnings figures.

11:10: Here’s the Ares Capital earnings presentation.

11:12: Arougheti is going over what he believes are the highlights, including an improvement in core earnings per share and better credit statistics - no new non-accruing loans and a decline in non-accruing loans as a percentage of all loans. Portfolio Ebitda growth is continuing.

11:15: We are moving on to Allied Capital’s earnings.

11:17: John Scheurer, chief executive of ALD, is talking about the company’s efforts to sell assets and delever its balance sheet this year, and going over the details of its debt restructuring.

11:19: “The restructured debt is expensive…the increased cost…left us in a position that required an ongoing need to sell assets to deleverage. The cost of the restructured capital also significantly reduced our profitability,” Scheurer says.

11:23: ALD CFO Penni Roll is going over the financials, which you can find in the various links above. Brief digression: why do all companies feel the need to go over, in depth, numbers that they’ve already published in these conference calls? I can think of about 2,000 better uses of this time.

11:25: Woo-hoo, time to talk merger! After the third safe harbor announcement of the call, of course. Is it just me, or does time enter an alternate dimension of slowness during safe harbor readings?

11:30 (ayem? pyem? I’m no longer sure! What day is this???): Okay, Arougheti is talking, warning that they’re limited in what they can discuss before their joint proxy statement gets filed.

11:34: The deal is for $648 million in stock at a fixed exchange ratio. Pro forma debt to equity at closing is expected to be 0.65 times to 0.75 times, representing a deleveraging to position the combined company for growth.

11:35: The deal should close by the end of the first quarter, subject to lender and stockholder consent, among other things. It should be accretive to NAV and core earnings per share in the first year. “We remain very committed to our dividend,” Arougheti says.

11:37: Arougheti says ARCC was viewed by many as too conservative during the buyout boom years, but today that’s resulted in strong performance that compares “quite favorably to our BDC peers.”

11:39: Our existing lenders are already showing significant support for this transaction, Arougheti says.

11:42: Now, over to Scheurer. “We are excited at the prospect of this mutually beneficial combination,” he says. The combined company will have a stronger balance sheet, improved access to capital, and a leading mid-market origination platform. He says ALD has reviewed a number of strategic plans and thinks it’s better positioned with this deal than without it.

11:44: “ARCC has been one of the best performing BDCs in the sector over the past year,” Scheurer says. Its investment-grade ratings will be a tremendous boon to ALD. “With lower cost and more patient capital, there would be more time to unlock the potential value in the ALD portfolio.”

11:46: “This increases profitability and reduces the risk of a go-it-alone strategy,” Scheurer concludes.

11:47: Arougheti is going over what the combined company will look like, which starts with slide 10 in the M&A presentation. “We believe we can improve both the profitability of these assets and the financing costs of the assets.”

11:49: Ares Management is a shareholder in ARCC. It has committed to waive or defer some fees for a couple of years if certain core earnings targets aren’t met while the combined portfolio is repositioned.

11:51: A history of the transaction: the teams have known each other for years as competitors. They’ve partnered and competed. Ares has a great working knowledge of many of ALD’s portfolio companies. The two firms currently have three portfolio companies in common. ARCC over several months conducted extensive due diligence on ALD, and vice versa, with every significant asset in the portfolio looked at.

11:55: The combined firm will reduce its debt-to-equity ratio in part by asset sales. ALD has accomplished $181 million in exits already, and has another $75 million pending. Between the two firms, there’s another $400 million in potential future asset sales identified. “We do not believe the issuance of common equity would be necessary to complete this transaction,” Arougheti says.

11:59: ARCC wants to upsize its current credit facility from its current $525 million to between $750 million and $1 billion. It says it’s already seen some commitments from lenders since this transaction was announced. It has also begun talks with ALD’s private noteholders. “This transaction is the opportunity that we’ve been waiting for and truly is transformational for both our businesses,” Arougheti concludes.

Crossing the noon mark as we start the Q&A.

12:04: Could other bidders come in? Scheurer says more attractive offers would have to be considered, but “Honestly we’ve looked and talked to a lot of people over the past year…and the management and boards of both companies felt like this was the most attractive transaction.”

12:10: These questions are pretty technical, so we are going to end the live blog. We will continue listening, however, and will add a final update in an hour or two if there is anything compelling. Thanks for sticking with us through this.

As promised, here are the highlights of the rest of the conference call.

On how much of the combined firm’s portfolio would go to equity deals: The number of leveraged buyouts in the combined company’s portfolio would “significantly decline” over time, said Arougheti. “Ares maintains a lower amount of equity in its portfolio…and will bring new perspective to bear in this [combined] portfolio.” He added: “Two or three years from now, the portfolio should look like Ares’ today.”

On how the whole is stronger than the parts: Arougheti said several companies in ALD’s portfolio could be built into platforms for future acquisitions and would receive strong support from the combined BDC that would have been impossible if ALD remains independent. “There is a lot of value to be unlocked,” he said. He also said that having a larger balance sheet and the “ability to underwrite larger transactions is a significant thing for us…We are not doing this just to get bigger, but bigger is absolutely better.”

On the integration: ARCC will bring some ALD people over for portfolio management and back-office functions. Since the two companies have only a handful of common portfolio companies, ARCC anticipates little disruption in day-to-day operations. (No mention of how top management gets combined.)

-With Shasha Dai

In this morning’s media roundup:

News: A new public-records document dump from California Public Employees’ Retirement System shows that former Calpers’ board member Al Villalobos and his firm Arvco Financial Ventures LLC reaped $15 million more in fees than originally reported from money managers doing business with Calpers. The Wall Street Journal story is here.

Add another private equity-related insider trading case to our growing list. This one involves SoftBrands, which was bought by Golden Gate Capital earlier this year. Barred from the securities industry is Abhishek Uppal, formerly of Piper Jaffray & Co., which advised SoftBrands in its merger negotiations. Read the Dow Jones Newswires story via LBO Wire.

Okay, sure private equity firms are interested in investing in troubled banks. But Russian banks? That’s just what Siguler Guff is set to do. According to the Financial Times, it will announce today the purchase of 3.3% of MDM Bank. That is not - repeat, not - the Russian bank that recently agreed to take a herd of pigs as collateral.

A new study from Moody’s gives us some data to back a theory that many already subscribed to: the largest buyouts are doing worse than the buyout industry overall. Read the WSJ story here.

The Swedish government has taken a stab at making the European Union’s proposed directive on alternative investments a little less unfriendly, suggesting removing a general limit on the use of leverage. For more details, the WSJ story is here.

Analysis: Don’t come out of your basements yet. According to Robert Kaplan, a former Goldman Sachs Group Inc. partner who now teaches at Harvard Business School and advises Berkshire Partners, populist rage about banks is going to get worse before it gets better. Read the interview with Bloomberg here.

Just for fun: Name the economist.