Forbes: Dell to test Silver Lake’s skills as ‘undertaker’
By Richard Waters in San Francisco and Henny Sender in New York
In Silicon Valley, where investors worship at the altar of growth, Silver Lake Partners is an unusual animal.
“They’re the undertakers of the technology industry,” says one prominent Valley venture capitalist, expressing a common disdain locally for the profits the buyout house has wrung out of mature parts of the sector.
Now, with its plan to take struggling PC maker Dell private in the biggest ever tech buyout, Silver Lake is about to put to the test its 14 years of experience in conjuring profits out of buying companies that have missed the tide of tech history.
Applying the techniques of the buyout business to the tech sector has turned the California-based group into one of the most successful large US private equity houses, though it has also had some bumps along the road.
Its third investment fund, a $9.6bn pool of money raised in 2007, has made a net annualised return of 17 per cent as of the end of September, according to a letter sent to one of its investors. Silver Lake insiders have made substantially more: before fees and carried interest – the share of profits kept by the firm – the gross return on its 2007 fund is 26 per cent, according to the investor letter.
The returns help to explain why, at a time when some other buyout groups are struggling to raise large funds, Silver Lake has already hit the $7.5bn target for its latest fund and may add more before closing the round, according to a person familiar with its capital-raising.
The potential Dell bid, worth as much as $25bn, at a time most believe that the PC maker “is both on the wrong side of history and of technology,” as one rival buyout executive puts it, highlights the approach that has characterised Silver Lake’s deals.
Founded by a mix of financial and technology specialists – Oracle executive David Roux, tech banker Jim Davidson, Blackstone executive Glenn Hutchins and tech investor Roger McNamee – its counter-intuitive plan to bring private equity to bear on tech at the height of the dotcom bubble made it one of the few to specialise in the industry.
Its best-known deals have, like Dell, involved companies with well-established positions in their markets. The 2000 buyout of disc drive maker Seagate put Silver Lake on the map by producing a return of five times its investment. The acquisition of internet communications company Skype returned 3.1 times the investment in only 18 months.
Others in private equity claim to see little value in taking Dell private. “It is fairly valued,” says another private equity executive. “It has already been through major cost-cutting. What would we do that Michael Dell hasn’t already done?”
Greater experience in a single sector makes it more willing to back such deals, according to the Silver Lake’s supporters. “I used to think a single sector fund was risky,” says Mark Bradley, who formerly headed Morgan Stanley’s advisory practice dealing with private equity firms and is one of the co founders of San Francisco based banking boutique, DBO Partners. “But they have deep, deep sector expertise and phenomenal contacts.”
The returns have not been even. Silver Lake’s first fund brought its investors a net annual return of 25.1 per cent, according to figures published by Calpers, the California teachers pension fund. But its second fund has netted only 10 per cent, thanks to underperformers like Sungard Data Systems, at the time the largest tech buyout.
Weaker investments in its latest fund include small stakes in Zynga and Groupon, made shortly before those companies’ IPOs and subsequent share-price collapses.
If Silver Lake pulls off its attempt to lead a Dell buyout, it will cap the rise of a new generation at the firm – something few private equity houses beside Warburg Pincus have been able to manage. Of the founders, only Mr Davidson remains fully active, according to people who know the group.
In their place, a new group of younger executives have come to the fore and will share in a bigger share of Silver Lake’s profits than the founders: Egon Durban, responsible for the Skype deal; Ken Hao, who led the investment in Chinese commerce company Alibaba; Mike Bingle and Greg Mondre.
Whether a Dell deal, if completed, turns out to be a Seagate-like success or a flop like Sungard will go a long way to determining if Silver Lake’s new generation of dealmakers inherit the role of preferred undertakers to Silicon Valley.