Look at the biggest technology buyouts of the past decade, and odds are that Silver Lake Partners was a player in the deal. The 8-year-old firm, with offices in Menlo Park, Calif., and New York, pioneered the concept of the tech buyout at a time when others saw the sector as too unpredictable for debt-financed acquisitions.
Since the late 1990s, Silver Lake has orchestrated some of the largest privatizations in the industry, including the buyouts of contract manufacturer Flextronics, software maker SunGard, and Avago, the semiconductor unit of Agilent Technology.
Today, the firm is sharpening its focus on middle market acquisitions. It is raising a middle market fund of $750 million to $1 billion in partnership with Shah Capital Partners of Santa Clara, Calif. The focus will be equity investments in companies with enterprise values under $500 million. The firm is also raising its third core fund, Silver Lake Partners III, which will continue to focus on large technology leveraged buyouts. It has already raised $3.5 billion for the fund, which aims to raise as much as $10 billion, according to a regulatory filing.
Managing Director Ken Hao joined Silver Lake in 2000, following a 10-year stint at technology investment bank Hambrecht & Quist, where he focused on semiconductors and software. While he doesn’t see broad opportunities for deal making between venture capital and buyout firms, Hao tells VCJ there are unique circumstances where the two types of funds may work together.
Q: What traits do you look for today in a technology deal?
A: Silver Lake invests in large scale businesses that are typically going through a transformation or are misunderstood by the existing investors or owners. The metrics we look at that are most important revolve around growth and profit margin potential. We also look for critical mass in our investments—typically revenue in the hundreds of millions or billions and companies that are No. 1 or No. 2 in their market.
Q: Which technology sectors do you see offering the best fit for LBOs?
When Silver Lake started, nobody wanted to lend money into our LBOs. Now it’s the opposite.”
Ken Hao, Managing Director, Silver Lake Partners
A: To date, Silver Lake has led seven of the 10 largest tech LBOs, and they’ve spanned a range of sectors from software [Serena Software] to disk drives [Seagate Technology] to semiconductors [Avago Technologies]. Our most recent one was in the online travel sector [Sabre Holdings]. So, the issue is a lot less about maturity and predictability of the sector and more about the maturity and predictability of the company. They also have to have the cash flow to support a reasonable amount of debt in their capital structure.
Q: Are there VC-backed companies that fit that profile?
A: It’s a relatively rare circumstance where you’ll see a PE fund buying a venture-backed company. But when we are approached by venture funds or venture-backed private companies, it generally falls into one of three or four categories.
One is that the company needs growth capital at a scale larger than what venture funds or crossover firms can invest. They’re looking to raise from $100 million to $500 million. Usually these companies have a much higher risk-to-reward ratio than we typically invest in, but there are exceptions when there is stability and strong leadership.
Sometimes we get approached by a VC fund that wants us to help figure out a way for a startup company to acquire a larger and slower growing business. Or sometimes VC firms have taken a company public and end up with a portfolio company that’s undervalued and misunderstood, and they want to look at taking it private.
Other times the deal involves giving a partial exit to backers or getting strategy or support from Silver Lake. These aren’t always companies backed by VCs. Some are bootstrapped by entrepreneurial founders or have nontraditional investors. We’re looking at a couple such deals today.
Q: Can you give any examples?
Some of our companies have patented technologies that may be very good candidates for venture funding.”
Ken Hao, Managing Director, Silver Lake Partners
A: I can’t talk about companies we’re looking at now. But one example like that was [online brokerage] Datek. They wanted new investors to buy out existing shareholders. That worked out well for us.
Q: Have you approached VCs or venture-backed companies about possible deals?
A: When we see hyper-growth opportunities in our portfolio companies, what we do is invite venture capitalists in to supervise that growth. Some of our companies also have patented technologies that may be very good candidates for venture funding, and we’re talking to VC funds about those. [Note: Silver Lake has looked into negotiating with VCs about spinning out some IP assets of one of its portfolio companies, but Hao declined to name the company or discuss the particulars. —Ed.]
Q: Established buyout funds are having an easy time securing financing these days. What effect do you see that having on valuations, especially for technology deals?
A: When Silver Lake started, nobody wanted to lend money into our LBOs. Now it’s the opposite. The current interest rate environment has certainly opened the flood gates to debt. That has enabled higher valuations and higher leverage levels than may be appropriate for the risk levels of the businesses.
I think this will lead to higher valuations, more leverage and more mistakes. Lenders are in great risk of underestimating the risk associated with technology companies. So we intend to stay disciplined in spite of the abundant debt that we’re offered.
Silver Lake Partners
EDUCATION: Bachelor’s in economics from Harvard University.
WORK HISTORY: Formerly a managing director at Hambrecht & Quist, focusing on the semiconductor, computer systems and software sectors and on investment banking projects in the Asia Pacific region.
FOCUS: Leveraged buyouts of technology companies, specializing in the semiconductor and software industries.
INVESTMENTS: Avago Technologies (formed from the semiconductor products group of Agilent Technologies), Network General Corp., UGS Capital.
DID YOU KNOW? Hao is also eyeing buyout investments for Silver Lake in Asia Pacific. Unlike in the United States, where funds seek targets with predictable revenues and profits, Asia Pacific deals are likely to be more growth-oriented.
Source: VCJ reporting