Does Silver Lake's blowout fundraise hint at moderated LP return expectations?

The largest private equity raise in the technology space was announced last week, as Silver Lake IV reached US$10.3 billion of Limited Partner commitments. This was far above the US$7.5 billion target. I’ve seen one of the Silver Lake founders, Glenn Hutchins, present a few times, and he’s as good as anyone I’ve ever watched at a podium. The message is always crisp, the anecdotes are poignant and often personal, and the multi-media show he ties to his off-the-cuff remarks suggests it takes a team of 16 people to prepare the research and professional programming to support his constant roadshow. Or else he’s a genius with both his assessment of international affairs AND a Master of Powerpoint.

Here are some neat details of the new fund, according to Reuters:

– For the first time in Silver Lake’s history, the majority of the investors in the fund were based outside the United States, with a big inflow of money coming from Asia and the Middle East, according to a person familiar with the matter.

– All the top ten investors by capital that participated in Silver Lake’s previous fund also made commitments to the latest fund.

– $300 million was committed to the fund by Silver Lake fund managers and entities affiliated with them.

– Silver Lake, whose best known investments include Skype and Chinese e-commerce company Alibaba Group, was founded in 1999 by Davidson, Glenn Hutchins and David Roux.

– Silver Lake has delivered a gross internal rate of return of 27 percent and a net internal rate of return (IRR) of 18 percent overall since its inception.

– Its previous fund, the $9.3 billion Silver Lake Partners III, which launched in 2007, was valued at 1.37 times the amount that investors had put into it, and had a net IRR of 16.76 percent as of the end of September, according to the New Jersey Division of Investment.

– Since the 2008 financial crisis, several private equity firms have launched funds that are smaller than their predecessors, making Silver Lake’s latest private equity fund an exception. Buyout funds raised $26 billion globally in the first quarter of 2013, a 44 percent increase from a year earlier, according to market research firm Preqin.

The Skype deal certainly gets a great deal of airplay here in Canada (see prior posts “Skype deal: is it a tech or infrastructure deal?” Sept. 2-09 and “Quick uptick on Skype?” Aug. 10-10), what with the CPP Investment Board’s co-investment and all (see prior post “12 questions CPP Investment Board won’t be answering on BNN today” Jan. 17-13). But what else is in there, beyond Skype?

I had a look at Silver Lake’s returns to get a sense of what it takes to attract US$10 billion to a tech fund these days. Here are the return figures, according to CalPERS:

Fund I (1999 vintage): 25.1% IRR, 2.3x multiple of capital
Fund II (2004): 9.8% IRR, 1.6x multiple of capital
Fund III (2007): 17.3% IRR, 1.4x multiple of capital

CalPERS is also invested in a couple of Silver Lake’s sister funds, as well:

Silver Lake Credit Fund (2008): 6.2% IRR, 1.3x multiple of capital
Silver Lake Sumeru Fund (2007): 11.5% IRR, 1.3x multiple of capital

According to one independent global PE fund tracking firm, not all of Silver Lake’s funds are in the top quartile:

Fund I (1999 vintage): 1st quartile
Fund II (2004): 3rd quartile
Fund III (2007): 2nd quartile
Sumeru (2007): 3rd quartile

To give you a sense of what multiples of capital LPs are ostensibly expecting on the return front these days, it is widely understood that a 2.5x return on your original capital invested is what it generally takes before a fund manager can be confident that he/she will have no trouble raising the next private equity fund.

Which puts a spotlight on Silver Lake’s undeniable fundraising success, since none of the last three equity funds (II, III and Sumeru) has yet to reach the 2x capital multiple threshold. Nor are they in they reported to be in the top quartile of their respective fund class/vintage (so far), at least in the eyes of one benchmarking firm. The funds in question may still have plenty of upside left in their portfolios, which is something that LPs will be better positioned to assess than anyone.

As well, if you raise funds in rapid succession, rather than every eight years or so, LPs may not need to earn more than 2x their invested capital to be happy. If a pension plan gave you $100 million, and they got back $140 million in the space of six years, rather than see no return in the public equity space as has been the case far too often, happiness will undoubtedly ensue.

Particularly if the volatility in the return is lower than average for the asset class.

Something else may also be afoot here, too. Brand matters, and Silver Lake’s is shining right now. The Dell deal has kept them in the media eye for months, although a couple of key LPs (CPPIB & Temasek) were reported to have passed on the opportunity to co-invest with the GP on that particular deal. Whether the Dell deal proceeds or not, Silver Lake is here to stay. Perhaps the message is simply that LPs are hinting that they suspect that the days of 20% net IRRs are over in buyout land, and that a predictable 9%-15% net would be just fine, thank you very much.

MRM