GP Profile: Sumeru Keeps Silver Lake Out Front Of Tech Pack

Tech buyout shop Silver Lake rose to prominence on the back of billion-dollar blockbuster deals like Seagate Technology and SunGard Data Systems. But the Menlo Park-based firm was in danger of becoming a victim of its own success.

“As we got bigger and bigger, and began investing at greater and greater scale, Silver Lake was constantly ceding opportunities in the vast middle market,” said Managing Director Hollie Moore, who joined the firm when it was first formed in 1999, in a prepared statement. “As time passed, we continued to see an ongoing stream of deals that we missed because of our focus on large transactions only. We decided that we need to be in this market. If we were committed to leading the technology investing category, we should be in that category fully and not just at the largest end.”

Indeed, mid-market technology deals account for about 40 percent of all dollars invested in the sector—and 70 percent of all deals, according to the firm. (Last year saw 182 technology buyouts sponsored by U.S. firms altogether, and those with disclosed values totaled $83.3 billion, according to Thomson Reuters Markets, publisher of Buyouts.) But Silver Lake’s large-cap funds—it closed its debut fund at $2.3 billion in 1999, and a $3.6 billion fund a few years later—were too busy pursuing opportunities in the billion-dollar-plus range. The firm simply didn’t have the capacity to focus on these smaller deals.

That’s when a man named Ajay Shah entered the picture. Shah had founded his own mid-market technology buyout firm, Shah Capital Partners, in 2004, after creating and managing the Technology Solutions Business of electronics manufacturer Solectron, a $2 billion operation. He was also a close friend of Silver Lake’s founding members as well as a limited partner.

In 2006, Shah found himself standing next to Silver Lake co-founders Jim Davidson and David Roux at the firm’s annual meeting. Said Shah in a prepared statement: “I remember Dave turning to me and saying, ‘Gee, you know, we find the mid-market really attractive. We’re going to find a way to develop a strategy in that market.’”

The Creation

That’s when the light bulb went off. Why not merge Shah Capital’s team into Silver Lake and create a new fund exclusively focused on the mid-market? The result: Silver Lake Sumeru, which put the final touches on its inaugural $1.1 billion fund in May.

For Shah, it was a match made in heaven. “Where Shah Capital had some gaps, Silver Lake was strong, and vice-versa,” he said in a prepared statement. “For instance my firm was more operationally driven and didn’t have quite the same financing strengths as Silver Lake.” They also, of course, focus on different segments of the market.

For its part, Silver Lake Sumeru typically makes equity investments of $50 million to $150 in companies with values ranging from $50 million to $500 million. The firm favors corporate carve-outs, mergers, and recapitalizations. By contrast, Silver Lake Partners focuses on high-profile, multi-billion dollar deals such as the $11.4 billion acquisition of SunGard, the $8 billion buyout of Avaya, and the $5 billion purchase of Sabre Holdings.

Both Silver Lake Partners and Silver Lake Sumeru occupy the same opulent office space on storied Sand Hill Road in Menlo Park, Calif. The Silver Lake Sumeru team of 14 investment professionals works on the first floor, with Silver Lake Partners one flight above. “Silver Lake is a tremendous brand,” said Shah in a prepared statement. “It also provides a tremendous network of connections that’s been very beneficial. It’s great to go to these guys and just say, ‘Hey, here’s something that’s of interest to us. What’s your view?’”

Led by Shah, Silver Lake Sumeru’s investment team includes Managing Director Kyle Ryland and Principal Gerald Hwasta, as well as long-time Silver Lake employees like Moore, who recently joined the Sumeru team full-time. The fund has also added outside talent, including Managing Director John Brennan, who previously led the platform software business at Adobe Systems and spearheaded a number of strategic acquisitions there.

Most members of the Silver Lake Sumeru team have a specialty within tech—Shah, for example, is well versed in semiconductors, Brennan in software. But the firm itself does deals across the technology market. “We tend to see deals in many different segments,” explained Shah in a prepared statement. “There is no way we can employ enough people with sector smarts across the entire technology spectrum, but we have people with broad backgrounds who are keen observers with expertise. In that respect, the whole tech landscape is open to us.”

Silver Lake Sumeru set out about a year ago to raise a $750 million fund. The credit crunch hadn’t yet started, and the market was still frothy. Most prospective limited partners wanted a piece of the action and didn’t bother to ask too many questions.

“Early on, it seemed that everyone was eager to get more allocation,” said Shah. Then the credit crunch hit. Suddenly, the Silver Lake Sumeru team was getting questions it hadn’t heard before. Questions like how they planned to find good transactions in a very spotty environment, and why the industry even needed another mid-market technology fund.

The team explained to potential LPs that they hadn’t done any transactions—both at Shah Capital and at Silver Lake Sumeru, which was working off capital from early investors—when the market was hot because they simply couldn’t find any good values. And now that things were cooling down, it was actually a better time to find the right opportunities. While other firms were doing deals at 8x and 9x EBITDA, the Silver Lake Sumeru team was sticking to its guns and refusing to pay more than 4x EBITDA.

Transformations

Investors also liked the investment strategy, which Shah and his team described as “transformative.” Said Moore in a prepared statement: “Our transactions go beyond cost cuts, margin points or whether we should sell this year or next year. We believe a scope that narrow is a fast track to making any investment average. Instead, we look for ways to change the market definition and grow revenue in a non-linear way. It’s amazing what you can do when you change the mindset and enable a company to start thinking like a market leader. Oftentimes, our job is giving companies and their management teams the courage and belief they need to build stronger businesses.”

Silver Lake Sumeru has had an opportunity to realize that vision with three deals to date. Its latest was the $185 million spinout of i2 from ChoicePoint Inc. The company develops software that allows law enforcement agencies to better analyze crime data and connect the dots in cases involving fraud, drug trafficking, counterterrorism, national security, and corporate security.

Though the deal still hasn’t officially closed, Silver Lake Sumeru said it intends to work with i2 to grow the company’s core products and customer base through acquisition. The firm has also lined up several acquisition targets that could possibly be rolled up under the i2 brand. Shah describes i2 as having a “fascinating” technology that is severely under-penetrated in the market. “They only had a few sales guys in the entire U.S.,” Shah said in a prepared statement. “We have the opportunity to impact the trajectory of this business in a very positive way.”

In April, Silver Lake Sumeru closed its second deal, providing financing to support the merger of Audio Visual Innovations and Signal Perfection Limited. The deal, in which Silver Lake Sumeru will own a majority stake in the combined company, created AVI-SPL, the world’s largest provider of video and audio conferencing solutions and integration services. In this case, the firm sees the transformative element as the combination itself, producing a company that is three or four times larger than its nearest competitor.

Silver Lake Sumeru closed its first deal in late 2007, taking a majority position in Mobile Messenger, a provider of technology and services for mobile content management and distribution. The firm plans to give Mobile Messenger a leg up by helping it take advantage of the burgeoning mobile advertising space.

In deploying a new fund, Silver Lake Sumeru is not without its naysayers. “Our critics might say that we are operational folks who will constantly interfere with the business,” said Shah in a prepared statement. “But we try to make sure that management understands that’s not the case. There is a clear line drawn around management’s responsibilities. We are there to guide and help and connect, but at the end of the day we are not management and we never confuse that line.”