Technology buyout firms want to take a big bite out of the fund-raising pie next year. And institutional investors appear eager to clear their calendars for the anticipated road shows.
At least eight firms are expected to reach out to LPs to secure committments for technology buyout funds over the next 12 months. Most of the firms make technology buyouts a specialty, though some have broader mandates. The fund-raising total is likely to surpass $15 billion and possibly reach $18 billion, or more.
“We’re bullish on technology buyouts,” says a principal at one fund-of-funds manager, when asked about his appetite for the sector. “We think there’s a lot of opportunity.”
Leading the charge to take advantage of that sentiment is likely to be Silver Lake Partners, which raised $3.6 billion for its second fund in 2004. Along with Texas Pacific Group, Menlo Park, Calif.-based Silver Lake ushered in the modern tech buyout age with the take-private of disk-maker Seagate Technology for an estimated $2 billion in 2000. Expect Silver Lake to launch two funds next year. Look for a mega-tech fund of perhaps $7 billion to $7.5 billion, along with a more modestly sized fund of $750 million to $1.5 billion available to finance smaller deals.
Other California firms expected to roll out funds with a tech focus next year include Garnett & Helfrich (seeking perhaps $750 million); The Gores Group ($400 million to $1 billion); Platinum Equity ($1 billion to $1.5 billion); Symphony Technology Group ($1 billion); Vector Capital ($700 million to $750 million); and Vista Equity Partners ($1 billion). Meanwhile, the Accel-KKR partnership has raised about $300 million for its latest tech buyout fund (see story, page tk). And Golden Gate Capital may join the hunt as well in 2007, although sources say it might not be until early 2008 that the firm returns to market. Led in large part by veterans of buyout shop Bain Capital and consulting firm Bain & Co., Golden Gate closed a $1.8 billion partnership in 2004.
A big reason why these firms can be optimistic about their fund-raising futures rests on strong early returns. Silver Lake, for example, as of June 30, had doubled the money that backer California Public Employees’ Retirement System invested in its 1999-vintage fund of $2.3 billion, based on realized gains and an estimate of the value of the remaining holdings. The fund’s net IRR clocked in at 23.7% over the same period. Investors have also soaked up an appreciation for the opportunities that lie ahead. According to the principal of the funds-of-funds manager, the “huge roll-ups” being executed by Oracle Corp., Google Inc. and other tech giants could lead to buyouts down the road. “Inevitably you roll up something that doesn’t make sense,” the principal says.
To be sure, investors don’t have to surf far to find cautionary tales. Just this month Fitch Ratings posted a report on its website entitled “Limited LBO Prospects for U.S. Technology Industry.” Darkening the prospect for tech LBOs, the report finds, are high valuations, a paucity of cost-cutting opportunities, and fears that the current technology cycle is nearing its zenith. Fitch Ratings predicts that strategic buyers will be able to outbid buyout firms in auctions for tech companies. But the report concentrated on a relatively small population of companies—just 21. And it doesn’t appear to take into account the extravagant variety of strategies pursued by tech buyout firms.
“I agree with Fitch that the general technology market is frothy, and that companies that have leadership positions are fetching valuations that will be hard to defend a few years from now,” says Alex Slusky, founder and managing partner of Vector Capital. But Slusky also sees a “tremendous amount of dispersion” in valuations, particularly for small-cap public companies that are prime candidates for the kind of going-private deals his firm savors. “It’s very hard to paint with a broad brush,” Slusky says.
Another tech buyout firm, Vista Equity Partners, has invested about $630 million from a $1 billion-plus pool it raised in 2000 to acquire software and software services companies, both healthy and unhealthy. Another $100 million or so is spoken for thanks to a recent agreement to buy Indus International Inc., says Vista Equity Managing Principal Robert Smith. Vista Equity, a hands-on firm that pursues going-privates, spin-outs and private investments in public companies, sees enough opportunity to support another $1 billion fund, which it plans to launch this January.
“If you’re as focused as we are, with the right team, it’s not about how many companies are out there,” says Smith. “It’s finding the right ones that fit the model of what you do. We see tremendous opportunity in the types of companies that lend themselves to our type of investing and our type of value creation.”
In light of the tech market’s maturity, it’s hard to argue that buyout firms can’t easily put $18 billion to work over the next three to four years, or even far more dollars than that. But the amount of money funneling into a still young channel of the buyout market is likely to give at least some investors pause.
“We haven’t been in a situation before where so many of these funds are coming to the market at the same time,” says one West Coast placement agent “The biggest concern is, ‘Is there enough deal flow to support all of them, or is the sector going to become too competitive on the pricing side?”