Silver Lake Partners w/ Shah

Silver Lake Partners and Shah Capital Partners are teaming up to raise a new fund focused on middle-market technology companies. Formal marketing is expected to begin in Q1 2007, with a target capitalization of between $750 million and $1.5 billion.

Some market watchers had thought that Silver Lake would not launch the middle-market fund until it closes its third large-market fund ($7.5 billion target), but it seems comfortable doing both simultaneously. Expect Shah Capital to continue managing and investing its existing fund, whose portfolio companies include Magellen Navigation, PulseCore Semiconductor, Ingenient Technologies, TES Electronic Solutions, C-MAC MicroTEchnology, Credence Systems and SMART Modular Technologies (went public). It is likely, however, that the firms investment team will soon order all future business cards with Silver Lake logos.

Neither firm is discussing the merger of non-equals, which means that Silver Lake also wont explain why its raising a dedicated middle-market fund instead of just allocating part of its larger fund to smaller deals.

Ive spoken to a couple of LP sources about this issue in general, not in specific reference to SLP and they seem split. Some like the idea of niche strategy-specific funds, because it helps them better define portfolio diversification. Others would prefer that the diversification occurs within a single/general fund, so as to prevent possible partnership squabbles.

For example, its not uncommon for a firm with two funds to have one that seriously outperforms the other. When that happens, the success stories often wonder why theyre sharing carry with the other guys (think Hicks Muse/Hicks Muse Europe). Im not saying that will happen at SLP, just that its a risk to be acknowledged.