Sumeru Leads Silver Lake’s Drive Into Emerging Markets: Corrected

Firm: Silver Lake Sumeru

Founded: 2007

Investment Professionals: 20

Key Executives: Ajay Shah, founding managing director; Managing Directors John Brennan, Hollie Moore Haynes, Paul Mercadante and Kyle Ryland

Strategy: Typically invests $25 million to $150 million in mid-market technology companies

Technology-focused buyout firm Silver Lake launched its Sumeru group in 2007 to target mid-market deals too small for the larger buyout fund, and to help the firm expand into emerging markets. Four years later, that thesis is starting to show results.

In the last year Sumeru, with around 20 investment professionals led by tech entrepreneur Ajay Shah, closed Silver Lake’s first deals in Brazil and Israel, and it is looking at opportunities in India, where Silver Lake has yet to make a direct investment but where many of its portfolio companies do business. Partly as a result of Sumeru’s trailblazing, Silver Lake—which also has offices in New York, San Francisco, London, Hong Kong and Tokyo—is looking at opening offices in Brazil and India, Shah told Buyouts

Silver Lake Partners, meanwhile, has led the way with bigger deals in China: In the last year, it’s closed its first three deals there, including the buyout of Allyes Online Media Holding Ltd., a Chinese digital marketing company whose clients have included Sony, Pepsi and Chrysler. Though the Silver Lake and Sumeru team collaborate on research and have looked at several deals together, they have yet to partner on an emerging markets deal. However, in April, they teamed up for the $645 million take-private of SMART Modular Technologies Inc., a maker of memory modules and other products for the electronics industry that is based in Newark, Calif., but which generates much of its revenue from Brazil.

In the coming years, Silver Lake expects Sumeru’s ability to make smaller investments to be critical in its foray into emerging markets, where rapidly expanding middle classes are creating vast opportunities in technology investing and smaller countries like Israel are becoming hotbeds of technology development. Sumeru has about $500 million left to deploy from its $1.1 billion debut fund, closed in 2008. (That same year Silver Lake Partners, the large-market buyout group, closed its third fund with $9.3 billion in commitments.) Of that, it expects to invest about one-third, or around $167 million, for take-privates, carve-outs and growth minority investments in emerging markets. And executives expect emerging markets to be a major focus for Sumeru in any follow up funds.

“These tech companies haven’t developed to the level of scale where a $300, $400 or $500 million equity investment makes sense or is even feasible,” Kyle Ryland, a managing director at Sumeru, told Buyouts. “So you have a large base of medium-sized businesses that are experiencing very strong growth, and those tend to be a great fit with our investment strategy.” Sumeru typically invests $25 million to $150 million of equity in its deals, while Silver Lake Partners invests at least $150 million in its deals

Countries Of Interest

The emerging markets of most interest to Sumeru and Silver Lake Partners are China, Brazil, India and Israel.

For China, Brazil and India, the firm’s interest is rooted in the massive growth of middle class consumers, which are driving demand for more broadband access, personal identification technology, mobile telephones, and online shopping. Both Sumeru and Silver Lake Partners are scouring these markets for opportunities in software, financial technology, data centers, consumer Internet, and information technology outsourcing, to name a few areas of interest.

Take, for example, Sumeru’s first investment in Brazil. Last September, the group took a minority stake in Web hosting company Locaweb Serviços de Internet S.A., which hosts 23.5 percent of all “.br” Web sites in Brazil. The deal came at a time when the government of Brazil is rolling out a major initiative to increase the number of broadband connections in the country by up to 40 million in 2014, according to the Brazil-U.S. Business Council, a Washington, D.C.-based group that promotes investment between the two countries.

In Israel, Silver Lake sees not so much a booming consumer class as it does with other emerging markets, but a small and vital developer of mobile technology, semiconductor technology, Internet technology, clean tech and security-related technology used around the world.

In January Sumeru invested an undisclosed amount in PrimeSense Inc., an Israeli company that develops gesture recognition technology used in Microsoft’s Kinect, a controller-free gaming system. Microsoft launched the system in November, and by March it had sold more than 10 million copies, making it the fastest-selling electronics device in history, according to Microsoft. Helping to execute the deal was Yuda Doron, an angel investor and strategy consultant for more than 20 years in the technology sector whom Sumeru had appointed in July 2010 as a senior adviser for Israel and head of its satellite office there.

Silver Lake, founded in 1999, was among the first buyout shops to focus solely on technology, a complex and volatile industry most buyout shops had avoided in favor of predictable, proven businesses. But compared to some of its competitors, Silver Lake is playing catch-up in emerging markets.

The Carlyle Group, for example, has for years sponsored several funds dedicated to Asia, Latin America and the Middle East. The Blackstone Group in recent years has favored smaller deals in China, India, South Korea and Brazil, where last year it bought a home-grown team in one shot with a 40 percent stake in Patria Investimentos, a São Paulo-based private equity firm, for $200 million. Even mid-market firm The Jordan Co. has been in China since 1996. Since 2008, private equity firms (including venture capital, buyout, mezzanine and growth equity investors) from around the world have invested more than $17 billion of equity in almost 1,600 technology deals in Brazil, China, India and Israel, according to Thomson Reuters data.

But Silver Lake executives believe their focus on technology gives it an edge over its competitors. Because technology companies can be so complex and they tend to serve global markets, management at technology companies based in emerging markets are often more concerned with a sponsor’s understanding of its business than its familiarity with the intricacies of the host country’s culture.

“I’m not saying that I disagree that a local presence is important,” said Shah. But “technology doesn’t have natural barriers that you might have with, say, food products.”

Gilberto Mautner, the founder and CEO of Locaweb, the Brazilian Web hosting company, told Buyouts his company could have done a deal with any of several private equity firms, including home-grown Brazilian shops. But it was Sumeru’s insightful suggestions about how the company could use cloud computing and other cutting-edge technologies to increase its customer base, improve customer service and cut costs that impressed Mautner.

“Nobody before had asked me such questions,” Mautner said. “Even if I didn’t close the deal I would have gained a big advantage from them only because of the questions they asked.”

(Correction: Silver Lake Sumeru typically invests $25 million to $150 million in its deals. A previous version of this story published online said it typically invests $25 million to $35 million in its deals. Also, Sumeru appointed Yuda Doron as a senior adviser in July 2010. The previous version said that he was appointed in conjunction with the firm’s investment in PrimeSense Inc., an investment Doron helped execute in January 2011.)