Dipanjan (DJ) Deb, managing partner of Francisco Partners, co-founded the San Francisco-based buyout shop in 1999 after working as a principal with Texas Pacific Group, the predecessor to TPG. He’s also worked as director of semiconductor banking at Robertson, Stephens & Co and as management consultant at McKinsey & Company.
Tell us about the fundraising for Francisco Partners II?
We raised $2.3 billion in 2006. It was an interesting time as the beginning of the “Golden Age” of buyouts – well before the downturn. Firms were doing bigger and bigger deals with more leverage, including deals in the technology sector. Investors were attracted to us, because we were viewed as not getting caught up in the wave of euphoria. We were very fortunate to have added a number of high quality new investors.
The Golden Age didn’t last forever. How did you navigate the financial crisis?
In 2006 and 2007 we were worried we’d be near the top of the market, so we reduced our risk. We did a lot of deals using little leverage, and we structured transactions to provide downside protection. Essentially, by focusing on operational and structural opportunities, we were not relying on leverage to produce our returns. Accordingly, while the downturn hurt, most of our companies had very little debt, and as such did not experience the issues that levered companies did. We never thought the downturn would be as bad as it was, nor that it would snap back as quickly as it did.
Let’s touch on some of the deals that drove performance for Francisco Partners II?
We made 30 investments and we’ve now sold 13 companies. The realizations from the first 13 exits represent significantly more than 100 percent of all the invested capital we raised. The remaining 17 companies will continue to be all gain at this point. On a gross return, these 13 exits have returned 2.5x times invested capital and about 40 percent IRR. There’s not one or two individual investments that drove performance, but rather many winners. Some specific examples are Metrologic Instruments (sold to Honeywell), API Healthcare, which we just sold to GE, QuadraMed – we sold two different divisions, one to Nuance and one to Constellation Software, and Attenti, which we sold to 3M. The thing we’re most proud of is the multitude of winners, rather than one home run conquering other sins, which speaks to repeatable investment strategy. We are actually getting closer to selling several other companies as well, and we believe 2014 should be a good year for the fund.
Is there anything you would have done differently with the fund now that you’re looking back?
If we had known the S&P 500 was going to be at 1,800 and the leveraged markets would go back to 2007 levels, we would have been more aggressive coming out of 2009. We feel good about the deals we have done, but would have been more aggressive in investing additional capital in hindsight.
Would you have been more aggressive on debt load?
It is easy to say in retrospect if you would or would not have been more aggressive on debt levels, but we do believe by not over-leveraging a capital structure, you can help fix the company, and once healthy, you can use the balance sheet for acquisitions or recaps. We call ourselves little “L in LBO” and many of our companies have very little to no leverage and it is very rare that we lever a company to the levels we are seeing in the marketplace today.
What was the fund’s contribution to the evolution of Francisco Partners?
It is a good question. FP II was a demonstration of our strategy of being able to invest in fast-changing technology markets in a low-beta manner. We maniacally focused on operational improvements, and structuring investments in a manner to reduce downside risk. I think given how well the fund performed during the downturn gave investors more confidence in our investment process, and [they] appreciated that we were not a leveraged buyout firm that went up and down with the markets. I think FP II’s performance gave investors continued belief that our returns were more durable, which in turn created significant interest in recommitting to FP III, even in the darkest of fundraising environments. FP III has also been a top-quartile performer.