TPG, Silver Lake look to the middle

Bigger is stil often better when it comes to mega-funds in the buyout industry.

But some firms are beginning to diversify downward.

Both Silver Lake Partners and Texas Pacific Group are prepping mid-market buyout funds, PE Week has learned. The Silver Lake fund is expected to begin marketing in the first quarter next year with a target of between $750 million and $1 billion, while TPG will look to raise about $1.5 billion.

“The middle-markets are continuing to grow, so it makes sense for these giant firms to keep an active eye on them,” says a limited partner of Silver Lake. “Not only are there some very good deals, but middle-market companies sometimes can become large-market companies.”

Silver Lake will mostly staff its middle-market effort with the team from Shah Capital Partners, a Santa Clara, Calif.-based firm that also has a fondness for technology deals. Shah will continue to manage its existing fund, but soon is expected to be subsumed by Silver Lake. Current Shah portfolio companies include Magellen Navigation, PulseCore Semiconductor, Ingenient Technologies, TES Electronic Solutions, C-MAC MicroTechnology, Credence Systems and SMART Modular Technologies (Nasdaq: SMOD).

It is unclear if TPG also will bring in a new team from the outside, or if it mostly will rely on existing staff. Both of the buyout firms and Shah declined to comment, citing regulatory restrictions. Some market watchers had thought that Silver Lake would not launch the middle-market fund until it closes its third large-market fund, which is targeted at $7.5 billion. Similarly, TPG is just weeks away from wrapping up its fifth general fund with $15 billion.

When contacted to discuss the issue of middle market funds, some LPs were split on the merits. Some liked 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 or general fund, so as to prevent possible partnership squabbles.

For example, it’s 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 they’re sharing carry with the less-succesful fund.

Still, there’s no chance that these mid-market funds will eat into their larger mega funds. Buyout firms continue to raise a record total of new funds. Buyout firms have raised about $155 billion year-to-date, and with several mega-funds nearing close, the industry is on pace to top last year’s fund-raising total of $183 billion.