Silver Lake, the technology-focused private equity firm, struck an enormous deal this week.
It’s writing a $US1 billion check to back Dell’s takeover of EMC, Bloomberg reported.
For Michael Dell, this bid is part of an ongoing effort to modernize the company that he took private — with Silver Lake’s help — a few years ago. And because much of Dell’s $US67 billion deal is being funded with borrowings, Silver Lake’s $US1 billion contribution makes the fund even more of a key shareholder.
But for Silver Lake, there’s an additional challenge on the table. It one day will have to “exit” the position, and that’s where Dell’s new scale could pose a problem.
By now, the private equity industry is littered with examples of funds that took on a massive, debt-loaded, headline grabbing deal only to wind up saddled with investments for much longer than they wanted. Some of the largest buyouts wound up stuck on a fund’s books for a decade or longer, and performance of the funds involved withered as a result. (More on this below).
A timely reminder how things can go wrong emerged just days after the EMC buyout was announced. Albertsons, the private equity backed supermarket chain, had to scrap an IPO, while First Data — also PE backed — slashed the share price just to get the deal done. In Albertsons’ case, the private equity fund — Cerberus Capital — has already owned the company for a decade.
Silver Lake has proven itself to be tremendously successful in past deals. It led a buyout of Skype that was quickly flipped in a sale to Microsoft and has also turned a tidy profit on investments in more run-of-the mill technology companies — like repeat deals with chipmaker Avago Technologies.
So, at least, Silver Lake can count on some goodwill from its investors if the Dell-EMC investment does go the way headline-grabbing takeovers have for other funds.
Here’s what megadeals have done to some of the highest profile buyout funds:
Henry Kravis’ private equity firm had established itself as a dominant investor in a budding industry in the 1980s, generating gaudy returns in the 20%-40% range through most of the decade. That ended with KKR's 1987 fund, which invested in RJR Nabisco, winning the auction that inspired the book Barbarians at the Gate. The first 'biggest deal' in KKR's history is historically regarded as a flop. The 1987 fund generated returns less than 10%.
Kravis' eyes kept getting bigger, but returns from big LBOs didn't. The next time KKR generated returns less than 10% in a private equity fund is its 2006 vintage. That fund houses another investment for KKR that disappointed: When TXU (at $45 billion, the biggest buyout ever at the time), went bust it would also wipe out equity from investors including Goldman Sachs’ private equity division and TPG Capital, more than seven years after the deal was announced.
TPG, too, has struggled with its very largest transactions. Just like KKR, it had historically posted outsized returns for investors (its first fund returned more than 35% to investors on an annualized basis).
But TPG's joint deal with private equity firm Apollo Global to back Caesars' buyout went poorly, and the failure of two transactions that once made headlines hampered the private equity firm's fundraising. The TPG 2006 fund that invested alongside KKR in TXU and made a bad bet on Caesars' has returns in the 3% to 5% range, according to various sets of pension data.
Bain Capital's reach into more expensive deals haven't generated the same returns as Mitt Romney's tenure
Bain Capital is still locked in one of its biggest-ever LBOs, Clear Channel, nearly a decade after striking the deal. The private equity firm successfully brought Hospital Corp. of America public and that company's stock has risen substantially since its 2011 IPO, but nine years after the initial LBO, Bain remains an investor.
Bain's ninth and tenth funds from 2006 and 2007 were invested in either HCA or Clear Channel; neither one of them has posted internal rate of return exceeding 10%, which pits them poorly against the private equity firm's performance when Mitt Romney was there. From 1984 until 1998 it posted returns ranging from 66% to 15%, every fund more successful than the one that did the biggest deals in Bain's history.
The Carlyle Group has largely eschewed enormous LBOs and has been fortunate and savvy enough to team up with other investors on big deals like the buyouts of Freescale Semiconductor, Hertz and Kinder Morgan before the financial crisis.
Despite their making profitable exits from each company, the fund that backed these transactions (Carlyle Group IV from 2005) has returned less, at an internal rate of return of 13%, than most of the other flagship funds it has operated.
And while Steve Schwarzman’s Blackstone Group is eager to point out its successes in its largest transactions — Equity Office Properties and Hilton Hotels — even those came at a cost. Just like many other investors, Blackstone’s stay in Hilton was longer than the average hold time in the private equity industry.
Data maintained by Blackstone shows it generated returns of about 9% for its fifth flagship fund, which backed a portion of the Hilton buyout. That’s less than what Blackstone returned from its second, third, fourth and sixth flagship funds. Blackstone's sixth real estate fund also invested in Hilton, and posted returns of 14%.
As for Equity Office Properties, that deal was split among two real estate funds Blackstone operates, which are separate from its flagship fund (the real estate funds posted low-double-digit returns). And, just like Hilton, Blackstone continues to manage a portion of the EOP properties it has yet to sell yet.