Convergent, MSDW Eye Buyouts in Tech Sector –

The technology sector already has been attracting buyout attention, but firms are not necessarily diving into the sector alone. Rather, as private equity shops commit capital to the technology arena, some have begun joining hands with partners that bring operating experience to buttress firms’ financial acumen.

Most recently, Morgan Stanley Dean Witter’s private equity group partnered with Convergent Partners to invest as much as $800 million in technology-related buyouts and late-stage growth capital deals.

“This [relationship] is a reflection of Morgan Stanley’s desire to move toward this area,” said Gary Fernandes, co-founder of Convergent Partners and former vice chairman of Electronic Data Systems Corp. “But they wanted to go with someone who could create value in the sector.”

Formed by Mr. Fernandes and Murray Holland, a former investment banker with First Boston and Kidder Peabody, Convergent will focus on investments in the technology and business services sectors.

Convergent and Morgan Stanley will keep separate pools of capital, although Mr. Fernandes said he expects the two will co-invest more often than not. The two groups will take equal responsibility for sourcing deals, Mr. Fernandes said, adding that due diligence will be done separately.

Morgan Stanley has committed at least $500 million to the venture from both the $2.5 billion Morgan Stanley Capital Partners IV, L.P. and the $275 million Morgan Stanley Venture Partners private equity funds, as well as $10 million to Convergent’s fund that came from Fund IV.

Following a Trend of Tech LBO Funds

Convergent sent out offering documents for its $300 million fund last week. To expedite the process, marketing efforts will target individuals and organizations that have existing relationships with the two principals. The minimum investment in the first-time effort will be $5 million and terms include an 80%/20% carried interest split, 2% management fee and 9% preferred return. The first close is targeted for the end of the second quarter.

“The deal flow is so robust that we either need to get bridge financing or a quick close,” Mr. Fernandes said. “Ideally, we would rather have the quick close.”

Citing the wild valuations associated with “.coms,” Mr. Fernandes said the partnership will not invest in pure technology plays. Opting instead to target companies that rely on technology to succeed, but have been swept up with the sky-high Internet valuations. Both Mr. Fernandes and a source at Morgan Stanley said the business services sector is particularly ripe for acquisition, due to changes associated with e-commerce. Public companies and corporate orphans will also fall within the range of the group’s looking glass. Unlike traditional buyout transactions, these tech-related deals likely will be structured with a minimal amount of leverage.

“Being less asset intensive, it is hard to imagine [debt-to-equity ratios] going higher than 2-1 or 1.5-1,” Mr. Fernandes said.

In addition to buyouts, which will account for roughly 75% of deals, the two groups intend to focus a significant portion of the $800 million total to late-stage growth capital deals.

Similar efforts that have seen financial and operating groups partner up to target the post-venture capital technology sector include $1 billion vehicles Silver Lake Partners LLC, a venture launched by former The Blackstone Group managing director Glenn Hutchins, MertiTech Capital, a mezzanine effort backed by four venture firms-Accel Partners, Brentwood Venture Capital, Oak Investment Partners and Worldview Technology Partners-and MSD Capital, Michael Dell’s private equity group that is managed by two bankers from Goldman, Sachs & Co.