Private Eye: Siris looks toward year-end fund launch; may seek $3 bln

Siris Capital, a popular member of a new class of technology-buyout specialists started in the last decade, is expected to be out in the market either late this year or early next with its third broadly marketed fund.

Look for the firm to set a target of at least $3 billion.

Speaking Friday at the Columbia Business School Private Equity and Venture Capital Conference, Peter Berger, a class of 1974 alum and one of three Siris Capital co-founders and managing partners, said his firm expects to hit the 70 percent investment mark by year’s end on Siris Partners III LP, its second broadly marked fund.

Between the $1.81 billion in its current fund and money supplied by co-investors, the firm plans to invest about $3 billion during the investment period, Berger said.

Siris Capital closed Fund III in February 2015 with help from placement agent Park Hill Group. The firm is expected to work with Park Hill again on the new fund.

The take-private specialist has been popular with backers, and publicly available data hints at why. Through June 30, Siris Partners II LP, the firm’s first broadly marketed fund, was generating a 25 percent net IRR and 1.4x investment multiple for backer California Public Employees’ Retirement System, through a program run by GCM Grosvenor Private Markets. (CalPERS considers the 2012-vintage, $650 million fund too young to be producing meaningful results.)

Other Fund II backers include Teachers’ Retirement System of the State of Illinois and Maryland State Retirement and Pension System. Those punching into the successor fund included Arkansas Teacher Retirement System, Canada Pension Plan Investment Board, State Board of Administration of Florida, Los Angeles County Employees Retirement Association, and several sub-pensions at New York City Employee Retirement System.

The three founders of Siris Capital, Frank Baker, Berger and Jeffrey Hendren, worked together for 10 years starting in the mid-1990s at Ripplewood Holdings, a generalist buyout shop with operations in the United States and Japan.

The three spun out to join hedge-fund manager S.A.C. Capital Advisors in 2007. There, they set up and invested a side-pocket fund of some $500 million, Berger said. It was at S.A.C. that the three started to concentrate mainly on technology and telecom deals. They left to launch Siris in 2011.

Siris Capital seeks mature tech companies that have been racing to develop new products to escape irrelevancy. Often target companies have a legacy business: a steady Eddie cash generator that the firm treats as the “bond” portion of its investment.

And target companies have the new, more speculative products that Siris Capital considers the “call option” portion of its investment. Siris Capital attempts to strike when both the staying power of the legacy business and the potential of the new products are underappreciated.

According to Berger, Siris Capital sources 90 percent of its own deals, buying businesses today for an average total enterprise value of $1 billion. For its past 10 platform acquisitions since 2008, the firm has paid an average acquisition multiple of 5x to 6x using average leverage of about 3x.

The firm takes its time, closing two or three transactions out of the 100 to 150 deals that it looks at every year, Berger said. As they did at Ripplewood, the founders lean heavily on a team of operating executives. The firm works with a team of a dozen “executive partners” who pitch in on deal sourcing, vetting and company operations.

Berger pointed to the 2010 take-private of Airvana as one of its more successful transactions. The firm acquired the provider of software and high-margin maintenance services to wireless operators for some $305 million, or 2.8x pro-forma earnings, including $136 million of equity.

At the time many investors thought that the company’s specialty, 3G (third-generation) broadband data, was on its way out, to be replaced by 4G. Investors also worried the the company had only a single customer: Ericsson.

Both concerns turned out to be overblown. “What the market didn’t realize was that Ericsson was really just a distributor for us,” Berger said, and that the company’s software (which “couldn’t be ripped out,” said Berger) was in widespread use across the cellphone market.

Siris Capital sold the legacy portion of its investment to Ericsson in late 2013 and the call-option portion, a technology that enhanced voice and data signals, about two years later to CommScope, then owned by Carlyle Group.

Siris Capital made a 3.3x gross multiple on invested capital, Berger said.

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