Silver Lake Sees Gold Rush With $1.5 Billion Close –

Investors have been stampeding to commit capital to Silver Lake Partners LLC, a new buyout fund focusing on technology that this month held a first close on approximately $1.5 billion-the largest close ever for a first-time fund.

Just four months ago, Silver Lake began drawing up its private placement memorandum, which featured a target of $1 billion (BUYOUTS Feb 8, p. 1). The official marketing lasted only five weeks, according to a source close to the effort, and intense interest from investors prompted general partners at Silver Lake to increase the fund’s cap to $2.2 billion. Silver Lake Partners, L.P. has scheduled a final closing for next month on that amount, according to Kevin Albert, a managing director at Merrill Lynch & Co.’s private placement group, which is raising the fund.

Although the management of Silver Lake has not previously worked together, the firm’s partners have well-established credentials and connections in the private equity community. Some industry sources, however, questioned the wisdom of allowing an untested team to manage so much capital.

“My brethren have got themselves all worked into a lather for this fund,” said an investment manager at a state pension who declined to be named.

One placement agent criticized the fund’s size relative to the size of the management team. “That organization has no earthly need for $40 million a year in fees,” he said, adding that Kleiner Perkins Caulfield & Byers, the top-shelf venture capital firm with which Silver Lake is affiliated, has a reputation for scrupulously limiting the size of its funds. The placement agent said he had heard from some institutional investors that they were “disappointed” in the large size of the Silver Lake fund.

Mr. Albert said the size of the fund is justified by the size of the deals Silver Lake plans to do. Silver Lake’s offering memorandum lays out a business plan that calls for 12 to 15 transactions with an average equity commitment of $200 million. Were the fund to be capped at $1 billion, partners at the firm were prepared to significantly involve co-investment partners in these deals. With the fund’s size over $2 billion, however, Silver Lake now can make acquisitions with much less outside equity, according to a source close to the fund raising.

If the recent activity of Texas Pacific Group is any indication, the sector targeted by Silver Lake is fertile ground for those firms with enough capital. TPG this month agreed to buy the semiconductor components division of Motorola Inc. for $1.6 billion (BUYOUTS May 17, p. 1). The firm will put approximately $350 million in equity into the deal.

Despite concerns about the fund’s size, investors have been all but crawling over each other to get into it, according to sources familiar with the fund raising. Mr. Albert said the fund has received more than $3 billion in interest from potential limited partners. “There are people in line if anyone drops out,” he said.

L.P.s Bullish on Tech Sector

Silver Lake’s rapid fund raising stands as a testament to the huge appetite among institutional investors for buyout strategies that focus on the maturing technology sector.

Although Mr. Albert declined to name any of Silver Lake’s limited partners, sources familiar with the fund raising said partners at the firm are favoring endowments and foundations and paring back commitments from state and corporate pensions, which historically have been dominant players in the buyout world.

A placement agent at a firm not raising the fund said that because the partners at Silver Lake mostly are from venture capital backgrounds, they may feel more comfortable with endowments and foundations, who traditionally have been more active in technology investing.

Mr. Albert, however, said the diminished role of pensions in the fund was indicative of the resistance that those investors, often advised by cautious gatekeepers, typically show toward debut funds.

About 20% of the capital for the first close was committed by technology company executives. A number of industry sources said technology luminaries-including Bill Gates and Michael Dell-would be committing to the fund, and that their names were being used to add marquee value to the effort.

“These guys [Silver Lake Partners] had the best presentation I’ve seen in a long time,” said a source who was present at one of the marketing sessions. “They were great in the meetings.”

The final list of L.P.s in the fund will be a long one. According to Mr. Albert, the largest commitment accepted was $75 million.

Silver Lake is the product of a marriage of skills between Glenn Hutchins, a former managing director at The Blackstone Group, James Davidson, an investment banker from Hambrecht & Quist L.L.C., David Roux, formerly an executive vice president at Oracle Corp., and the partners of venture capital firm Integral Capital Partners, which is an affiliate of Kleiner Perkins. One of the partners at Integral Capital, Roger McNamee, helps invest money for Mr. Gates in conjunction with the software mogul’s private portfolio manager, Michael Larson. Sources said this relationship led to Mr. Gates’ interest in the fund.

Of the investment professionals at Silver Lake, only Mr. Hutchins has experience as a buyout partner.

Battle of the Placement Agents

The battle to be selected as Silver Lake’s placement agent was just as fierce as the battle to be a limited partner in the fund. When choosing a placement agent, Silver Lake pitted Merrill Lynch against rival Donaldson, Lufkin & Jenrette, according to a placement agent source. Silver Lake wanted Merrill Lynch to handle overseas fund raising and DLJ to cover domestic marketing. The placement agents rejected that idea, and DLJ subsequently opted to sign on with Thomas Weisel Partners, another fund focusing on the technology sector (BUYOUTS Feb. 8, p. 3). Ultimately, Merrill Lynch did not take Silver Lake’s fund raising activities beyond U.S. soil.