In addition to the news that the Skype deal has closed, I’ve got a few more insights, jokes, aphorisms, and numbers from Silver Lake’s Chairman and Co-founder Jim Davidson at Buyouts West in Los Angeles.
In light of our Hollywood digs and an upcoming remake of A Christmas Carol, Davidson looked at the Ghosts of LBOs past, present and future, and he’s not scared (ha).
Maybe because he can see into the future—did you know that Silver Lake, like just about every PE speaker I’ve ever seen, saw the credit crunch coming? Davidson said: “In 2007 we stood before our annual LP meeting and said we had 10 rules for companies that year: ‘Cash, liquidity, cash cash liquidity liquidity cash cash cash liquidity.’ The debt market right now is not sustainable.”
And sarcasm aside, the firm saw an opportunity in the turmoil and grabbed it by the throat. Silver Lake started a small credit fund, Silver Lake Financial, to “incubate things.” That business is up 58% YTD unlevered, Davidson said.
On the Ghosts of LBOs past:
“The private equity business became a velocity business. The faster you could securitize debt and get aerating form the ratings agencies, the better you became.”
“I’m a diehard independent. You could say I live in the Bay Area so I must be a Berkley liberal, or that as a private equity guy I must be a diehard republican, but that’s not the case.”
“The interesting thing is the debt’s still out there. There’s only one covenant that’s non-waivable and that’s maturity.”
“We can cut costs till the cows come home and we won’t be able to pay that debt. We have to refinance and force these companies to survive.”
On Debt in Silver Lake Companies:
“When we started Silver Lake we didn’t start with a lot of debt because tech was not understood by lenders. We eventually were able to use more debt, but 80% of our returns came from companies leveraged less than 2x.”
On Overpaying For Avago (paraphrased):
Silver Lake bought a semiconductor company in 2005 at the height of the valuations, we aid 20x Ebitda. HP didn’t want it, so they called private equity. “If you’re looking for a sucker, call a sucker.” We paid a lot but knew we could take some costs out because HP “isn’t the glowing example of best practices for cost containment.” We saw whole divisions that weren’t strategic to us, so we sold them. Within six months, we reduced net debt from 1.6bn to 700m. We then invested in businesses we thought could grow and that customers valued. We made 3x our money in a semiconductor business from 2005 to 2009. That is the way Silver Lake has run its business from where we started.
On Giving Up on Bad Investments:
We were successful in first fund because we realized one thing, even though we wanted to be successful on every investment, that our job is to maximize the return on our fund.
We fight to get our money back on every company, but we can’t on every one. We shut down a company in 2002 with seven years of cash on its balance sheet. We took a 70% loss on the investment and decided to spend more time on a different company that ultimately returned 8x its money. There will be failures and defaults in our 05-06-07 portfolio. We have none yet, but there are some companies that need to improve and our job is to maximize value of portfolio.