There is a good interview with David Roux of technology buyout firm Silver Lake Partners over at BusinessWeek. The decision to start Silver Lake in 1999 ranks as one of the shrewdest moves in recent private equity history.
WIth the technology boom about to turn to bust, returns in traditional venture capital would quickly follow it down. But an investor like Silver Lake could — and did — exploit the then-apathy about technology firms, buying solid assets at relatively low prices, cleaning them up, and then selling them again for significant returns. It was counter to accepted wisdom, with too many people repeating the mantra that buyouts didn’t work in tech, as assets rode the elevator every morning and night, and banks weren’t prepared to accord such firms much capacity for carrying debt.
Wrong, Not only has Silver Lake prospered with billion-dollar deals like Datek, Seagate, and so on, but it arguably set off the current mini-boom in technology buyouts. Kudos to Roux, Roger McNamee, and the Kleiner partnership for demonstrating remarkable radar.
Q: What’s driving the [buyout] increase lately?
A: There was very little capital to do classic buyouts in the ’90s. Plus, no bank would lend money on cash flow. A lot of these businesses have no assets. In 2000, when we did the Seagate deal, it was the first time anyone put debt on a storage company. It was a watershed event. Then, banks would lend two times maintenance sales.
Today, the banks are willing to lend us five times EBITDA. It took five years to convince the banks that these businesses were really good businesses. Customers were good, cash flows were stable, and the software itself was a vital asset to customer.
Q: Is the increase in tech buyouts changing the industry in any significant way?
A: You end up having a broader capital source. In the old days, you couldn’t get debt. If you were hot, you could go to public market. If not, you had a tendency to languish. You’d be stuck.
In other industries, if you had a hard time, there were tons of private equity firms you could work with. If you’re a big business and you have a strategic issue, there are guys like us who are willing to make a strategic investment.
But the real phenomenon isn’t that there are more tech buyouts. It’s that there’s more specialization in the [overall] buyout industry. There’s a rise of the category-killer buyout firm. Providence, for example specializes in media buyouts. Quadrangle does media buyouts. Shorenstein & Co. does real estate deals.
And this comment on the difference between buyout and technology venture capital is spot-on, neatly explaining why most venture sorts are not good buyout managers:
Q: How do you make money in the buyout business?
A: We raise a fund and get a percentage of the fees. In the venture business, the guys who make money are risk-seeking missiles. Their job is making something out of nothing. Our business is very different. Our business is about risk management. Our job is working with management team to make things better. It’s about operational excellence. We hit lots of doubles and triples and an occasional single. Our job is to create supra-normal returns.
[Update] Something has apparently gone kerflooey over at BusinessWeek as this article no longer comes up. No idea what’s happened, and you can still see it on the search page, but it just bounces back to the front page.