Bloomberg News

Silver Lake Founders Said to Reduce Ownership in Transition

December 28, 2011

(Adds investor comment in fourth paragraph.)

Dec. 21 (Bloomberg) -- Glenn Hutchins, David Roux and Jim Davidson, who co-founded Silver Lake 13 years ago and built it into the largest technology-focused private-equity manager, will reduce their ownership as part of a broader leadership transition, according to two people briefed on the matter.

Silver Lake, based in Menlo Park, California, will form a five-member managing committee, comprised of Davidson and four younger managing directors, according to one of the people. Roux, the firm’s 55-year-old chairman, and Hutchins, co-chief executive officer with Davidson, will play a less active role in day-to-day management, said the people, who asked not to be named because the information is private.

Silver Lake, which made a threefold profit this year when it sold Skype Technologies SA to Microsoft Corp., is among a growing number of private-equity firms dealing with the challenge of succession. Longtime investors, including California Public Employees’ Retirement System, which backed Silver Lake since its first and most successful fund in 1999, will have to decide whether to support the younger ranks of deal makers when the firm will formally market its fourth flagship fund in February, according to one of the people.

“The way firms plan succession impacts a variety of organizational issues and therefore fundraising,” said Tim Kelly, a partner at fund-of-funds manager Adams Street Partners. Kelly recommends that firms give clients advance notice of changes in management. If a succession is expected to occur within the next decade, “you better have a plan in place already,” he said.

Succession Challenge

Davidson, 52, is the only member of the current executive management to join the new managing committee. Egon Durban, Mike Bingle, Ken Hao and Greg Mondre will join Davidson on the committee and take a bigger ownership stake, said the people.

Gemma Hart, a spokeswoman for the firm, declined to comment.

Blackstone Group LP, the biggest private-equity firm, and KKR & Co. have listed their firms on the New York Stock Exchange to facilitate handing over ownership. Washington-based Carlyle Group is planning to go public next year. All three have diversified their businesses beyond buyouts and cut reliance on the founders.

Boston-based Bain Capital LLC dealt with transition when one of its co-founders, GOP presidential candidate Mitt Romney, left in 1999. At the time, the firm spread ownership across its top partners, resulting in a structure where no single stakeholder receives more than 10 percent of profits.

Courting Investors

Hutchins, 56, Davidson and Roux formed Silver Lake in 1999 with Roger McNamee. Silver Lake Partners I generated an annual rate of return of 25 percent, net of fees. Subsequent pools, Silver Lake Partners II in 2004 and Silver Lake Partners III in 2007, yielded 10 percent and 19 percent, according to the presentation.

While competitors KKR and Providence Equity Partners Inc. are setting more modest targets for their new funds, Silver Lake is seeking to raise a similar size fund as its $9.4 billion predecessor pool. The firm, which invested in new Internet companies including Zynga Inc. and Groupon Inc. through its last fund that was intended to focus on large companies, has set a preliminary target of $8.5 billion to $10 billion, according to a person familiar with the plans.

To win over clients, the firm is using its recent bid for a stake in Internet company Yahoo! Inc. to show that it’s a favorite investor among technology companies, according to one person. The firm is saying Yahoo preferred Silver Lake as a partner over TPG Capital because of its expertise.

Flipping Skype

Silver Lake, working with Microsoft, venture-capital firm Andreessen Horowitz and Canada Pension Plan Investment Board, offered to buy a minority stake in Yahoo for about $16.60, people familiar with the bidding said last month. That’s less than an offer made by private-equity firm TPG, two people said.

Bloomberg LP, the parent company of Bloomberg News, is an investor in Andreessen Horowitz.

Silver Lake invested about $1.3 billion in capital this year, including about $350 million to $365 million in Web registration and hosting company Go Daddy Group Inc. and about $328 million in Chinese Internet giant Alibaba Group Holding Ltd., according to an investor presentation.

The firm distributed $6.3 billion to clients across its three funds this year. It bought Internet-calling service Skype in November 2009 and sold it 18 months later to Microsoft for $8.5 billion.

--Editors: Christian Baumgaertel, Larry Edelman

To contact the reporters on this story: Cristina Alesci in New York at calesci2@bloomberg.net; Sabrina Willmer in New York at swillmer2@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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