April 21, 2017 / 2:33 PM / 9 months ago

Tech fund overflow may swamp deal discipline

DALLAS (Reuters Breakingviews) - Technology-focused private-equity investors are planning on setting some records. Silver Lake just raised a $15 billion fund. Other buyout firms have newly stocked war chests, and Japan’s SoftBank has launched a fund that could get as big as $100 billion. Silver Lake and many rivals know their patch. But there are only so many SoFis – one of the firm’s holdings – and even fewer Dells. Investment discipline could be tested.

Silver Lake’s fund is the largest U.S. tech fund on record, according to data from Thomson Reuters. Combine it with SoftBank’s ambitious target and recent funds from Vista Equity Partners and Thoma Bravo, and these four alone have more than $130 billion to deploy. Assuming they write equity checks for 40 percent of transaction values and borrow the rest – roughly the leverage Thomson Reuters LPC pegged for deals last year – they will have perhaps $330 billion of firepower.

That’s enough to cover the price Silver Lake and its partners paid for Dell (now Dell Technologies) in 2013 some 13 times over, or to acquire a wooly mammoth like, say, IBM with almost enough left over to do it again. Most deals are far smaller, though, and many involve partners. Silver Lake and Thoma Bravo bought SolarWinds for $4.5 billion last year, for example.

The biggest deals are scarce and may need to be shared, while more manageable bites attract more competing buyers. It’s already becoming an expensive business. The Nasdaq 100 technology-sector stock-price index has more than doubled in five years, and the median price-to-EBITDA multiple in tech-sector deals was 37 percent higher last year than in 2012, according to Thomson Reuters. Downturns after past tech bubbles have left scars. The 2000 bust is famous, but the more recent financial crisis took its toll, too.

Silver Lake may use its fund to invest in companies in other sectors looking to boost their tech credentials, an approach which might make finding viable targets easier. Blackstone boss Tony James said on Thursday that his firm has invested recently in tech and likes such businesses. He added, however, that the amount of money being earmarked for the industry was “a little worrisome.” He and other buyout veterans know that too much capital plus too few deals often equals disappointment.


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