The Economist this week carries an article (subscription required) on Private Equity firms, buyout firms specifically, and their renewed interest in tech and telecom. Most importantly, in my view, the article points out the new depths within target balance sheets that buyout firms have been able to bury their equity investments.
It wasn't so long ago that debt was limited to around 3 times EBITDA for deals like this. Today 7 times is not unheard of and one notable deal for Serena Software peaked at 11 times EBITDA, with Silver Lake Partners paying $24.00 a share to scoop up the firm.
At 11 times PE firms are banking on massive growth to pay off the debt the deal takes on in a reasonable time.
It's not surprising that Silver Lake, and co-Founder David Roux, would be so optimistic. An investment of $874 million by Silver lake in combination with Texas Pacific Group and others in Seagate in 2000 is worth nearly $6.8 billion presently. Silver Lake retained around 20% of the new firm.
Just to name one interested party, Silver Lake's 1999 fund had given CalPERS a 66% IRR on its $64 million investment as of August 2005.
But buyout firms have been burned on tech before. Names like Prime Computers, Rhythm NetConnections, XO Communications are the reason no one wanted to lend on weak balance sheets. Until recently.
One thing is certain, there are a lot of nervous private equity associates tracking the telecom and tech sectors.