Two years after helping to take Dell Inc. private in a $24.9 billion buyout, private equity firm Silver Lake today said that it also will participate in Dell’s pending $67 billion purchase of EMC Corp. (EMC). It is possibly the biggest bet in private equity history.
Silver Lake isn’t disclosing how much equity it will contribute, but sources close to the deal say that it is effectively doubling down on Dell. But, to be clear, that doesn’t mean that Silver Lake is committing another $1.04 billion — which was its piece of the original Dell buyout, minus co-investments from its limited partners. Instead, the “double down” is based on the more recent carrying value of the firm’s investment in Dell, which The Wall Street Journal reported late last year had already appreciated by around 90%. In other words, Silver Lake would have between $2 billion and $3 billion of capital exposure to Dell, once the EMC merger closes.
Not only is that a massive investment by any private equity standards, but it also means that Silver Lake will have committed well over 20% of its $10.3 billion fourth fund to a single portfolio company. In general, private equity firms avoid investing more than 10% into a single company, so as not to have so much concentration that a single bad bet could sink overall performance (for an example of how bad such excess can go, just do a Google search for defunct buyout giant Forstmann Little and bankrupt XO Communications).
Many funds even codify that ceiling in their limited partnership agreements, and only can breach it following a special investor vote.
Silver Lake, however, does not have such language in its fund documents. That means it’s free to make such a deal, although its ability to raise new funds will certainly be predicated on how Dell+EMC is performing.
In short: Silver Lake’s future is now inextricably entwined with Dell’s future. That’s a high risk move, even by the high-risk standards of private equity.
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