Monday, January 29, 2007

Grudge Match: PE vs. Tech

Umm, the answer is "no".

The question is whether private equity "gets" technology enough to make a successful go at buyouts in that arena.

I think the article lays out the reasons more clearly than I could. Now, why has Silver Lake been successful? I'd attribute it to Roger McNamee's background as a technology analyst and technology venture capitalist gave him above average knowledge of the industry. Now, that's not to say that the big name PE shops couldn't bring on specialists to help manage these investments. But I doubt they are likely to, because (and this is just my opinion/observation), they seem to be very ego driven. Each new buyout becomes another trophy, not an actual business problem to (re)solve. Add to that the fact that few PE shops these days are interested in the bread-and-butter work of corporate restructuring that was the original foundation of the industry, and I don't see how they would make a tech buyout work. They'd be too interested in levering the company, extracting dividends from the proceeds and re-IPO'ing the operation, to actually FIX it. Of course, as the article also points out, given the requirement to maintain cash flows to service the debt, and notorious advance of technology which seeks to stem those cash flows, that kind of shortsighted strategy can only end poorly.

I vote tech. PE will never figure out how to make these situations work, until they become dedicated to it like Silver Lake or Platinum Equity are. Tech is fundamentally a business, like any other, but one with very different requirements from the ones typical taken on by PE investors.

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