Silver Lake Cutting Fees for Large Clients in Next Fund

Silver Lake, the largest technology-focused private-equity manager, is cutting fees for big clients as it seeks to raise as much as $10 billion for its next buyout fund, according to a marketing document.

The fund, Silver Lake Partners IV LP, has a target of $7.5 billion, with the option of raising more, the firm told prospective investors this month in the private-placement memorandum, a copy of which was obtained by Bloomberg News. Silver Lake’s third flagship fund, which had the same initial target, ultimately raised about $9.4 billion in 2007.

Gemma Hart, a spokeswoman for Silver Lake, declined to comment.

Carlyle Group (CG), Blackstone Group LP (BX), KKR & Co. (KKR) and Warburg Pincus LLC have also reduced fees or arranged special deals to entice larger clients as buyout firms vie for a shrinking pool of investor dollars. Silver Lake, based in Menlo Park, California, oversees more than $14 billion for clients including the California Public Employees’ Retirement System, or Calpers, and the Washington State Investment Board.

The discount the firm is offering grows as a client’s investment increases. The management fee will be as high as 1.5 percent for commitments of less than $250 million and as low as 1.375 percent for those putting up at least $500 million, according to the document.

Silver Lake charged all clients a flat 1.5 percent for the third fund.

The firm also will collect the standard 20 percent of profits as a performance fee, known as carried interest.

Key-Man Clause

The firm won’t include co-founders David Roux and Glenn Hutchins as key men on the fund, according to the sales document. The change is part of a leadership transition that will see the two men, as well as co-founder Jim Davidson, reduce their ownership stakes and play less active roles at the firm.

A key-man provision is a common feature in private-equity investment contracts that governs what happens when personnel considered essential leave a fund or change their role.

The clause names a newly formed five-member managing committee, comprised of Davidson and four younger managing directors: Egon Durban, Mike Bingle, Ken Hao and Greg Mondre. All but Davidson are taking a bigger ownership stake in the firm, two people familiar with the firm said in December.

A key-man event will occur if fewer than three of the five are devoting “substantially all” of their work time to the firm and making the funds under management their primary business activity, according to the marketing memo. That would cause the firm to suspend investments until a majority of clients agree to resume commitments.

Fund Returns

Roux, a senior director, Hutchins, a managing director, and Davidson, a managing partner and managing director, were listed on the key-man clause for the firm’s last fund. The three men founded Silver Lake in 1999.

The firm’s best returns have come from its $2.3 billion debut fund, Silver Lake Partners LP, raised 13 years ago. The fund produced a net multiple of 2.5 times invested capital and a net internal rate of return of 25 percent as of Dec. 31, according to the marketing memo.

Silver Lake Partners III LP generated a net multiple of 1.4 times invested capital and a net internal rate of return of 19 percent, according to the document. The third fund has distributed about $5.4 billion in cash.

Skype Technologies SA has been the strongest investment from the fund, producing a more than threefold profit for investors when the video-chat company was sold to Microsoft Corp. last year.

Groupon, Go Daddy

The third fund deployed more than $1.2 billion across six companies in 2011. It invested $50 million in online coupon provider Groupon Inc. (GRPN), $358 million in Web registration and hosting provider Go Daddy Group Inc. and $328 million in Chinese Internet company Alibaba Group Holding Ltd.

Big private-equity investors are turning to separately managed accounts to obtain cheaper fees and more control in exchange for locking up their money for a decade or more. New Jersey said in December it would put as much as $1.5 billion into four custom funds to be managed by New York-based Blackstone, which the state said will save about $120 million in fees.

To contact the reporter on this story: 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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