Dell Keeps LBO Financing in the Family With MSD Capital
Michael Dell set up a family office in 1998 that diversified his wealth beyond stock in the computer maker he had started 14 years earlier. Now, as he seeks to take Dell Inc. (DELL) private, the same investment firm may provide pivotal financing for what would be the largest buyout since 2007.
It wouldn’t be the first time that Dell, who ranks 63rd on the Bloomberg Billionaires Index with $14.1 billion, has relied on MSD Capital LP to increase his holdings in the computer company. Between January 2006 and March 2011, he bought $625 million of Dell stock with cash provided by MSD Capital, according to a person familiar with the firm, who asked not to be identified because its operations are private.
Dell’s fortune is key to pulling off the LBO. He’s expected to contribute about half of the estimated $8 billion to $9 billion in equity needed for the deal, with private-equity firm Silver Lake Management LLC and Microsoft Corp., whose software powers many of Dell’s machines, each contributing $1 billion to $2 billion, people with knowledge of the deal said.
“Given the difficulty of raising capital for new funds, some general partners would be reluctant to put big checks into one company like that,” said Marc Bonavitacola, the head of U.S. private equity at SVG Advisers Inc. in Boston. “You need two sponsors plus Michael Dell’s equity.”
Since peaking more than a decade ago, the computer company that Dell founded with $1,000 in 1984 while attending the University of Texas has lost three quarters of its market value. Michael Dell’s 15.7 percent stake in the Round Rock, Texas-based computer company is valued at $3.6 billion today. MSD Capital’s assets have surged beyond $12 billion.
A spokesman for MSD Capital, whose initials stand for Michael Saul Dell, declined to comment. David Frink, a spokesman for the computer company, said Michael Dell doesn’t comment on his personal investments. Frink also declined to comment on the potential buyout.
Housed on the 21st Floor of 645 Fifth Avenue in Manhattan, MSD was formed by former Goldman Sachs (GS) Group Inc. executives John Phelan and Glenn Fuhrman in 1998. Today, the firm has five investment groups, including a private-equity unit that seeks to invest in leveraged buyouts of companies with “world class management teams,” according to its website.
Dell hired Phelan and Fuhrman about 10 years after Goldman Sachs took his computer maker public through a $30 million stock offering. During the intervening years, Dell’s market value had soared, leaving him with a personal stake valued at close to $20 billion in early 2000.
Michael Dell had previously invested proceeds from the sale of Dell stock with various money managers, a process that led him to conclude that he needed a dedicated investment team, said the person familiar with the firm.
The opportunity came when he had lunch with Phelan, who had formerly worked as an analyst in Goldman Sachs’s investment banking unit as well as for real estate investor Sam Zell and hedge-fund manager Edward Lampert.
During the lunch, Phelan outlined plans to start his own firm, only to have Dell say “Why don’t you do this for me?” according to a January 2010 interview published by the student union newspaper at the London School of Economics, the money manager’s alma mater. Phelan teamed up with Fuhrman, who had worked at Goldman Sachs’s Special Investments Group, to co-found MSD Capital with an initial contribution of $400 million in capital from Dell, the article said.
Fuhrman said in an e-mail that he wasn’t available for comment.
Created just as the Internet stock boom was gathering force, MSD Capital initially made venture capital investments, alongside other strategies, building a portfolio of 50 technology companies ranging from FTD.com to E-Steel, according to a January 2001 press release.
After the dot-com bust at the turn of the century, MSD Capital curtailed its venture investing. Even before, the firm had begun diversifying into other types of alternative assets. Today, more than 100 employees in offices in New York, Los Angeles and London run money in five different investment groups, including ones that invest in distressed securities, hedge funds, real estate and publicly traded stocks, as well as the private-equity team.
Taking his company private would give Michael Dell the flexibility to invest more heavily in mobile computing, according to Rich Kugele, an analyst at Needham & Co. Dell shares have declined 35 percent during the past five years, as consumers opted to replace desktop and notebook computers with smart phones and tablets manufactured by the likes of Apple Inc. and Samsung Electronics Co.
Even with the stock market decline, a leveraged buyout of Dell would require raising more equity and debt than any deal since 2007. In addition to the equity put up by Michael Dell, Silver Lake, and Microsoft, the buyout would be financed by debt and possibly some of the $11 billion in cash that the computer company had on its balance sheet as of Sept. 30.
“It’s a tough transaction to get done,” said John Orrico, co-portfolio manager of the $3 billion Arbitrage Fund (ARBFX), run by Water Island Capital LLC in New York. “You have to be concerned about their ability to transform themselves in the context of being heavily debt laden.”
In addition to purchasing stock in his company, Michael Dell has used MSD to pay his taxes and make charitable contributions, said the person close to the firm.
Some of the firm’s capital is locked up in illiquid investments such as private equity and real estate. Those holdings are marked at cost, meaning gains or losses on the investments aren’t reflected in the company’s assets under management, according to the person.
The private-equity unit, led by Eric Rosen, a former managing director at Onex Corp., usually invests $100 million to $250 million per deal, but will consider larger as well as smaller opportunities “depending on the particular investment profile,” according to MSD Capital’s website.
In July 2009, Phelan and Fuhrman set up a separate firm called MSDC Management LP to run hedge funds with capital from outside investors as well as the Dell family. At the end of 2011, the firm had $4.4 billion in assets under management and ran three funds that specialized in credit opportunities, distressed European debt and energy. It also has a special purpose vehicle that holds stock in the former IndyMac Bancorp, now known as OneWest Bank FSB, which MSD Capital acquired along with Paulson & Co. and JC Flowers & Co. for $13.9 billion in January 2009.
The credit opportunity fund, which MSD initially started in January 2002 as an internal strategy, has produced a compounded annual growth rate of 9.6 percent since that time, compared with 5.9 percent for hedge funds globally, according to Chicago-based Hedge Fund Research Inc. The energy fund’s annual growth rate has been 23 percent since October 2008, compared with 6.5 percent for hedge funds.
MSD Capital held at least $561 million worth of stock in eight companies traded on U.S. exchanges as of Sept. 30, including DineEquity Inc., the parent to the Ihop pancake chain, and Wright Express Corp., which last quarter changed its name to WEX Inc., according to a regulatory filing. Many of MSD Capital’s other holdings are long-term investments, according to news reports and public filings.
MSD Capital’s real estate holdings include the Four Seasons Resort Maui at Wailea Hotel in Hawaii as well as the Heritage Fields, a shuttered marine base with 3,724 acres (1,507 hectares) in El Toro, California. MSD Capital teamed up with the real estate arm of Cerberus Capital Management and homebuilder Lennar Corp., as well as other investors, to buy the former marine base for $650 million in February 2005.
Other previous investments include a 50 percent stake in Gap Radio Broadcasting, an operator for 111 radio stations, and the subordinated bonds of Simmons Bedding Co.
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