Private equity firm Silver Lake has made a lot of major investments in large companies in recent years, including its acquisition of Electronic Arts (EA) on Monday. So, what is this firm and how does private equity work?
What is Silver Lake?
Silver Lake is a private equity firm, which is described as an investment company that pools money from wealthy people to purchase stakes in privately held companies or purchase publicly traded companies.
“You can think of this as a private investment in the equity of the business, right?” Vrinda Mittal, assistant professor of finance at the University of North Carolina, told Straight Arrow News. “So, let’s say, if you’re an investor and I’m running a company and you want to invest in my company, I get the financing, and you get the returns. So, this is basically a good deal for the both of us.”
Since launching, Silver Lake has taken over more than $110 billion in combined assets across North America, Europe and Asia. Their portfolio of companies generates approximately $260 billion in annual revenue and employs around 448,000 people.
The company was founded in 1999 by David Roux, Jim Davidson, Roger McNamee and Glenn Hutchins, all four of whom are veterans of the business and investment worlds. The current CEOs are Egon Durban and Greg Mondre, who have both been with the company since its inception.
Silver Lake came along as private equity firms started to boom in Silicon Valley.
“If you think about traditional forms of financing right before private equity even came up in the 2000s, it was mostly banks and, let’s say, equity markets,” Mittal said.
Silver Lake investments
Private equity is one way for companies to get money, and there are dozens of companies now under the Silver Lake umbrella, including Klarna, Waymo and Dell Technologies. They’re also one of the major investors keeping TikTok alive in the U.S.
One of the firm’s first major investments was Skype, where they purchased 65% of the company in 2009 for $1.9 billion. Two years later, Microsoft acquired Skype for $8.5 billion.
And that’s how it works for these kinds of companies. The deal worked out great for Silver Lake, but not so much for Microsoft. Skype officially ended operations earlier this year.
In recent years, Silver Lake has invested in other major tech companies, such as a $1 billion investment in Airbnb in 2020.
Along with tech companies, they’ve taken a shine to sports as well, with companies like City Football Group, Diamond Baseball Holdings, Madison Square Garden Sports and more in their portfolio. Silver Lake also invested $320 million into Fanatics in 2021. That company has seen its valuation grow by about $18 billion since that time.
“It is a lot about the rich getting richer, though, to be honest, if you’re not like, say, the richest person in America, right? We still have access to a lot of these investment opportunities,” Mittal said. “But are we able to make the best use of those opportunities?”
Impact on companies
For the companies Silver Lake invests in, it’s a great way to get some extra capital.
Take the $55 billion EA deal. Every shareholder got paid out $210 per share, which is well above what the stock was trading for at the time of the purchase. For those who owned majority shares of that company, they are now extremely wealthy.
“Then maybe from the cash I get, I can start another company, and then do this process again,” Mittal said. “That’s how I become a serial entrepreneur, right? Which is what I see happening a lot, not only in the media, but I would say technology and healthcare.”
Impact on employees
For those who aren’t holding a lot of shares of EA and are an employee at the company, that sale might have a different meaning.
“I think you were concerned at that point in time as an employee of the firm, because there is a lot of restructuring,” Mittal said. “When I was looking at some data, I also see that there are enormous job losses at these firms.”
A recent report from the Private Equity Stakeholder Project found an average job loss of 4.4% in the two years after a company was bought by private equity. “This is a well-known fact, that when private equity comes in, a lot of people lose their jobs,” Mittal said.
While private equity firms often tout their benefits for the economy, they rarely create new jobs since they’re buying companies that are already up and running.
There was a 33% increase in the number of people employed by companies owned by private equity between 2018 and 2020. U.S. employment also dropped by 4.5% over that same period.
“As an employee, I would be very worried,” Mittal said. “And it’s not only about my job, right? It’s also about the management changing. So, let’s say I have my job, but the management changes, and now suddenly I have a new boss. I am under a different payroll system, for example, and then I have different expectations.”
But from the perspective of the private equity firm, layoffs and boosting profitability make sense.
“The end goal of all of these private equity funds is, in my opinion, a lot of it is to make high returns, right?” Mittal said. “And why do they need these high returns? Because they need to justify their investors. And investors in these private equity funds are all sorts of big institutional investors.”
Silver Lake did not respond to Straight Arrow News’ request for comment.
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